Abbott Laboratories 2013 Annual Report Download - page 62

ABBOTT 2013 ANNUAL REPORT
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approvals across numerous countries and expanding its presence in
emerging markets. In the diagnostics business, Abbott will focus on
the development of next-generation instrument platforms and other
advanced technologies, expansion in emerging markets, and further
improvements in the segment’s operating margin. In the vascular
business, Abbott will continue to focus on marketing products
in the Xience and endovascular franchises, and increasing MitraClip
sales, as well as further clinical development of ABSORB, its biore-
sorbable vascular scaffold (BVS) device and a further penetration
of ABSORB in numerous countries. In Abbott’s other segments,
Abbott will focus on developing differentiated technologies in
higher growth markets.
CRITICAL ACCOUNTING POLICIES
Sales Rebates—In 2013, approximately 49 percent of Abbott’s
consolidated gross revenues were subject to various forms of
rebates and allowances that Abbott recorded as reductions of
revenues at the time of sale. Most of these rebates and allowances
are in the Established Pharmaceuticals and Nutritional Products
segments. Abbott provides rebates to state agencies that adminis-
ter the Special Supplemental Nutrition Program for Women,
Infants, and Children (WIC), 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. Factors used
in the rebate calculations include the identification of which
products have been sold subject to a rebate, which customer or
government agency price terms apply, and the estimated lag time
between sale and payment of a rebate. Using historical trends,
adjusted for current changes, Abbott estimates the amount of the
rebate that will be paid, and records the liability as a reduction of
gross sales when Abbott records its sale of the product. Settlement
of the rebate generally occurs from one to six months after sale.
Abbott regularly analyzes the historical rebate trends and makes
adjustments to reserves for changes in trends and terms of rebate
programs. Rebates and chargebacks charged against gross sales
in 2013, 2012 and 2011 amounted to approximately $2.0 billion,
$1.9 billion and $1.7 billion, respectively, or 16.1 percent, 16.0 percent
and 16.8 percent, respectively, based on gross sales of approxi-
mately $12.5 billion, $11.8 billion and $10.1 billion, respectively,
subject to rebate. A one-percentage point increase in the percentage
of rebates to related gross sales would decrease net sales by
approximately $125 million in 2013. Abbott considers a one-per-
centage point increase to be a reasonably likely increase in the
percentage of rebates to related gross sales. Other allowances
charged against gross sales were approximately $150 million,
$149 million and $117 million for cash discounts in 2013, 2012 and
2011, respectively, and $208 million, $199 million and $170 million
for returns in 2013, 2012 and 2011, respectively. Cash discounts
are known within 15 to 30 days of sale, and therefore can be
reliably estimated. Returns can be reliably estimated because
Abbott’s historical returns are low, and because sales returns
terms and other sales terms have remained relatively unchanged
for several periods.
Management analyzes the adequacy of ending rebate accrual
balances each quarter. In the domestic nutritional business,
management uses both internal and external data available
to estimate the level of inventory in the distribution channel.
Management has access to several large customers’ inventory
management data, and for other customers, utilizes data from a
third party that measures time on the retail shelf. These sources
allow management to make reliable estimates of inventory in the
distribution channel. Except for a transition period before or
after a change in the supplier for the WIC business in a state,
inventory in the distribution channel does not vary substantially.
Management also estimates the states’ processing lag time based
on claims data. In addition, internal processing time is a factor in
estimating the accrual. In the WIC business, the state where the
sale is made, which is the determining factor for the applicable
price, is reliably determinable. Estimates are required for the
amount of WIC sales within each state where Abbott has the
WIC business. External data sources utilized for that estimate are
participant data from the U.S. Department of Agriculture (USDA),
which administers the WIC program, participant data from some
of the states, and internally administered market research.
The USDA has been making its data available for many years.
Internal data includes historical redemption rates and pricing
data. At December 31, 2013, Abbott had WIC business in 23 states.
Historically, adjustments to prior years’ rebate accruals have not
been material to net income. Abbott employs various techniques
to verify the accuracy of claims submitted to it, and where possi-
ble, works with the organizations submitting claims to gain insight
into changes that might affect the rebate amounts. For government
agency programs, the calculation of a rebate involves interpreta-
tions of relevant regulations, which are subject to challenge or
change in interpretation.
Income Taxes—Abbott operates in numerous countries where
its income tax returns are subject to audits and adjustments.
Because Abbott operates globally, the nature of the audit items are
often very complex, and the objectives of the government auditors
can result in a tax on the same income in more than one country.
Abbott employs internal and external tax professionals to mini-
mize audit adjustment amounts where possible. In accordance
with the accounting rules relating to the measurement of tax
contingencies, in order to recognize an uncertain tax benefit, the
taxpayer must be more likely than not of sustaining the position,
and the measurement of the benefit is calculated as the largest
amount that is more than 50 percent likely to be realized upon
resolution of the benefit. Application of these rules requires a
significant amount of judgment. In the U.S., Abbott’s federal
income tax returns through 2010 are settled except for three
items, and the income tax returns for years after 2010 are open.
Abbott does not record deferred income taxes on earnings
reinvested indefinitely in foreign subsidiaries.
Pension and Post-Employment Benefits—Abbott offers pension
benefits and post-employment health care to many of its employees.
Abbott engages outside actuaries to assist in the determination
of the obligations and costs under these programs. Abbott must
develop long-term assumptions, the most significant of which are
the health care cost trend rates, discount rates and the expected
FINANCIAL REVIEW