Professional Documents
Culture Documents
Us Gaap Issues Nov 2013
Us Gaap Issues Nov 2013
Pharmaceuticals
and Life Sciences
November 2013
Foreword
The contents of this publication are based on guidance effective as of September 30,
2013. Accordingly, certain solutions in the publication may be superseded as new
guidance and interpretations emerge.
We hope you find this publication useful in understanding the accounting for
common transactions you encounter in your business. By stimulating debate on these
topics through this publication, we hope we will encourage consistent practices by
pharmaceutical and life sciences companies in financial reporting under US GAAP.
This consistency will be critical to the continued usefulness and transparency of
pharmaceuticals and life sciences companies financial statements.
Portions of various FASB documents included in this work, copyrighted by the Financial
Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, are reproduced with permission.
Table of contents
Manufacturing 39
34. Treatment of validation batches 40
35. Treatment and presentation of development supplies 41
36. Pre-launch inventoryTreatment of in-development drugs 42
37. Recognition of raw materials as inventory 44
38. Indicators of impairmentInventory 45
39. Patent protection costs 46
Healthcare Reform 57
46. Accounting for the annual pharmaceutical manufacturers fee 58
47. Accounting for the Medicare coverage gap 59
Revenue recognitionGeneral 73
56. Revenue recognition for a newly launched product 74
57. Pay-for-performance arrangements 75
58. Revenue recognition to customers with a history of long delays in payment 77
Business combination 78
59. Asset acquisition versus business combination 79
60. Accounting for acquired IPR&D 80
61. Unit of accountIPR&D 81
62. Pre-existing relationships in a business combination 82
63. Useful economic lives of intangibles 84
Acknowledgements 85
Contacts 86
Capitalization and impairment
PwC 1
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Costs to perform research and development, including internal development costs, should be expensed as incurred.
2 PwC
Capitalization and impairment
Solution
No. Costs to perform research and development, including internal development costs, should be expensed as incurred, regardless
of past history with similar drugs or regulatory approval expectations. Research and development costs should not becapitalized.
PwC 3
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
No. The development costs should be expensed as incurred, regardless of the probability of success and history.
4 PwC
Capitalization and impairment
Solution
No. Research and development costs should be expensed as incurred.
PwC 5
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
No. CompanyA should expense sales and marketing expenditures such as training a sales force or performing market research as
incurred. This type of expenditure does not create, produce or prepare the asset for its intended use.
6 PwC
Capitalization and impairment
Solution
No. CompanyA should expense as incurred the costs of adding new functionality as these costs are research and
developmentexpenditures.
PwC 7
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
No. Costs to perform research and development, including internal development costs, should be expensed as incurred, regardless
of history with similar drugs or regulatory expectations.
8 PwC
Capitalization and impairment
Solution
Research and development costs could include materials, equipment or facility charges, compensation and benefits for personnel,
intangible assets purchased from others (if they do not have alternative use or have not achieved technological feasibility), the cost
of contract services performed by others and a reasonable allocation of indirect costs.
CompanyA determined that the cost associated with the identification of a new formulation would be expensed as research and
development costs, while the cost associated with the routine update to the manufacturing line would be expensed to cost of sales.
PwC 9
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Because the compound was acquired prior to regulatory approval, the payment would be expensed as research and development
costs (since there is no alternative future use and the acquired asset does not constitute a business). If the compound had been
acquired after regulatory approval, CompanyA would begin amortizing the intangible asset on the date it is available for its
expected use. This would generally be the acquisition date for an approved compound.
10 PwC
Capitalization and impairment
Solution
Management can regard an asset as having an indefinite life if there are no factors (as cited above) that would limit the assets
useful life. If an asset has an indefinite life, management is required to test it for impairment by comparing its fair value
with its carrying value both annually and more frequently if there is an indication that the intangible asset may be impaired.
Pharmaceutical intangible assets that might be regarded as having an indefinite life could include acquired brands (e.g., over
the counter products) or generic products. Technological and medical advances will reduce the number of situations where an
indefinite life would apply. As a result of limited patent lives, only in exceptional cases would prescription pharmaceutical products
have indefinite economic lives.
