Accounts Receivable, Sales and Allowances

The nature of the Company’s business inherently involves, in the ordinary course, significant amounts and substantial volumes of transactions and estimates relating to allowances for product returns, chargebacks, rebates, doubtful accounts and discounts given to customers. This is typical of the pharmaceutical industry and not necessarily specific to the Company. Depending on the product, the end-user customer, the specific terms of national supply contracts and the particular arrangements with the Company’s wholesaler customers, certain rebates, chargebacks and other credits are deducted from the Company’s accounts receivable. The process of claiming these deductions depends on wholesalers reporting to the Company the amount of deductions that were earned under the terms of the respective agreement with the end-user customer (which in turn depends on the specific end-user customer, each having its own pricing arrangement, which entitles it to a particular deduction). This process can lead to partial payments against outstanding invoices as the wholesalers take the claimed deductions at the time of payment.

With the exception of the provision for doubtful accounts, which is reflected as part of selling, general and administrative expense, the provisions for the following customer reserves are reflected as a reduction of revenues in the accompanying consolidated statements of comprehensive income. Additionally, with the exception of administrative fees and others, which is included as a current liability, the ending reserve balances are included in trade accounts receivable, net in the Company’s consolidated balance sheets.

As of and for the year ended December 31, 2016, the Company determined that in order to more closely align with internal analysis of associated reserves it would adjust the allowances disclosure to separately report rebates from chargebacks and rebates for both net trade accounts receivable and gross sales adjustments and to consolidate administrative fees and others with rebates for purposes of reporting gross sales to net revenues. All prior period information, including as of and for the years ended December 31, 2015 and 2014, have been recast to reflect this disclosure change.

Trade accounts receivable, net consists of the following (in thousands):



	December 31,
	2016			2015
Gross accounts receivable	$	519,175		$	466,570
Less reserves for:
Chargebacks	(80,360		)	(91,844		)
Rebates (1)	(97,935		)	(162,596		)
Product returns	(43,689		)	(48,333		)
Discounts and allowances	(12,389		)	(10,079		)
Advertising and promotions	(688		)	(1,518		)
Doubtful accounts	(960		)	(1,579		)
Trade accounts receivable, net	$	283,154		$	150,621

(1) - The primary reason for the significant decrease in the reserve for rebates for the twelve months period ended December 31, 2016 compared to the balance at December 31, 2015 is due to an abnormal delay in processing the 2015 rebates driven in part by the 2014 Financial Restatement efforts. In 2016, the rebates reserve balance declined each subsequent quarter-end reporting period as the Company progressively returned to normal processing timing of rebate claims. The rebates processed during full year 2016 are disclosed under the caption “charges processed,” in the table below.

For the years ended December 31, 2016, 2015 and 2014, the Company recorded the following adjustments to gross sales (in thousands):



	Year ended December 31,
	2016			2015			2014
Gross sales	$	2,891,267		$	2,511,693		$	1,433,603
Less adjustments for:
Chargebacks	(1,218,560		)	(1,065,244		)	(643,004		)
Rebates, administrative fees and others	(463,724		)	(367,514		)	(177,518		)
Product returns	(28,285		)	(34,272		)	(20,993		)
Discounts and allowances	(55,494		)	(50,384		)	(30,782		)
Advertising, promotions, and others	(8,361		)	(9,203		)	(6,258		)
Revenues, net	$	1,116,843		$	985,076		$	555,048

The annual activity in the Company’s allowance for customer deductions accounts for the three years ended December 31, 2016 is as follows (in thousands):



	Returns			Chargebacks			Rebates (1)			Discounts			Doubtful Accounts			Advert. & Promotions			Total
Balance at December 31, 2013	8,164			8,635			4,247			1,644			25			452			23,167
Provision	20,993			643,004			132,960			30,782			247			6,258			834,244
Additions from acquisitions	35,542			38,500			—			5,160			51			311			79,564
Charges processed	(20,053		)	(587,701		)	(41,533		)	(22,032		)	(14		)	(6,262		)	(677,595		)
Balance at December 31, 2014	$	44,646		$	102,438		$	95,674		$	15,554		$	309		$	759		$	259,380
Provision	34,272			1,065,244			295,787			50,384			840			9,203			1,455,730
Additions from acquisitions	—			—			—			—			291			—			291
Charges processed	(30,585		)	(1,075,838		)	(228,865		)	(55,859		)	139			(8,444		)	(1,399,452		)
Balance at December 31, 2015	$	48,333		$	91,844		$	162,596		$	10,079		$	1,579		$	1,518		$	315,949
Provision	28,285			1,218,560			384,074			55,494			—			8,361			1,694,774
Charges processed	(32,929		)	(1,230,044		)	(448,735		)	(53,184		)	(619		)	(9,191		)	(1,774,702		)
Balance at December 31, 2016	$	43,689		$	80,360		$	97,935		$	12,389		$	960		$	688		$	236,021

(1) - As provisions for rebates, administrative fees and others represent both contra-receivables and current liabilities, depending on the method of settlement, the cumulative provision relating to rebates, administrative fees and others is bifurcated as applicable based on the associated consolidated balance sheet classification. Accordingly, for the years ended December 31, 2016, 2015 and 2014, an additional $79.7 million, $71.7 million and $44.6 million, respectively, of provision was associated with administrative fees and others.

Provisions and utilizations of provisions activity in the current period which relate to prior period revenues are not provided because to do so would be impracticable. Our current systems and processes do not capture the chargeback and rebate settlements by the period in which the original sales transaction was recorded. Chargeback and rebate claims are not submitted by customers with sufficient details to link the accrual recorded at the point of sale with the settlement of the accrual. As a result, the Company is unable to reasonably determine the dollar amount of the change in estimate in its gross to net reporting reflected in its results of operations for each period presented, and, those changes could be significant. However, the Company uses a combination of factors and applications to estimate the dollar amount of reserves for chargebacks and rebates at each balance sheet date. The Company regularly monitors the chargeback reserve based on an analysis of the Company’s product sales and most recent claims, wholesaler inventory, current pricing, and anticipated future pricing changes. If claims are different from the estimate due to changes from estimated rates, accrual rate adjustments are considered prospectively when determining provisions in accordance with authoritative GAAP.