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 is 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 that entitles it to a particular deduction). This process can lead to partial payments to the Company 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 (loss) 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.

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



	December 31,
	2018			2017
Gross accounts receivable (1)	$	308,305		$	378,759
Less reserves for:
Chargebacks (2)	(55,312		)	(73,984		)
Rebates (2)	(55,963		)	(111,945		)
Product returns	(35,146		)	(41,687		)
Discounts and allowances	(6,561		)	(7,779		)
Advertising and promotions	(1,574		)	(1,301		)
Doubtful accounts	(623		)	(680		)
Trade accounts receivable, net	$	153,126		$	141,383

(1) The reduction in the Gross accounts receivable balance as of December 31, 2018 when compared to the December 31, 2017 balance is due to the decline in Gross sales in the fourth quarter of 2018 compared to the fourth quarter of 2017.

(2) The reductions in the reserve for chargebacks and in the reserve for rebates as of December 31, 2018 compared to December 31, 2017 is primarily due to payment timing, product mix, customer mix and lower wholesaler inventory. Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in an increase in chargebacks and a decrease in rebates, which is also a contributing factor in the comparability between the two periods compared.

For the years ended December 31, 2018, 2017 and 2016, the Company recorded the following adjustments to gross sales (in thousands):



	Year ended December 31,
	2018			2017			2016
Gross sales	$	1,887,862		$	2,351,071		$	2,891,267
Less adjustments for:
Chargebacks (1)	(830,038		)	(953,326		)	(1,218,560		)
Rebates, administrative fees and others (1)	(297,802		)	(476,601		)	(463,724		)
Product returns	(20,162		)	(26,874		)	(28,285		)
Discounts and allowances	(36,933		)	(45,292		)	(55,494		)
Advertising, promotions, and others	(8,909		)	(7,933		)	(8,361		)
Revenues, net	$	694,018		$	841,045		$	1,116,843

(1) The decreases in chargebacks and rebates, administrative and other fees for the twelve month period ended December 31, 2018 compared to the same period in 2017, were primarily due to product mix, customer mix, volume declines, and price erosion due to increased industry pricing pressure and the competitive nature of our business. Additionally, a change in contractual terms with a major customer in the first quarter of 2018 resulted in an increase in chargebacks and a decrease in rebates, which is also a contributing factor in the variances between the two periods compared.

The annual activity in the Company’s allowance for customer deductions accounts for the three years ended December 31, 2018 is as follows (in thousands):



	Returns			Chargebacks			Rebates (1)			Discounts			Doubtful Accounts			Advertising & Promotions			Total
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
Provision	26,874			953,326			416,125			45,292			—			7,933			1,449,550
Charges processed	(28,876		)	(959,702		)	(402,115		)	(49,902		)	(280		)	(7,320		)	(1,448,195		)
Balance at December 31, 2017	$	41,687		$	73,984		$	111,945		$	7,779		$	680		$	1,301		$	237,376
Provision	20,162			830,038			257,417			36,933			—			8,909			1,153,459
Charges processed	(26,703		)	(848,710		)	(313,399		)	(38,151		)	(57		)	(8,636		)	(1,235,656		)
Balance at December 31, 2018	$	35,146		$	55,312		$	55,963		$	6,561		$	623		$	1,574		$	155,179

(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, 2018, 2017 and 2016, an additional $40.4 million, $60.5 million and $79.7 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.