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Revenue from contracts with customers | 3 Months Ended
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Mar. 31, 2018
Revenue from contracts with customers | NOTE 9 – Revenue from contracts with customers: On January 1, 2018, Teva adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. The cumulative effect of initially applying the new revenue standard was immaterial. Revenue recognition prior to the adoption of the new revenue standard Please refer to note 1 to the consolidated financial statements and critical accounting policies included in our Annual Report on Form 10-K for the year ended December 31, 2017 for a summary of our significant accounting policies Revenue recognition following the adoption of the new revenue standard A contract with a customer exists only when: the parties to the contract have approved it and are committed to perform their respective obligations, the Company can identify each party’s rights regarding the distinct goods or services to be transferred (“performance obligations”), the Company can determine the transaction price for the goods or services to be transferred, the contract has commercial substance and it is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. Revenues are recorded in the amount of consideration to which the Company expects to be entitled in exchange for performance obligations upon transfer of control to the customer, excluding amounts collected on behalf of other third parties and sales taxes. The amount of consideration to which Teva expects to be entitled varies as a result of rebates, chargebacks, returns and other sales reserve and allowances (“SR&A”) the Company offers its customers and their customers, as well as the occurrence or nonoccurrence of future events, including milestone events. A minimum amount of variable consideration is recorded concurrently with the satisfaction of performance obligations to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Estimates of variable consideration are based on historical experience and the specific terms in the individual agreements (which the Company believes approximates expected value). Rebates and chargebacks are the largest components of SR&A. For further description of SR&A components and how they are estimated, see “Variable consideration” below. Shipping and handling costs after control over a product has transferred to a customer are accounted for as a fulfillment cost and are recorded under S&M expenses. Teva does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between the time of transfer of the promised goods or services to the customer and the time the customer pays for these goods or services to be generally one year or less. The Company’s credit terms to customers are in average between thirty and ninety days. The Company generally recognizes the incremental costs of obtaining contracts as an expense since the amortization period of the assets that the Company otherwise would have recognized is one year or less. The costs are recorded under S&M expenses. Similarly, Teva does not disclose the value of unsatisfied performance obligations for contracts with original expected duration of one year or less. Disaggregation of revenue The following table disaggregates Teva’s revenues by major revenue streams. For additional information on disaggregation of revenues see note 17.
|  | March 31, 2018 |
|  | North America |  |  | Europe |  |  | Growth Markets |  |  | Other activities |  |  | Total |
|  | (U.S. dollars in millions) |
Sale of goods |  |  | 2,168 |  |  |  | 1,429 |  |  |  | 519 |  |  |  | 177 |  |  |  | 4,293 |
Licensing arrangements |  |  | 32 |  |  |  | 10 |  |  |  | 20 |  |  |  | 2 |  |  |  | 64 |
Distribution |  |  | 331 |  |  |  | 3 |  |  |  | 153 |  |  |  | — |  |  |  | 487 |
Other |  |  | — |  |  |  | — |  |  |  | 58 |  |  |  | 163 |  |  |  | 221 |
|  | $ | 2,531 |  |  | $ | 1,442 |  |  | $ | 750 |  |  | $ | 342 |  |  | $ | 5,065 |
|  | March 31, 2017 |
|  | North America |  |  | Europe |  |  | Growth Markets |  |  | Other activities |  |  | Total |
|  | (U.S. dollars in millions) |
Sale of goods |  |  | 2,824 |  |  |  | 1,287 |  |  |  | 529 |  |  |  | 196 |  |  |  | 4,836 |
Licensing arrangements |  |  | 121 |  |  |  | 1 |  |  |  | 1 |  |  |  | 1 |  |  |  | 124 |
Distribution |  |  | 295 |  |  |  | 53 |  |  |  | 125 |  |  |  | — |  |  |  | 473 |
Other |  |  | — |  |  |  | — |  |  |  | 63 |  |  |  | 154 |  |  |  | 217 |
|  | $ | 3,240 |  |  | $ | 1,341 |  |  | $ | 718 |  |  | $ | 351 |  |  | $ | 5,650 |
