McKesson 2016 Annual Report Download - page 81

McKESSON CORPORATION
FINANCIAL NOTES (Continued)
Share-Based Compensation: We account for all share-based compensation transactions using a fair-value
based measurement method. The share-based compensation expense, for the portion of the awards that is
ultimately expected to vest, is recognized on a straight-line basis over the requisite service period. The
compensation expense recognized has been classified in the consolidated statements of operations or capitalized
on the consolidated balance sheets in the same manner as cash compensation paid to our employees.
Loss Contingencies: We are subject to various claims, including claims with customers and vendors,
pending and potential legal actions for damages, investigations relating to governmental laws and regulations and
other matters arising out of the normal conduct of our business. When a loss is considered probable and
reasonably estimable, we record a liability in the amount of our best estimate for the ultimate loss. However, the
likelihood of a loss with respect to a particular contingency is often difficult to predict and determining a
meaningful estimate of the loss or a range of loss may not be practicable based on the information available and
the potential effect of future events and decisions by third parties that will determine the ultimate resolution of
the contingency. Moreover, it is not uncommon for such matters to be resolved over many years, during which
time relevant developments and new information must be reevaluated at least quarterly to determine both the
likelihood of potential loss and whether it is possible to reasonably estimate a range of possible loss. When a
material loss is probable but a reasonable estimate cannot be made, disclosure of the proceeding is provided.
Disclosure is also provided when it is reasonably possible that a loss will be incurred or when it is
reasonably possible that the amount of a loss will exceed the recorded provision. We review all contingencies at
least quarterly to determine whether the likelihood of loss has changed and to assess whether a reasonable
estimate of the loss or range of the loss can be made. As discussed above, development of a meaningful estimate
of loss or a range of potential loss is complex when the outcome is directly dependent on negotiations with or
decisions by third parties, such as regulatory agencies, the court system and other interested parties. Such factors
bear directly on whether it is possible to reasonably estimate a range of potential loss and boundaries of high and
low estimate.
Business Combinations: We account for acquired businesses using the acquisition method of accounting,
which requires that once control is obtained of a business, 100% of the assets acquired and liabilities assumed,
including amounts attributed to noncontrolling interests, be recorded at the date of acquisition at their respective
fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded
as goodwill. Acquisition-related expenses and related restructuring costs are expensed as incurred.
Several valuation methods may be used to determine the fair value of assets acquired and liabilities
assumed. For intangible assets, we typically use the income method. This method starts with a forecast of all of
the expected future net cash flows for each asset. These cash flows are then adjusted to present value by applying
an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more
significant estimates and assumptions inherent in the income method or other methods include the amount and
timing of projected future cash flows, the discount rate selected to measure the risks inherent in the future cash
flows and the assessment of the asset’s life cycle and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry. Determining the useful life of an
intangible asset also requires judgment as different types of intangible assets will have different useful lives and
certain assets may even be considered to have indefinite useful lives.
Recently Adopted Accounting Pronouncements
Deferred Income Taxes: In November 2015, amended guidance was issued for the balance sheet
classification of deferred income taxes. The amended guidance requires the classification of all deferred tax
assets and liabilities as noncurrent on the balance sheet instead of separating deferred taxes into current and
noncurrent amounts. The amended guidance would have been effective for us commencing in the first quarter of
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