PwC 11
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
ASC360103521 provides several examples of events or changes in circumstances (not all-inclusive) that management
should consider when assessing whether an intangible asset should be tested for impairment. Some of the events or changes in
circumstances include: a significant decrease in the market price of the long-lived asset, a significant adverse change in the manner
in which the asset is used or a significant adverse legal event.
Management of pharmaceutical and life sciences entities should also consider other industry-specific indicators, including:
Changes or anticipated changes in participation rates or reimbursement policies of insurance companies, Medicare or
thegovernment.
12 PwC
Capitalization and impairment
Solution
CompanyA should consider the general indicators given in ASC360103521 when assessing whether there is an impairment of
property, plant and equipment. In addition, pharmaceutical and life sciences entities should consider industry-specific factors such
as the following:
Technical obsolescence of the property, plant and equipment (for example, because it cannot accommodate new
marketpreferences);
Changes or anticipated changes in third-party reimbursement policies that will impact the price received for the sale of
product manufactured by the property, plant and equipment.
As a result of withdrawing the product, CompanyA determined that the property, plant and equipment was fully impaired as there
were no future cash flows associated with the long-lived asset group.
PwC 13
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyA acquired the rights to market the fungicide cream over a broad territory and not specifically in CountryX. Therefore,
the entire territory would likely represent the lowest level of identifiable cash flows for testing impairment of the marketing rights.
Because revenues from product sales in CountryX were not significant, the withdrawal of the product from CountryXs market
would not be considered a triggering event that would require an impairment analysis to be performed.
However, CompanyA should carefully consider whether the development of blisters in patients in Country X is indicative of
potential problems in other territories. If the issue cannot be isolated, a triggering event would be considered to have occurred
and a broader impairment analysis should be performed, including the consideration of the potential for more wide-ranging
decreasesin sales.
14 PwC
Capitalization and impairment
Solution
Assuming that the antidepressant asset group represents the lowest level of identifiable cash flows, CompanyA should evaluate
the carrying amount of the antidepressants asset group (including the production line) relative to its future undiscounted cash
flows. An impairment loss should be recognized if the carrying amount of the antidepressants asset group exceeds the future
undiscounted cash flows. The resulting impairment would be based on the difference between the carrying amount of the unit and
its fair value.
In addition, CompanyA should revise the estimated useful life of the affected assets remaining after the impairment analysis is
performed based on the estimated period it expects to obtain economic benefit from the assets. After recognizing the impairment
and revising the estimated useful life for the affected assets, CompanyA would continue to amortize the remainder of the asset over
its expected useful life.
PwC 15
Externally
Research and
sourced
development
research
and development
16 PwC
Externally sourced research and development
The fair value of neither the asset(s) received nor the asset(s)
relinquished is determinable within reasonable limits.
Solution
CompanyA should recognize the compound received at the fair value of the compound given up, which is $3 million. CompanyA
should also recognize a gain on the exchange of $3 million ($3 millionzero book value for the compound Company A gave up)
because CompanyA has no continuing involvement or additional obligations with respect to the product given up.
PwC 17
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyA should recognize the compound received at the fair value of the compound given up, which is $2million
($3million$1 million). The fair value of $1 million relating to the marketing rights is excluded from the calculation becausethe
rights have not been sold.
CompanyA needed to assess whether it had continuing involvement related to the compound it had exchanged to determine the
appropriate accounting for the $2 million. If CompanyA has determined it had continuing involvement, the gain would be deferred
and recognized over the continuing involvement period. The SEC Staff has reiterated that ASC845, Nonmonetary Transactions,
is a measurement standard and does not address the timing of revenue or gain recognition. CompanyA would need to assess the
earned and realized criteria of CON 5, Recognition and Measurement in Financial Statements of Business Enterprises, and the
performance and delivery criteria of SAB Topic 13.A to determine the appropriate recognition timing.
18 PwC
Externally sourced research and development
Solution
CompanyB should initially recognize the shares received as available-for-sale securities at their fair value. CompanyB should also
derecognize the patent that is transferred to CompanyA, and recognize any gain arising from the sale of the patent. The fair value
of the shares received represents the amount of the consideration received, which would likely be used to measure this transaction
as it is more readily determinable (market quoted value) than the value of the patent given up. As CompanyB is in the business of
routinely licensing and selling patents in its patent portfolio, it would be appropriate to recognize a gain on the sale of the patent as
revenue. Transaction costs, if any, would be recorded as a reduction of the gain on the sale of the patent.
