Pfizer 2015 Annual Report Download - page 75

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
74
2015 Financial Report
G. Revenues and Trade Accounts Receivable
Revenue Recognition—We record revenues from product sales when the goods are shipped and title passes to the customer. At the time of
sale, we also record estimates for a variety of revenue deductions, such as rebates, chargebacks, sales allowances and sales returns. When
we cannot reasonably estimate the amount of future sales returns and/or other revenue deductions, we record revenues when the risk of
product return and/or additional revenue deductions has been substantially eliminated.
Deductions from Revenues––Our gross product revenues are subject to a variety of deductions, that generally are estimated and recorded in
the same period that the revenues are recognized, and primarily represent rebates, chargebacks and sales allowances to government
agencies, wholesalers/distributors and managed care organizations with respect to our pharmaceutical products. These deductions represent
estimates of the related obligations and, as such, knowledge and judgment is required when estimating the impact of these revenue deductions
on gross sales for a reporting period.
Specifically:
• In the U.S., we record provisions for pharmaceutical Medicare, Medicaid, and performance-based contract rebates based upon our
experience ratio of rebates paid and actual prescriptions written during prior quarters. We apply the experience ratio to the respective
period’s sales to determine the rebate accrual and related expense. This experience ratio is evaluated regularly to ensure that the historical
trends are as current as practicable. We estimate discounts on branded prescription drug sales to Medicare Part D participants in the
Medicare “coverage gap,” also known as the “doughnut hole,” based on the historical experience of beneficiary prescriptions and
consideration of the utilization that is expected to result from the discount in the coverage gap. We evaluate this estimate regularly to ensure
that the historical trends and future expectations are as current as practicable. For performance-based contract rebates, we also consider
current contract terms, such as changes in formulary status and rebate rates.
• Outside the U.S., the majority of our pharmaceutical sales allowances are contractual or legislatively mandated and our estimates are
based on actual invoiced sales within each period, which reduces the risk of variations in the estimation process. In certain European
countries, rebates are calculated on the government’s total unbudgeted pharmaceutical spending or on specific product sales thresholds,
and we apply an estimated allocation factor against our actual invoiced sales to project the expected level of reimbursement. We obtain
third-party information that helps us to monitor the adequacy of these accruals.
• Provisions for pharmaceutical chargebacks (primarily reimbursements to U.S. wholesalers for honoring contracted prices to third parties)
closely approximate actual as we settle these deductions generally within two to five weeks of incurring the liability.
• Provisions for pharmaceutical sales returns are based on a calculation for each market that incorporates the following, as appropriate: local
returns policies and practices; historical returns as a percentage of sales; an understanding of the reasons for past returns; estimated shelf
life by product; an estimate of the amount of time between shipment and return or lag time; and any other factors that could impact the
estimate of future returns, such as loss of exclusivity, product recalls or a changing competitive environment. Generally, returned products
are destroyed, and customers are refunded the sales price in the form of a credit.
• We record sales incentives as a reduction of revenues at the time the related revenues are recorded or when the incentive is offered,
whichever is later. We estimate the cost of our sales incentives based on our historical experience with similar incentives programs to
predict customer behavior.
Our accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract rebates, chargebacks, sales
allowances and sales returns and cash discounts totaled $3.9 billion as of December 31, 2015, of which approximately $2.6 billion is included in
Other current liabilities, $272 million is included in Other noncurrent liabilities and approximately $1.1 billion is included against Trade accounts
receivable, less allowance for doubtful accounts, in our consolidated balance sheet. Our accruals for Medicare rebates, Medicaid and related
state program rebates, performance-based contract rebates, chargebacks, sales allowances and sales returns and cash discounts totaled $3.4
billion as of December 31, 2014, of which approximately $2.0 billion is included in Other current liabilities, $300 million is included in Other
noncurrent liabilities and approximately $1.1 billion is included against Trade accounts receivable, less allowance for doubtful accounts, in our
consolidated balance sheet. Total accruals for Medicare rebates, Medicaid and related state program rebates, performance-based contract
rebates, chargebacks, sales allowances and sales returns and cash discounts as of December 31, 2015 increased by approximately $500
million compared to December 31, 2014, primarily due to the addition, in 2015, of Hospira accruals.
Amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely
heavily on estimates and assumptions. For information about the risks associated with estimates and assumptions, see Note 1C.
Taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from Revenues.
Collaborative Arrangements—Payments to and from our collaboration partners are presented in our consolidated statements of income based
on the nature of the arrangement (including its contractual terms), the nature of the payments and applicable accounting guidance. Under co-
promotion agreements, we record the amounts received from our collaboration partners as alliance revenues, a component of Revenues, when
our collaboration partners are the principal in the transaction and we receive a share of their net sales or profits. Alliance revenues are recorded
when our collaboration partners ship the product and title passes to their customer. The related expenses for selling and marketing these
products are included in Selling, informational and administrative expenses. In collaborative arrangements where we manufacture a product for
our collaboration partners, we record revenues when our collaboration partners sell the product and title passes to their customers. All royalty
payments to collaboration partners are included in Cost of sales.
Trade Accounts Receivable—Trade accounts receivable are stated at their net realizable value. The allowance against gross trade accounts
receivable reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience,
specific allowances for known troubled accounts and other currently available information. Trade accounts receivable are written off after all
reasonable means to collect the full amount (including litigation, where appropriate) have been exhausted.