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Investment in Change Healthcare Joint Venture | 6 Months Ended
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Sep. 30, 2019
Equity Method Investments and Joint Ventures [Abstract] |
Investment in Change Healthcare Joint Venture | Investment in Change Healthcare Joint Venture In the fourth quarter of 2017, we contributed the majority of our McKesson Technology Solutions businesses to form a joint venture, Change Healthcare LLC (“Change Healthcare JV”), under a contribution agreement between McKesson and Change Healthcare Inc. and others, including shareholders of Change Healthcare Inc. In exchange for the contribution, we initially owned approximately 70% of the joint venture with the remaining equity ownership of approximately 30% held by Change Healthcare Inc. The Change Healthcare JV is jointly governed by McKesson and shareholders of Change Healthcare Inc. The initial investment in Change Healthcare JV represented the fair value of our 70% equity interest in the joint venture upon closing of the transaction. We account for our investment in Change Healthcare JV using the equity method of accounting with a one-month reporting lag. The Company’s accounting policy is to disclose any intervening events of the joint venture in the lag period that could materially affect our condensed consolidated financial statements. Effective April 1, 2019, Change Healthcare JV adopted the amended revenue recognition guidance. In the first quarter of 2020, we recorded our proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax to the opening retained earnings. Initial Public Offering by Change Healthcare Inc. On June 27, 2019, common stock and certain other securities of Change Healthcare Inc. began trading on the NASDAQ (“IPO”). Change Healthcare Inc. is a holding company and does not own any material assets or have any operations other than through its interest in Change Healthcare JV. On July 1, 2019, upon the completion of its IPO, Change Healthcare Inc. received net cash proceeds of approximately $888 million. Change Healthcare Inc. contributed the proceeds from its offering of common stock of $609 million to Change Healthcare JV in exchange for additional membership interests of Change Healthcare JV (“LLC Units”) at the equivalent of its offering price of $13 per share. The proceeds from the concurrent offering of other securities of $279 million were used by Change Healthcare Inc. to acquire certain securities of Change Healthcare JV that substantially mirror the terms of other securities included in the offering by Change Healthcare Inc. Change Healthcare JV, in return, used the majority of the IPO proceeds to repay a portion of the joint venture’s outstanding debt. As a result, McKesson’s equity interest in Change Healthcare JV was diluted from approximately 70% to approximately 58.5% and Change Healthcare Inc. now owns approximately 41.5% of the outstanding LLC Units. Accordingly, in the second quarter of 2020, we recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between our proportionate share of the IPO proceeds and the dilution effect on our investment’s carrying value. Effective with the second quarter of 2020, we recognized our proportionate share of net income or loss based on our reduced equity interest in Change Healthcare JV, adjusted for the effect of basis differences and other items as applicable. This amount was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations. Since the completion of its IPO in July 2019, the fair value from the trading prices of Change Healthcare Inc.’s public common stock has been below the corresponding carrying value of our investment in Change Healthcare JV, triggering an other-than-temporary impairment (“OTTI”) evaluation. As of September 30, 2019, we expect to exit our investment in Change Healthcare JV within the next six to twelve months. In light of our planned exit and the corresponding publicly-traded share price of Change Healthcare Inc., we concluded an OTTI has occurred during our second quarter of 2020 and recorded a pre-tax impairment charge of $1,157 million ($864 million after-tax), representing the difference between the carrying value of our investment and the fair value derived from the corresponding closing price of Change Healthcare Inc.’s common stock at September 30, 2019. This charge was included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations. We recorded our proportionate share of loss from investment in Change Healthcare JV of $51 million and $47 million for the second quarter and first six months of 2020, and $56 million and $112 million for the second quarter and first six months of 2019. Our proportionate share of income or loss from this investment includes integration expenses incurred by Change Healthcare JV and basis differences between the joint venture and McKesson including amortization of fair value adjustments primarily representing incremental intangible assets. These amounts were included within equity earnings and charges from investment in Change Healthcare joint venture in our condensed consolidated statements of operations. At September 30, 2019 and March 31, 2019, our carrying value of this investment was $2,167 million and $3,513 million. Our carrying value included equity method intangible assets and goodwill which caused our investment basis to exceed our proportionate share of the Change Healthcare JV’s book value of net assets by approximately $2,090 million and $4,158 million at September 30, 2019 and March 31, 2019. Related Party Transactions In connection with the formation of Change Healthcare JV, McKesson, Change Healthcare JV and certain shareholders of Change Healthcare Inc. entered into various ancillary agreements, including transition services agreements (“TSA”), a transaction and advisory fee agreement (“Advisory Agreement”), a tax receivable agreement (“TRA”) and certain other agreements. Fees incurred or earned from Advisory Agreement were not material during the second quarters and first six months of 2020 and 2019. Fees incurred or earned from TSA were no t material for the second quarter and first six months of 2020 and $26 million and $36 million for the second quarter and first six months of 2019. During the second quarter of 2019, we renegotiated the terms of the TRA which resulted in the extinguishment and derecognition of the $90 million noncurrent liability. In exchange for the shareholders of Change Healthcare Inc. agreeing to extinguish the liability, we agreed to an allocation of certain tax amortization that had the effect of reducing the amount of a distribution from Change Healthcare JV that would otherwise have been required to be made to the shareholders of Change Healthcare Inc. As a result of the renegotiation, McKesson was relieved from any potential future obligations associated with the noncurrent liability and recognized a pre-tax credit of $90 million ($66 million after-tax) in operating expenses in the accompanying condensed consolidated statement of operations. At September 30, 2019 and March 31, 2019, we had no outstanding payable balance to the shareholders of Change Healthcare Inc. under the TRA. Revenues recognized and expenses incurred under these agreements with Change Healthcare JV were not material during the second quarters and first six months of 2020 and 2019. At September 30, 2019 and March 31, 2019, receivables due from the Change Healthcare JV were not material. Under the agreement executed in the second quarter of 2019 between Change Healthcare JV, McKesson, Change Healthcare Inc., and certain subsidiaries of Change Healthcare JV, McKesson has the ability to adjust the manner in which certain depreciation or amortization deductions are allocated among Change Healthcare Inc. and McKesson. McKesson currently intends to exercise its right under the agreement and allocate certain depreciation and amortization deductions to Change Healthcare Inc. for the tax year ended March 31, 2019. These allocated depreciation and amortization deductions are not expected to have a material effect on our condensed consolidated financial statements. Concurrent with the IPO, Change Healthcare Inc. appointed two of our current executive officers and our former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting we apply to our investment in Change Healthcare JV. There were no material transactions with Change Healthcare Inc.

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- Definition The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -SubTopic 10 -Section S99 -Paragraph 4 -Subparagraph (SX 210.3A-04) -URI http://asc.fasb.org/extlink&oid=116822174&loc=d3e355119-122828 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 323 -URI http://asc.fasb.org/topic&trid=2196965 + Details
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