CompanyB should not yet recognize any asset relating to the future royalty stream from the potential sales of the drug because
this stream of royalties is contingent upon the successful development of the drug. The revenue will generally be recognized on an
accrual basis in the period that the royalties are earned (e.g., when the related sales on which the royalties are determined occurs),
if CompanyB has an ability to reasonably estimate such royalties.
PwC 19
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Generally, the fair value of the patent given up will likely be more readily determinable than the fair value of the shares because
these shares are of an unlisted subsidiary. ASC320 states that fair value is only deemed readily determinable if sales prices or
bid-and-asked quotations are currently available on a securities exchange registered with the Securities and Exchange Commission
or in the over-the-counter market, or similar foreign market.
CompanyB would generally be expected to conclude that the fair value of the shares is the same value as the patent given up. As
CompanyB is not in the business of licensing and selling patents in its portfolio, CompanyB should recognize the gain arising
from the sale of the patent (fair value less carrying value of the patent) as a gain on sale of long-lived assets (separately stated, if
material) or as other income. Transaction costs would be recorded as a reduction of the gain.
CompanyB should not yet recognize any asset relating to the future royalty stream from the potential sales of the drug because
this stream of royalties is contingent upon the successful development of the drug. The revenue will generally be recognized on an
accrual basis in the period that the royalties are earned (i.e., when the related sales on which the royalties are determined occurs),
if CompanyB has an ability to reasonably estimate such royalties.
20 PwC
Externally sourced research and development
Solution
CompanyA should expense the $3million when incurred as research and development costs since the know-how and technology
have no alternative future uses.
The royalty payments of 20% of sales are generally presented in the income statement within cost of sales.
PwC 21
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Although the payment is non-refundable, CompanyA will receive a future benefit as the CRO performs the research services over
the two-year period. Therefore, the upfront payment should be capitalized and recognized in the income statement (as research
and development expense) using the straight-line method, unless another method is more reflective of the CROs effort. CompanyA
should continue to evaluate whether it expects the goods to be delivered or services to be rendered each reporting period to assess
recoverability of the asset.
22 PwC
Externally sourced research and development
Solution
CompanyB should recognize research and development expense of $0.25 million each quarter for as long as it authorizes
CompanyA to continue performing the research.
PwC 23
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The costs should be expensed as CompanyB performs the services and recorded as research expense. CompanyA should accrue the
contract research costs over the expected period of the research. CompanyA will need some visibility into CompanyBs pattern of
performance in order to properly expense the contract research costs under the arrangement. The structuring of the payments does
not alter the accounting treatment.
24 PwC
Externally sourced research and development
Solution
The initial upfront payment represents a prepayment for future development by a third party and should be capitalized initially and
then amortized as CompanyB performs the research (i.e., generally straight line over the expected period of performance unless
another recognition pattern more accurately depicts performance). CompanyA should expense the milestone payment when it is
probable the payment will be made.
PwC 25
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
26 PwC
Externally sourced research and development
Solution
CompanyA effectively removes its exposure to failure of the development of its compound, having transferred all development risks
to CompanyB. In this case, there are no indicators that would lead to a presumption that the buyback will occur and that a liability
should be recognized before any decision to reacquire the rights were to occur.
Through exercise of the buy-back option, CompanyA reacquires the commercialization right intangible asset. Since exercise of the
buy-back option is triggered upon regulatory approval, the buyback payment would be capitalized when contractually due and then
amortized over the useful life of the commercialization right.
PwC 27
Research and development related issues
28 PwC
Research and development related issues
Solution
If costs incurred are a reasonable representation of the services performed, CompanyA should recognize the revenue on
a proportional performance basis. Otherwise, CompanyA should recognize the revenue on a straight-line basis over the
five-yearperiod.
PwC 29
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyB should record the initial payment as deferred income. This deferred income will subsequently be recognized as revenue
based on proportional performance or on a straight line basis over the expected development period if development is performed
evenly. At no point, however, should the revenue recorded exceed the amount of cash received. When the payment is initially
received, the earnings process has not been completed. The future milestone payments are not included in the determination of
revenue, as their receipt cannot be reliably estimated and no earnings process has been completed.