Nature of revenue streams Revenue from sales of goods, including sales to distributors is recognized when the customer obtains control of the product. This generally occurs when products are shipped once the Company has a present right to payment, legal title, and risk and rewards of ownership are obtained by the customer. Licensing arrangements performance obligations generally include intellectual property (“IP”) rights, certain R&D and contract manufacturing services. The Company accounts for IP rights and services separately if they are distinct – i.e. if they are separately identifiable from other items in the arrangement and if the customer can benefit from them on their own or with other resources that are readily available to the customer. The consideration is allocated between IP rights and services based on their relative stand-alone selling prices. Revenue for distinct IP rights is accounted for based on the nature of the promise to grant the license. In determining whether the Company’s promise is to provide a right to access its IP or a right to use its IP, the Company considers the nature of the IP to which the customer will have rights. IP is either functional IP which has significant standalone functionality or symbolic IP which does not have significant standalone functionality. Revenue from functional IP is recognized at the point in time when control of the distinct license is transferred to the customer, when the Company has a present right to payment and risks and rewards of ownership are transferred to the customer. Revenue from symbolic IP is recognized over the access period to the Company’s IP. Revenue from sales based milestones and royalties promised in exchange for a license of IP is recognized only when, or as, the later of subsequent sale or the performance obligation to which some or all of the sales-based royalty has been allocated, has been satisfied. Revenues from licensing arrangements included royalty income of $21 million and $105 million for the three months ended March 31, 2018 and 2017, respectively. The amount recognized in 2017 includes royalty income resulting from the Ninlaro® transaction. Distribution revenues are derived from sales of third-party products for which the Company acts as distributor, mostly in the United States via Anda and in Israel. The Company is the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment and legal title, and risk and rewards of ownership are obtained by the customer. Other revenues are primarily comprised of contract manufacturing services, sales of medical devices, and other miscellaneous items. The Company is generally the principal in these arrangements and therefore records revenue on a gross basis as it controls the promised goods before transferring these goods to the customer. Revenue is recognized when the customer obtains control of the products. This generally occurs when products are shipped once the Company has a present right to payment, legal title, and risk and rewards of ownership are obtained by the customer. Contract assets and liabilities Contract assets are mainly comprised of trade receivables net of allowance for doubtful debts, which includes amounts billed and currently due from customers. Contract liabilities are mainly comprised of deferred revenues, which were immaterial as of March 31, 2018 and December 31, 2017, respectively. Variable consideration Variable consideration mainly includes SR&A, comprised of rebates (including Medicaid and other governmental program discounts), chargebacks, returns and other promotional (including shelf stock adjustments) items. Provisions for prompt payment discounts are netted against trade receivables. The Company recognizes these provisions at the time of sale and adjusts them if the actual amounts differ from the estimated provisions. The following briefly describes the nature of each deduction and how provisions are estimated: Rebates Rebates are primarily related to volume incentives and are offered to key customers to promote loyalty. These rebate programs provide that, upon the attainment of pre-established volumes or the attainment of revenue milestones for a specified period, the customer receives a rebate. Since rebates are contractually agreed upon, they are estimated based on the specific terms in each agreement based on historical trends and expected sales. Externally obtained inventory levels are evaluated in relation to estimates made for rebates payable to indirect customers. Medicaid and Other Governmental Rebates Pharmaceutical manufacturers whose products are covered by the Medicaid program are required to rebate to each state a percentage of their average manufacturer’s price for the products dispensed. Many states have also implemented supplemental rebate programs that obligate manufacturers to pay rebates in excess of those required under federal law. The Company estimates these rebates based on historical trends of rebates paid, as well as on changes in wholesaler inventory levels and increases or decreases in sales. Chargebacks The Company has arrangements with various third parties, such as managed care organizations and drug store chains, establishing prices for certain of Teva’s products. While these arrangements are made between the Company and the customers, the customers independently select a wholesaler from which they purchase the products. Alternatively, certain wholesalers may enter into agreements with the customers, with Teva’s concurrence, which establish the pricing for certain products which the wholesalers provide. Under either arrangement, Teva will issue a credit (referred to as a “chargeback”) to the wholesaler for the difference between the invoice price to the wholesaler and the customer’s