AbbVie 2014 Annual Report Download - page 54

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. generally accepted accounting
principles requires the use of estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenue and expenses. A summary of the company’s significant
accounting policies is included in Note 2 to the consolidated financial statements. 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 2014, 2013 and 2012 totaled $5.9 billion,
$4.9 billion, and $4.3 billion, respectively, or 29 percent, 30 percent, and 28 percent, respectively, of the
gross sales subject to rebate. A one-percentage point increase in the percentage of rebates to related
annual gross sales would decrease net sales by $201 million in 2014. 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 $610 million, $748 million, and
$667 million in 2014, 2013 and 2012, 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, managed
care 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,
48 2014 Form 10-K