AstraZeneca Annual Report and Form 20-F Information 2011

Financial ReviewSensitivity analysis of the Group’s exposure to exchange rate andinterest rate movements is also detailed in Note 23 to the FinancialStatements from page 171.Critical accounting policies and estimatesOur Financial Statements are prepared in accordance with IFRSs asadopted by the EU (adopted IFRS) and as issued by the IASB, and theaccounting policies employed are set out in the Group AccountingPolicies section in the Financial Statements from page 146. In applyingthese policies, we make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingentassets and liabilities. The actual outcome could differ from thoseestimates. Some of these policies require a high level of judgementbecause the areas are especially subjective or complex. We believethat the most critical accounting policies and significant areas ofjudgement and estimation are in:> Revenue recognition> Research and development> Impairment testing of goodwill and intangible assets> Litigation> Post-retirement benefits> Taxation.Revenue recognitionRevenue is recorded at the invoiced amount (excluding inter-companysales and value added taxes) less movements in estimated accrualsfor rebates and chargebacks given to managed-care and othercustomers and product returns – a particular feature in the US. Theimpact in the rest of the world is not significant. It is the Group’s policyto offer a credit note for all returns and to destroy all returned stock inall markets. Cash discounts for prompt payment are also deductedfrom sales. Revenue is recognised at the point of delivery, which isusually when title passes to the customer either on shipment or onreceipt of goods by the customer depending on local trading terms.Income from royalties and from disposals of IP, brands and productlines is included in other operating income.Gross to net sales – US PharmaceuticalsRebates, chargebacks and returns in the USWhen invoicing sales in the US, we estimate the rebates andchargebacks that we expect to pay. These rebates typically arisefrom sales contracts with third party managed-care organisations,hospitals, long-term care facilities, group purchasing organisationsand various federal or state programmes (Medicaid ‘best price’contracts, supplemental rebates etc). They can be classifiedas follows:> Chargebacks, where we enter into arrangements under whichcertain parties, typically hospitals, the Department of VeteransAffairs, Public Health Service Covered Entities and the Departmentof Defense, are able to buy products from wholesalers at the lowerprices we have contracted with them. The chargeback is thedifference between the price we invoice to the wholesaler and thecontracted price charged by the wholesaler. Chargebacks are paiddirectly to the wholesalers.> Regulatory, including Medicaid and other federal and stateprogrammes, where we pay rebates based on the specific terms ofagreements with the US Department of Health and Human Servicesand with individual states, which include product usage andinformation on best prices and average market prices benchmarks.> Contractual, under which entities such as third party managed-careorganisations, long-term care facilities and group purchasingorganisations are entitled to rebates depending on specifiedperformance provisions, which vary from contract to contract.The effects of these deductions on our US pharmaceuticals revenueand the movements on US pharmaceuticals revenue provisions areset out below.Accrual assumptions are built up on a product-by-product andcustomer-by-customer basis, taking into account specific contractprovisions coupled with expected performance, and are thenaggregated into a weighted average rebate accrual rate for each of ourproducts. Accrual rates are reviewed and adjusted on a monthly basis.There may be further adjustments when actual rebates are invoicedbased on utilisation information submitted to us (in the case ofcontractual rebates) and claims/invoices are received (in the case ofregulatory rebates and chargebacks). We believe that we have madereasonable estimates for future rebates using a similar methodologyto that of previous years. Inevitably, however, such estimates involvejudgements on aggregate future sales levels, segment mix and thecustomer’s contractual performance.Gross sales 23,613 22,909 22,646Chargebacks (1,958) (2,075) (1,841)Regulatory – US government and state programmes (2,293) (1,949) (1,357)Contractual – Managed-care and group purchasing organisation rebates (5,437) (4,755) (4,752)Cash and other discounts (452) (437) (428)Customer returns (72) (21) (193)Other (276) (265) (196)Net sales 13,125 13,407 13,8792011$m2010$m2009$mMovement in provisions – US PharmaceuticalsBroughtforward at1 January2011$mProvision forcurrent year$mAdjustment inrespect ofprior years$mReturns andpayments$mCarriedforward at31 December2011$mChargebacks 523 2,012 (54) (2,086) 395Regulatory – US government and state programmes 1,122 2,364 (71) (2,125) 1,290Contractual – Managed-care and group purchasing organisation rebates 1,194 5,452 (15) (5,031) 1,600Cash and other discounts 41 452 – (452) 41Customer returns 133 75 (3) (84) 121Other 64 276 – (260) 80Total 3,077 10,631 (143) (10,038) 3,52794 Financial ReviewAstraZeneca Annual Report and Form 20-F Information 2011