30 PwC
Research and development related issues
Solution
CompanyB should recognize the revenue on a straight-line basis or proportionally over the contract term based on the level of
effort spent each period. Costs incurred may be an appropriate basis for measuring level of effort. Initial set-up costs for materials,
equipment or similar items should not be considered as they are generally not related to revenue generating activities. Under a
proportional performance method, since CompanyB has incurred $2 million in development costs to date and expects to incur
another $1 million, it should have recognized as revenue a comparable ratio of deferred income (e.g., 66.7% or $2million
asrevenue).
No consideration should be given to the future milestone payments, as their receipt cannot be reliably estimated and no earnings
process has been completed.
It is important to note that CompanyB has no continuing involvement after the development phase in this scenario. If there was
continuing involvement (e.g., co-marketing, manufacturing, steering committees), the terms of those deliverables would need to be
considered in determining the appropriate period to recognize the upfront payment as revenue.
PwC 31
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyB could recognize the milestone payments received ($1 million due upon commencement of Phase III clinical trials and
$2 million for securing regulatory approval) under either the milestone method of revenue recognition, or another proportional
performance method.
To utilize the milestone method of revenue recognition, the milestones would need to be substantive and represent the achievement
of defined goals worthy of the payments. To be substantive, the consideration must (a) be commensurate with either (i) the
vendors performance to achieve the milestone or (ii) the enhancement of the value of the delivered item or items as a result of a
specific outcome resulting from the vendors performance to achieve the milestone; (b) relate solely to past performance; and (c)
be reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the
arrangement [ASC 605-28-25-2].
In this example, Company B has no remaining obligations to Company A when it receives the two milestone payments. As a result,
regardless of whether Company B utilizes the milestone method of revenue recognition or another proportional performance
method to recognize the amounts received, the $3 million received should be recognized since the earnings process relative to these
payments have been fully completed.
32 PwC
Research and development related issues
Solution
CompanyA should expense the donation when incurred (normally when paid) or at the time an unconditional promise to give is
made, whichever is sooner, in the income statement (generally selling, general and administrative expense).
PwC 33
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Borrowing costs associated with costs for research and development projects are expensed as incurred as development costs as they
do not qualify as assets.
34 PwC
Research and development related issues
Solution
CompanyA should initially recognize the raw materials acquired for the production of trial batches as inventory since the raw
materials have alternative future use in the production of other approved drugs. As the trial batches do not have any alternative
future use and the technical feasibility of the drug is not proven (the drug is in Phase III), the trial batches (including the cost of raw
materials used in production) should be charged to development expense when they are produced.
PwC 35
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
While ASC73020 only relates to research and development funding, ASC4701025 does not specifically exclude research and
development funding arrangements from its scope. If the research and development risk is substantive, such that its not probable
the development will be successful, the guidance in ASC73020 could be followed. However, if the successful completion of the
research and development is probable at the time the funding is received, the guidance in ASC4701025 is mostapplicable.
36 PwC
Research and development related issues
Solution (continued)
To conclude that a liability does not exist, the transfer of financial risk involved with the research and development from
CompanyA to Investor B must be substantive and genuine. When assessing the substance of the transfer of financial risk,
CompanyA should consider any explicit or implicit obligations to repay any or all of the funding. If surrounding conditions suggest
that it is probable that CompanyA will repay any of the funds regardless of the outcome of the research and development, the
funding should be recorded as a liability. Assessing the probability of repayment requires significant judgment and will be based on
the facts and circumstances of the transaction.
Examples of conditions leading to a presumption that repayment is probable include the following:
CompanyA has indicated an intent to repay all or a portion of the funds regardless of the outcome of the research
anddevelopment;
CompanyA would suffer a severe economic penalty if it failed to repay any of the funds provided to it regardless of the
outcome of the research and development; and
A significant related party relationship exists between the parties (in this scenario CompanyA and Investor B are unrelated).
Given the nature of the development and regulatory process, CompanyA determines that there is significant risk associated with
the research and development and that successful development is not probable. Accordingly, CompanyA will apply the guidance in
ASC73020 to evaluate the accounting for the research and development funding (i.e., whether it is a liability to repay the funding
party or an obligation to perform contractual services).
