This excerpt taken from the SSRX 20-F filed Jun 29, 2007.
Net revenues consist of the invoiced value of goods sold, net of VAT, trade discounts and allowances, and, in very rare circumstances, discretionary sales returns. In the PRC, VAT on the invoice amount is collected on behalf of tax authorities in respect of the sales of goods. Revenue is stated net of VAT. VAT collected from customers is set off by VAT paid for purchases, with the net amount recorded as a liability in the consolidated balance sheet until it is paid to the authorities.
We sell our products primarily to distributors, who resell them to healthcare providers, including hospitals and dialysis centers. With respect to our principal products, EPIAO and TPIAO, we rely on our own sales force to promote them to the hospitals and other customers. Because of PRC regulations governing the distribution of pharmaceuticals by manufacturers, we direct our customers to purchase our products from designated distributors. We generally sell our products to these distributors at a discount of approximately 8% off the wholesale prices to healthcare providers such as hospitals and dialysis centers. With respect to legacy products, Intefen and Inleusin, we primarily rely on distributors to market, as well as sell, our products with their own sales force. We reimburse the related costs of these distributors sales efforts in the form of a negotiated discount. For accounting purposes, we account for the net revenues generated from these indirect selling arrangements on a net basis in our statements of income, in accordance with Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendors Products), or EITF Issue No. 01-9. Accruals for reimbursement of the related selling costs to these distributors, based on pre-determined percentages of sales, are recorded as a reduction to net revenues.
We generally recognize revenues at the time our products are delivered and the customers take ownership and assume risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed. We are a party to binding purchase agreements with our distributors or with our hospital customers each time we make a sale of our products. Under these purchase agreements, our distributors or hospital customers agree to pay a non-refundable, fixed amount of money per unit of our products over a period of time. Our distributors take ownership of our products when either they themselves or the hospitals designated by them under contracts accept our products.