McKesson 2016 Annual Report Download - page 78

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Revenues for our Distribution Solutions segment include large volume sales of pharmaceuticals primarily to
a limited number of large customers who warehouse their own products. We order bulk product from the
manufacturer, receive and process the product primarily through our central distribution facility and deliver the
bulk product (generally in the same form as received from the manufacturer) directly to our customers’
warehouses. We also record revenues for direct store deliveries of shipments from the manufacturer to our
customers. We assume the primary liability to the manufacturer for these products.
Revenues are recorded gross when we are the primary party obligated in the transaction, take title to and
possession of the inventory, are subject to inventory risk, have latitude in establishing prices, assume the risk of
loss for collection from customers as well as delivery or return of the product, are responsible for fulfillment and
other customer service requirements, or the transactions have several but not all of these indicators.
Revenues are recorded net of sales returns, allowances, rebates and other incentives. Our sales return policy
generally allows customers to return products only if they can be resold for value or returned to suppliers for
credit. Sales returns are accrued based on estimates at the time of sale to the customer. Sales returns from
customers were approximately $3.1 billion in 2016, $2.7 billion in 2015 and $1.9 billion in 2014. Taxes collected
from customers and remitted to governmental authorities are presented on a net basis; that is, they are excluded
from revenues.
Our Distribution Solutions segment also engages in multiple-element arrangements, which may contain a
combination of various products and services. Revenue from a multiple-element arrangement is allocated to the
separate elements based on their relative selling price and recognized in accordance with the revenue recognition
criteria applicable to each element. Relative selling price is determined based on vendor-specific objective
evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”), if VSOE of selling price is not
available, or estimated selling price (“ESP”), if neither VSOE of selling price nor TPE is available.
Technology Solutions
Revenues for our Technology Solutions segment are generated primarily by licensing software and software
systems (consisting of software, hardware and maintenance support), providing software as a service (“Saas”) or
SaaS-based solutions and providing claims processing, outsourcing and professional services. Revenue for this
segment is recognized as follows:
Software systems are marketed under information systems agreements as well as service agreements.
Perpetual software arrangements are recognized at the time of delivery or under the percentage-of-completion
method if the arrangements require significant production, modification or customization of the software.
Contracts accounted for under the percentage-of-completion method are generally measured based on the ratio of
labor hours incurred to date to total estimated labor hours to be incurred. Changes in estimates to complete and
revisions in overall profit estimates on these contracts are charged to earnings in the period in which they are
determined. We accrue for contract losses if and when the current estimate of total contract costs exceeds total
contract revenue.
Revenue from time-based software license agreements is recognized ratably over the term of the agreement.
Software implementation fees are recognized as the work is performed or under the percentage-of-completion
method. Maintenance and support agreements are marketed under annual or multi-year agreements and are
recognized ratably over the period covered by the agreements. Hardware revenues are generally recognized upon
delivery.
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