Pfizer 2010 Annual Report Download - page 61

Notes to Consolidated Financial Statements
Pfizer Inc. and Subsidiary Companies
H. Revenues
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 sales deductions, such as sales rebates, discounts and incentives, and
product returns. When we cannot reasonably estimate the amount of future product returns, we record revenues when the risk of
product return has been substantially eliminated. We record sales of certain of our vaccines to the U.S. government as part of the
Pediatric Vaccine Stockpile program; these rules require that for fixed commitments made by the U.S. government, we record
revenues when risk of ownership for the completed product has been passed to the U.S. government. There are no specific
performance obligations associated with products sold under this program.
Deductions from Revenues—As is typical in the biopharmaceutical industry, our gross product sales 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 and discounts to government agencies, wholesalers, distributors and managed care organizations with respect to our
pharmaceutical products. These deductions represent estimates of the related obligation and, as such, judgment and knowledge of
market conditions and practices are required when estimating the impact of these sales deductions on gross sales for a reporting
period.
Specifically:
•In the U.S., we record provisions for pharmaceutical Medicaid, Medicare and 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. As appropriate, we will adjust the ratio to better match our current experience or our expected future
experience. In assessing this ratio, we consider current contract terms, such as changes in formulary status and discount rates.
•Outside the U.S., the majority of our pharmaceutical rebates, discounts and price reductions are contractual or legislatively mandated,
and our estimates are based on actual invoiced sales within each period; both of these elements help to reduce the risk of variations in
the estimation process. Some European countries base their rebates on the government’s unbudgeted pharmaceutical spending, and
we use an estimated allocation factor (based on historical payments) and total revenues by country 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 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 returns are based on a calculation at each market that incorporates the following, as appropriate: local
returns policies and practices; 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.
•Our accruals for Medicaid rebates, Medicare rebates, performance-based contract rebates and chargebacks were $3.0 billion as of
December 31, 2010, and $2.1 billion as of December 31, 2009, and substantially all are included in Other current liabilities.
Taxes collected from customers relating to product sales and remitted to governmental authorities are presented on a net basis; that
is, they are excluded from Revenues.
Collaborative Arrangements––Payments to and from our collaboration partners are presented in the statement 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 partners as alliance revenues, a component of
Revenues, when our co-promotion partners are the principal in the transaction and we receive a share of their net sales or profits.
Alliance revenues are recorded when our co-promotion partners ship the product and title passes to their customers. 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 partner, we record revenues when our partner sells the product
and title passes to its customer. All royalty payments to collaboration partners are recorded as part of Cost of sales.
I. Cost of Sales and Inventories
We value inventories at lower of cost or market. The cost of finished goods, work in process and raw materials is determined using
average actual cost.
J. Selling, Informational and Administrative Expenses
Selling, informational and administrative costs are expensed as incurred. Among other things, these expenses include the costs of
marketing, advertising, shipping and handling, information technology and the associated employee compensation.
Advertising expenses relating to production costs are expensed as incurred, and the costs of radio time, television time and space in
publications are expensed when the related advertising occurs. Advertising expenses totaled approximately $4.0 billion in 2010,
$2.9 billion in 2009 and $2.6 billion in 2008.
2010 Financial Report 59