REVENUE RECOGNITION

The Company’s revenues are primarily generated from product sales, primarily in the therapeutic areas of eye-health, GI and dermatology, that consist of: (i) branded pharmaceuticals, (ii) generic and branded generic pharmaceuticals, (iii) OTC products and (iv) medical devices (contact lenses, intraocular lenses, ophthalmic surgical equipment and aesthetics devices). Other revenues include alliance and service revenue from the licensing and co-promotion of products and contract service revenue primarily in the areas of dermatology and topical medication. Contract service revenue is derived primarily from contract manufacturing for third parties and is not material. See Note 20, "SEGMENT INFORMATION" for the disaggregation of revenue which depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by the economic factors of each category of customer contracts.

Product Sales Provisions

As is customary in the pharmaceutical industry, gross product sales are subject to a variety of deductions in arriving at reported net product sales. The transaction price for product sales is typically adjusted for variable consideration, which may be in the form of cash discounts, allowances, returns, rebates, chargebacks and distribution fees paid to customers. Provisions for variable consideration are established to reflect the Company’s best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in the future period.

Provisions for these deductions are recorded concurrently with the recognition of gross product sales revenue and include cash discounts and allowances, chargebacks, and distribution fees, which are paid to direct customers, as well as rebates and returns, which can be paid to direct and indirect customers. Returns provision balances and volume discounts to direct customers are included in Accrued and other current liabilities. All other provisions related to direct customers are included in Trade receivables, net, while provision balances related to indirect customers are included in Accrued and other current liabilities.

The following tables present the activity and ending balances of the Company’s variable consideration provisions for the three months ended March 31, 2019 and 2018.



	Three Months Ended March 31, 2019
(in millions)	Discounts and Allowances			Returns			Rebates			Chargebacks			Distribution Fees			Total
Reserve balances, January 1, 2019	$	175		$	813		$	1,024		$	209		$	163		$	2,384
Acquisition of Synergy	—			3			12			—			1			16
Current period provisions	204			33			533			443			48			1,261
Payments and credits	(210		)	(55		)	(568		)	(497		)	(85		)	(1,415		)
Reserve balances, March 31, 2019	$	169		$	794		$	1,001		$	155		$	127		$	2,246

Included in Rebates in the table above are cooperative advertising credits due to customers of approximately $27 million and $26 million as of March 31, 2019 and January 1, 2019, respectively, which are reflected as a reduction of Trade receivables, net in the Consolidated Balance Sheets. There were no price appreciation credits for the three months ended March 31, 2019.



	Three Months Ended March 31, 2018
(in millions)	Discounts and Allowances			Returns			Rebates			Chargebacks			Distribution Fees			Total
Reserve balances, January 1, 2018	$	167		$	863		$	1,094		$	274		$	148		$	2,546
Current period provisions	184			88			635			477			48			1,432
Payments and credits	(199		)	(75		)	(620		)	(474		)	(81		)	(1,449		)
Reserve balances, March 31, 2018	$	152		$	876		$	1,109		$	277		$	115		$	2,529

Included as a reduction of current period provisions for Distribution Fees in the table above are price appreciation credits of $15 million for the three months ended March 31, 2018.

Contract Assets and Contract Liabilities

There are no contract assets for any period presented. Contract liabilities consist of deferred revenue, the balance of which is not material to any period presented.