Comparative Revenue Recognition in the Pharmaceutical Industry Across the United States, the United Kingdom, and India

Abstract

A technical accounting challenge that has substantial implications for reported growth, margins and investor interpretation in the pharmaceutical sector is revenue recognition. In this paper, the authors will examine the nature of ASC 606, IFRS 15 and Ind AS 115, as well as the recent annual reports of U.S. Pfizer, Merck and Eli Lilly with the U.K. GSK, AstraZeneca and Hikma as well as the India firms Sun Pharmaceutical Industries, Cipla and Dr. Reddy's Laboratories, in order to compare the revenue recognition in the United States, the United Kingdom and India. The analysis reveals high formal convergence as all three frameworks employ a five-step model, where a control-based approach is applied, and involve a level of estimation for variable consideration. Practical divergence is caused by the structure of markets and the disclosure practice. The U.S. pharmaceutical industry reports gross revenue but has a heavy reliance on gross-to-net deductions, primarily rebates, chargebacks and sales returns. In the case of UK IFRS reporters, estimation problems are found to be similar in nature, as are problems in the separation of product sales and alliance and collaboration revenue in the case of AstraZeneca. Indian Ind AS reporting has the same model but can offer greater transparency around the reconciling of contracted price to recognized revenue as Sun Pharma demonstrates. The paper concludes with policy recommendations for standard-setters, regulators and auditors, and pharmaceutical preparers, that revenue recognition is not only possible once there is a converged standard, but rather disclosure of transparent, comparable and auditable transaction-price estimates, performance obligations and contract balances is essential for publication-quality revenue recognition.