Financial Reporting & Analysis

Course Project
on
Ranbaxy Laboratories Limited

2nd Preliminary Progress Report

Submitted to: Prof. Manoj Kumar

By: Group F, Section F

Pankaj Kumar PGP 26354

Paramjeet Singh PGP 26355
Paramjyothi Akula PGP 26356
Prashant Rishi PGP 26357
Preetham N PGP 26358
Puneet Singh PGP 26359
Revenue Recognition

The Revenue Recognition policy of Ranbaxy Laboratories Limited is given in the Annual Report in the
Schedule - Significant Accounting Policies which are included in schedules forming part of consolidated
financial statements. The revenue recognition policy as per the Annual report of the company for the
year 2009, 2008, 2007, 2006 is reproduced below:

2009

Revenue from sale of goods is recognized on transfer of significant risks and rewards of ownership to the
customer. Revenue includes excise duty and is shown net of sales tax, value added tax and applicable
discounts and allowances. Allowances for sales returns are estimated and provided for in the year of
sales. Service income is recognized as per the terms of contracts with customers when the related
services are rendered, or the agreed milestones are achieved. Income from royalty, technical know-
how arrangements, exclusivity and patents settlement, licensing arrangements is recognized on an
accrual basis in accordance with the terms of the relevant agreement. Export entitlements are
recognized as income when the right to receive credit as per the terms of the scheme is established in
respect of the exports made and where there is no significant uncertainty regarding the ultimate
collection of the relevant export proceeds. Dividend income is recognized when the right to receive the
income is established. Income from interest on deposits, loans and interest bearing securities is
recognized on the time proportion method.

In the United States of America, large customers are major wholesalers who resell products to third
party customers like managed care organizations, drug store chains and pharmacies. A significant part of
gross revenues from such wholesalers are subject to various forms of rebates and allowances (referred
to as "Chargebacks"), which are recorded as reductions from the gross revenues. The computation of
the estimate for expected chargebacks is complex and involves significant judgment based on historical
experience and estimated wholesaler inventory levels, as well as expected sell-through levels by the
wholesalers to indirect customers. The primary factors considered in developing and evaluating
provision for chargeback includes the average historical chargeback credits and an estimate of the
inventory held by such wholesalers, based on internal analysis of wholesaler's historical purchases and
contract sales.
2008

Revenue is recognized to the extent that it can be reliably measured and is probable that the economic
benefits will flow to the Company. Sale of Goods: Revenue from sale of goods is recognized when the
significant risks and rewards of ownership of the goods are transferred to the customer and is stated net
of trade discounts, excise duty, sales returns and sales tax. Royalties, Technical Know-how and
Licensing income: Revenue is recognized on accrual basis in accordance with the terms of the relevant
agreement. Interest: Revenue is recognized on a time proportion basis taking into account the amount
outstanding and the applicable rate of interest. Dividends: Revenue is recognized when the right to
receive is established.

Chargebacks In the United States of America, large customers are the major wholesalers who resell
products to third party customers like managed care organisations, drug store chains and pharmacies. A
significant part of the gross revenues from such wholesalers are subject to various forms of rebates and
allowances (referred to as "Chargebacks"), which are recorded as reductions from the gross revenues.
The computation of the estimate for expected chargebacks is complex and involves significant judgment
based on historical experience and estimated wholesaler inventory levels, as well as expected sell-
through levels by the wholesalers to indirect customers. The primary factors considered in developing
and evaluating provision for chargebacks include the average historical chargeback credits and an
estimate of the inventory held by such wholesalers, based on internal analysis of wholesaler's historical
purchases and contract sales.

2007

Product sales Revenue from sales of active pharmaceutical ingredients and formulation products is
recognised when title and risk of loss of products are transferred to the customer, on shipment of
products for Free-on-Board ("FOB") shipping point sales and upon delivery to the customers for FOB
destination point sales and when the following criteria are met:

 Persuasive evidence of an arrangement exists;