contract price. Provisions for chargebacks involve estimates of contract prices of over 2,000 products and multiple contracts with multiple wholesalers. The provision for chargebacks varies in relation to changes in product mix, pricing and the level of inventory at the wholesalers and therefore will not necessarily fluctuate in proportion to an increase or decrease in sales. Provisions for estimating chargebacks are calculated using historical chargeback experience and/or expected chargeback levels for new products and anticipated pricing changes. Teva considers current and expected price competition when evaluating the provision for chargebacks. Chargeback provisions are compared to externally obtained distribution channel reports for reasonableness. The Company regularly monitors the provision for chargebacks and makes adjustments when the Company believes that actual chargebacks may differ from estimated provisions. Other Promotional Arrangements Other promotional or incentive arrangements are periodically offered to customers, specifically related to the launch of products or other targeted promotions. Provisions are made in the period for which the Company can estimate the incentive earned by the customer, in accordance with the contractual terms. The Company regularly monitors the provision for other promotional arrangements and makes adjustments when Teva believes that the actual provision may differ from the estimated provisions. Shelf Stock Adjustments The custom in the pharmaceutical industry is generally to grant customers a shelf stock adjustment based on the customers’ existing inventory contemporaneously with decreases in the market price of the related product. The most significant of these relate to products for which an exclusive or semi-exclusive period exists. Provisions for price reductions depend on future events, including price competition, new competitive launches and the level of customer inventories at the time of the price decline. Teva regularly monitors the competitive factors that influence the pricing of its products and customer inventory levels and adjust these estimates where appropriate. Returns Returns primarily relate to customer returns of expired products which, the customer has the right to return up to one year following the expiration date. Such returned products are destroyed and credits and/or refunds are issued to the customer for the value of the returns. Accordingly, no returned assets are recoded in connection with those products. The returns provision is estimated by applying a historical return rate to the amounts of revenue estimated to be subject to returns. Revenue subject to returns is estimated based on the lag time from time of sale to date of return. The estimated lag time is developed by analyzing historical experience. Additionally, The Company considers specific factors, such as levels of inventory in the distribution channel, product dating and expiration, size and maturity of launch, entrance of new competitors, changes in formularies or packaging and any changes to customer terms, for determining the overall expected levels of returns. Prompt Pay Discounts Prompt pay discounts are offered to most customers to encourage timely payment. Discounts are estimated at the time of invoice based on historical discounts in relation to sales. Prompt pay discounts are almost always utilized by customers. As a result, the actual discounts do not vary significantly from the estimated amount. SR&A to U.S. customers comprised approximately 86% of the Company’s total SR&A as of March 31, 2018, with the remaining balance primarily in Canada and Germany. The changes in SR&A for third-party sales for the period ended March 31, 2018 were as follows:
|  | Sales Reserves and Allowances |  |  |  |
|  | Reserves included in Accounts Receivable, net |  |  | Rebates |  |  | Medicaid and other governmental allowances |  |  | Chargebacks |  |  | Returns |  |  | Other |  |  | Total reserves included in Sales Reserves and Allowances |  |  | Total |
|  | (U.S. dollars in millions) |
Balance at December 31, 2017 |  | $ | 196 |  |  | $ | 3,077 |  |  | $ | 1,908 |  |  | $ | 1,849 |  |  | $ | 780 |  |  | $ | 267 |  |  | $ | 7,881 |  |  | $ | 8,077 |
Provisions related to sales made in current year period |  |  | 136 |  |  |  | 1,865 |  |  |  | 357 |  |  |  | 2,711 |  |  |  | 70 |  |  |  | 103 |  |  |  | 5,106 |  |  |  | 5,242 |
Provisions related to sales made in prior periods |  |  | 2 |  |  |  | (19 | ) |  |  | 3 |  |  |  | (1 | ) |  |  | 21 |  |  |  | (8 | ) |  |  | (4 | ) |  |  | (2 | )
Credits and payments |  |  | (157 | ) |  |  | (2,051 | ) |  |  | (349 | ) |  |  | (2,927 | ) |  |  | (119 | ) |  |  | (139 | ) |  |  | (5,585 | ) |  |  | (5,742 | )
Translation differences |  |  | 1 |  |  |  | 9 |  |  |  | 2 |  |  |  | 1 |  |  |  | 1 |  |  |  | (1 | ) |  |  | 12 |  |  |  | 13 |
Balance at March 31, 2018 |  | $ | 178 |  |  |  | 2,881 |  |  | $ | 1,921 |  |  | $ | 1,633 |  |  | $ | 753 |  |  | $ | 222 |  |  | $ | 7,410 |  |  | $ | 7,588 |

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 + Details
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