AbbVie 2012 Annual Report Download - page 59

accounting policies is included in Note 2. Certain of these policies are considered critical as these most
significantly impact the company’s financial condition and results of operations and require the most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Actual results may vary from these estimates.
Revenue Recognition
AbbVie recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the sales price is fixed or determinable, and collectability of the sales price is reasonably assured.
Revenue from product sales is recognized when title and risk of loss have passed to the customer.
Rebates
AbbVie provides rebates to pharmacy benefit management companies, state agencies that administer
the federal Medicaid program, insurance companies that administer Medicare drug plans, wholesalers,
group purchasing organizations, and other government agencies and private entities. Rebate amounts
are usually based upon the volume of purchases using contractual or statutory prices for a product. For
each type of rebate, the factors used in the calculations of the accrual for that rebate include the
identification of which products have been sold subject to the rebate, which customer or government
agency price terms apply for that rebate, and the estimated lag time between sale and payment of the
rebate. Using historical trends for that rebate, adjusted for current changes, AbbVie estimates the
amount of the rebate that will be paid, and records the liability as a reduction of gross sales when
AbbVie records its sale of the product. Settlement of the rebate generally occurs from two to eight
months after sale. AbbVie regularly analyzes the historical rebate trends and makes adjustments to
reserves for changes in trends and terms of rebate programs.
Rebate and chargeback accruals are recorded in the same period as the related sales, and are reflected
as a reduction of sales. Rebates and chargebacks in 2012, 2011 and 2010 totaled $4.3 billion,
$3.7 billion and $3.4 billion, respectively, or 28 percent, 25 percent and 28 percent, respectively, of the
gross sales subject to rebate. A one-percentage point increase in the percentage of rebates to related
gross sales would decrease net sales by $152 million in 2012. AbbVie considers a one-percentage point
increase to be a reasonably likely increase in the percentage of rebates to related gross sales. Other
allowances for cash discounts and returns charged against gross sales were $667 million, $617 million
and $453 million in 2012, 2011 and 2010, respectively.
Management analyzes the adequacy of ending rebate accrual balances each quarter. In the United
States, the most significant charges against gross sales are for Medicaid and Medicare rebates,
pharmacy benefit manager rebates and wholesaler chargebacks. Medicaid rebates relate to the Federal
Medicaid program, which is administered by state agencies, whereby rebates are provided to
participating state and local government entities under various laws and regulations and in some cases
supplemental rebates are also provided to the states under contractual agreements. Medicare rebates
are negotiated with managed care organizations that manage prescription drug plans covering the
Medicare Part D drug benefit. Pharmacy benefit manager rebates arise from contractual agreements
with private health care plans that seek to reduce costs by negotiating discounts with pharmaceuticals
manufacturers. Under wholesaler chargeback programs, the wholesaler charges AbbVie back for the
difference between the price paid by the wholesaler to AbbVie and the price paid by the end customer
to the wholesaler under contractual discount agreements negotiated between AbbVie and the end
customer. In order to evaluate the adequacy of the ending accrual balances, for each type of rebate,
management uses both internal and external data to estimate the level of inventory in the distribution
channel and the rebate claims processing lag time for that rebate. External data sources used to
estimate the inventory in the distribution channel include inventory levels periodically reported by
wholesalers. Management estimates the processing lag time based on periodic sampling of claims data.
To estimate the price rebate percentage, systems and calculations are used to track sales by product and
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