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Investment in Change Healthcare Joint Venture
 9 Months Ended
Dec. 31, 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, the Company contributed the majority of its 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, the Company 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 McKesson’s 70% equity interest in the joint venture upon closing of the transaction.
The Company accounts for its 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 its condensed consolidated financial statements. Effective April 1, 2019, Change Healthcare JV adopted the amended revenue recognition guidance. In the first quarter of 2020, the Company recorded its proportionate share of the joint venture’s adoption impact of the amended revenue recognition guidance of approximately $80 million, net of tax, to the Company’s 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 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, the Company recognized a pre-tax dilution loss of $246 million ($184 million after-tax) primarily representing the difference between its proportionate share of the IPO proceeds and the dilution effect on the investment’s carrying value. Effective with the second quarter of 2020, the Company recognized its proportionate share of net income or loss based on its 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 the Company’s condensed consolidated statements of operations.
In the second quarter of 2020, the Company recorded a pre-tax other-than-temporary impairment (“OTTI”) charge of $1.2 billion ($864 million after-tax) to its investment in Change Healthcare JV, representing the difference between the carrying value of the Company’s 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 the Company’s condensed consolidated statements of operations for the nine months ended December 31, 2019. On February 4, 2020, the Company’s wholly-owned subsidiary, PF2 SpinCo, Inc. filed a registration statement with the SEC on Form S-4 and Form S-1 relating to a potential exit by the Company from its investment in the Change Healthcare JV.
The Company recorded its proportionate share of loss from its investment in Change Healthcare JV of $28 million and $75 million for the three and nine months ended December 31, 2019, and $50 million and $162 million for the three and nine months ended December 31, 2018. The Company’s 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 the Company’s condensed consolidated statements of operations.
At December 31, 2019 and March 31, 2019, the Company’s carrying value of this investment was $2.1 billion and $3.5 billion. The carrying value included equity method intangible assets and goodwill which caused the Company’s investment basis to exceed its proportionate share of the Change Healthcare JV’s book value of net assets by approximately $2.0 billion and $4.2 billion at December 31, 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 the Advisory Agreement were not material during the three and nine months ended December 31, 2019 and 2018. Fees incurred or earned from the TSA were not material for the three months ended December 31, 2019 and $18 million for the nine months ended December 31, 2019. These fees were $12 million and $48 million for the three and nine months ended December 31, 2018. During the second quarter of 2019, the Company 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, the Company 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 its condensed consolidated statement of operations in the second quarter of 2019. At December 31, 2019 and March 31, 2019, the Company 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 three and nine months ended December 31, 2019 and 2018. At December 31, 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 the Company’s condensed consolidated financial statements.
Concurrent with the IPO in July 2019, Change Healthcare Inc. appointed two of the Company’s executive officers as well as McKesson’s former chief executive officer to its Board of Directors. These appointments had no impact on the equity method of accounting the Company applies to its investment in Change Healthcare JV. There were no material transactions with Change Healthcare Inc.