Amgen 2015 Annual Report Download - page 61

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Summary of Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and the notes to the financial statements.
Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates
under different assumptions or conditions.
Product sales and sales deductions
Revenues from sales of our products are recognized when the products are shipped and title and risk of loss have passed.
Product sales are recorded net of accruals for estimated rebates, wholesaler chargebacks, cash discounts and other deductions
(collectively, “sales deductions”) and returns, which are established at the time of sale.
We analyze the adequacy of our accruals for sales deductions quarterly. Amounts accrued for sales deductions are adjusted
when trends or significant events indicate that adjustment is appropriate. Accruals are also adjusted to reflect actual results. Amounts
recorded in Accrued liabilities in the Consolidated Balance Sheets for sales deductions were as follows (in millions):
Rebates Chargebacks Other deductions Total
Balance as of January 1, 2013 $ 847 $ 167 $ 115 $ 1,129
Amounts charged against product sales 1,784 3,008 669 5,461
Payments (1,736)(2,924)(682)(5,342)
Balance as of December 31, 2013 895 251 102 1,248
Amounts charged against product sales 2,499 3,399 688 6,586
Payments (2,274)(3,454)(727)(6,455)
Balance as of December 31, 2014 1,120 196 63 1,379
Amounts charged against product sales 2,734 4,275 732 7,741
Payments (2,735)(4,198)(701)(7,634)
Balance as of December 31, 2015 $ 1,119 $ 273 $ 94 $ 1,486
For the years ended December 31, 2015, 2014 and 2013, total sales deductions were 27%, 25% and 23% of gross product
sales, respectively. Included in the amounts are immaterial adjustments related to prior-year sales due to changes in estimates.
Such amounts represent less than 3% of the aggregate sales deductions charged against product sales in each of the three years
ended December 31, 2015.
In the United States, we utilize wholesalers as the principal means of distributing our products to healthcare providers, such
as physicians or their clinics, dialysis centers, hospitals and pharmacies. Products we sell in Europe are distributed principally to
hospitals and/or wholesalers depending on the distribution practice in each country where the product is sold. We monitor the
inventory levels of our products at our wholesalers by using data from our wholesalers and other third parties, and we believe
wholesaler inventories have been maintained at appropriate levels (generally two to three weeks) given end-user demand.
Accordingly, historical fluctuations in wholesaler inventory levels have not significantly impacted our method of estimating sales
deductions and returns.
Accruals for sales deductions are based primarily on estimates of the amounts earned or to be claimed on the related sales.
These estimates take into consideration current contractual and statutory requirements, specific known market events and trends,
internal and external historical data and forecasted customer buying patterns. Sales deductions are substantially product-specific
and, therefore, for any given year, can be impacted by the mix of products sold.
Rebates include primarily amounts paid to payers and providers in the United States, including those paid to state Medicaid
programs, and are based on contractual arrangements or statutory requirements which vary by product, by payer and by individual
payer plans. As we sell product, we estimate the amount of rebate we will pay based on the product sold, contractual terms,
estimated patient population, historical experience and wholesaler inventory levels and accrue these rebates in the period the
related sale is recorded. We then adjust the rebate accruals as more information becomes available and to reflect actual claims
experience. Estimating such rebates is complicated, in part because of the time delay between the date of sale and the actual
settlement of the liability. We believe the methodology we use to accrue for rebates is reasonable and appropriate given current
facts and circumstances, but actual results may differ. For example, we had managed Medicaid rebate adjustments of $164 million
in 2013. Changes in annual estimates related to prior annual periods were less than 3% of the estimated rebate amounts charged
against product sales for the years ended December 31, 2015 and 2014, and less than 10% for the year ended December 31, 2013,
including the aforementioned adjustment. A 10% change in our rebate estimate attributable to rebates recognized in 2015 would