 The price to the buyer is fixed and determinable; and
 Collectibility of the sales consideration is reasonably assured
Provisions for sales discounts, medicaid and other rebates, damaged product returns and exchanges for
expired products are recognised as a reduction of sales revenues. These revenue reductions are
established based on best estimates at the time of sale based on historical experience, adjusted to
reflect known changes in the factors that impact such reserves. These reductions are reflected either as
a direct reduction to accounts receivable or through an allowance.
In the United States, some of the large customers are major wholesalers who resell the products to third
party customers like managed care organisations, drug store chains and pharmacies. A significant part of
gross revenues from such wholesalers are subject to various forms of rebates and allowances (known as
"chargebacks"), which are recorded as reductions from gross revenues. The computation of the estimate
for expected chargebacks is complex and involves significant judgment based on historical experience
and estimated wholesaler inventory levels, as well as expected sell-through levels by the wholesalers to
indirect customers. The primary factors considered in developing and evaluating provision for
chargeback includes the average historical chargeback credits and an estimate of the inventory held by
the wholesalers, based on internal analysis of wholesaler's historical purchases and contract sales.
Actual experience associated with any of these items may be different to the Group's estimates and the
Group regularly reviews the factors that influence its estimates and, if necessary, makes adjustments
when it believes that actual product returns, credits, rebates, chargebacks and other allowances may
differ from established provisions. At December 31, 2007 and December 31, 2006, the Group had
reserves for chargebacks of Rs. 2,244.37 million and Rs. 2,910.39 million, respectively.

Service income
License fees The Group receives payments under various development, manufacturing, supply and
distribution agreements. Under the terms of these agreements, certain amounts may be received by the
Group prior to the commercial launch of a product and fulfilment of the Group's obligations under such
agreements. These amounts are recorded as deferred revenue and are amortised in the statement of
income from the date of commercial launch through the term of the related agreement. These
arrangements are generally for a period of 3 to 5 years. Non-refundable upfront payments received are
deferred and recognised in the consolidated statements of income on a straightline basis over the
estimated development period. Other milestone payments received are recognised in accordance with
the terms prescribed in the license agreement and where the Group has no future obligations or
continuing involvement pursuant to such milestone payment.
Royalty income is based on sales made by third parties and is recognised on an accrual basis, in
accordance with the terms of the respective agreements.

Other revenues include claim settlements and export incentives. Revenues from claim settlements are
recognised in accordance with the terms of related agreements in the period in which the claim is
established. Export incentives are recognised on an accrual basis when the right to receive the
incentives is established in accordance with the applicable laws.

2006
Revenue is recognized to the extent that it can be reliably measured and is probable that the economic
benefits will flow to the Company.

Sale of Goods Revenue from sale of goods is recognized when the significant risks and rewards of
ownership of the goods are transferred to the customer and is stated net of trade discounts, excise duty,
sales returns and other levies.

Royalties, Technical Know-how and Licensing income Revenue is recognized on accrual basis in
accordance with the terms of the relevant agreement.

Interest Revenue is recognized on a time proportion basis taking into account the amount outstanding
and the rate applicable.

Dividends Revenue is recognized when the right to receive is established.

Chargebacks In the United States, amongst Group’s large customers are the major wholesalers who
resell products to third party customers like managed care organisations, drug store chains and
pharmacies. A significant part of the gross revenues from such wholesalers are subject to various forms
of rebates and allowances (known as "Chargebacks"), which are recorded as reductions from gross
revenues. The computation of the estimate for expected chargebacks is complex and involves significant
judgment based on historical experience and estimated wholesaler inventory levels, as well as expected
sell-through levels by the wholesalers to indirect customers. The primary factor considered in
developing and evaluating provision for chargebacks include the average historical chargeback credits
and an estimate of the inventory held by such wholesalers, based on internal analysis of wholesaler's
historical purchases and contract sales.

Analysis
The company has been consistent in the revenue recognition policy over the four year period (2006-
2009) which we have analyzed. The company follows a conservative revenue recognition policy and
recognizes revenue when it has been established beyond doubt that significant proportions of the risks
and rewards associated with the ownership have been transferred to the counterparty. As per the
business model of the company in case of domestic sales of generics, the recognition occurs when the
product has reached the final hands, i.e. the stockists who receive it from the clearing and forwarding
agents. These stockists or retailers are the absolute last point where the company can actually recognize
its revenue. The company does not recognize its revenue when the products are being dispatched or
produced so as to minimize any adjustments, changes later to the accounts and financial statements.

USA is a key market for the Company, and the significant amount of revenue comes from here. The
company’s major clients here are wholesalers, managed care organizations etc. who are allowed
significant rebates and allowances known as chargebacks which are required to be deducted from gross
revenue received from these clients. The calculation of these chargebacks is quite complex and has not
been disclosed in the annual report.