In this example, CompanyA has no explicit or implicit obligation to repay any of the funds and therefore determines that the
arrangement is an obligation to perform contractual services.
PwC 37
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyB should recognize the non-refundable upfront fee received on a straight-line basis over the three-year term of the
license. The $3 million upfront fee is a service fee for granting a third party access to its technology and to keep it updated in
accordance with its requirements for a period of three years. This is the case even if the technology maintenance requirements are
not expected to be significant.
CompanyB should recognize the royalty receipts as revenue when earned. If material, the royalty should be presented as a separate
class of revenue in CompanyBs income statement.
38 PwC
Manufacturing
Research and development
PwC 39
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The laboratory should capitalize the costs incurred (including materials, labor, applicable overhead) to obtain the necessary
validation for the use of the machinery, together with the cost of the machinery. Validation is required to bring the machinery to its
working condition. However, management should exclude abnormal validation costs caused by errors or miscalculations during the
validation process (such as wasted material, labor or other resources). If the machinery requires revalidation, the costs related to
this would be expensed as incurred as the asset had already been prepared for its original intended use.
40 PwC
Manufacturing
Solution
The batches do not meet the definition of inventory because they can only be used for development. However, the batches do
meet the definition of an asset (other current asset or prepaid asset) since they have alternative future uses in other development
projects. They should therefore be recorded at cost and accounted for as supplies used in the development process. When supplies
are used, the associated cost forms part of research and development expense.
PwC 41
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
42 PwC
Manufacturing
Solution
Pre-launch inventory can be capitalized if it has probable future economic benefit. The assessment of whether pre-launch inventory
has probable future economic benefits depends on individual facts and circumstances. Factors to consider include whether key
safety, efficacy and feasibility issues have been resolved, status of any advisory committee reviews, and understanding of any
potential hurdles to regulatory approval or product reimbursement.
CompanyA believes that the filing for regulatory approval indicates that future economic benefit is probable. Accordingly, the
pre-launch inventory can be capitalized at the lower of cost or market. Periodic reassessments should be made to determine
whether the inventory continues to have a probable future economic benefit (e.g., whether regulatory approval is still probable and
whether product will be sold prior to expiration of its useful life). If the value of inventory is written down based on this
reassessment, the reduced amount is the new cost basis (i.e., if regulatory approval is ultimately obtained, the inventory is not
written back up). If at any time regulatory approval is deemed to not be probable, the inventory should be written down to its net
realizable value, which is presumably zero assuming that the product cannot be sold.
Companies should consider whether additional financial statement disclosures are necessary related to the capitalization of
pre-launch inventory, including the accounting policy and total amount capitalized. Further, if inventory that had previously been
written down is ultimately sold, companies should consider disclosing the impact on margins.
PwC 43
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyA should account for raw materials that can be used in the production of marketed drugs as inventory. When the material
is consumed in the production of sample products, CompanyA should account for the sample product to be given away as an
expense in accordance with its policy, which would generally be either when the product is packaged as sample product or the
sample is distributed. When the materials are released to production for use in the manufacturing of drugs in development, the cost
of the materials should be accounted for as research and development expense.
Alternatively, if the bulk materials were only able to be used for a particular research and development project, and did not have
alternative future uses, the costs would be recognized as research and development expense when incurred.
44 PwC
Manufacturing
Solution
CompanyA would need to consider all available evidence to determine if there is an impairment. Suspending production and
recalling the product are indicators that the carrying value of raw material inventory used to manufacture the drug may not be
recoverable. Other factors that CompanyA may consider include: the reason for the recall, its history with past recalls, if the quality
issue could be fixed, and if the raw materials could be used for other products.
PwC 45
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
Capitalizing or expensing patent defense costs has evolved into an accounting policy decision. Generally in the pharmaceuticals
and life sciences industries, patent defense costs are not viewed as enhancing the value of a patent. In cases where it is believed that
the defense of the patent merely maintains rather than increases the expected future economic benefits from the patent, the costs
would generally be expensed as incurred.
Companies could capitalize external legal costs incurred in the defense of its patents when it is believed that a successful defense is
probable and that the value of the patent will be increased by virtue of a successful outcome; in that case, costs may be capitalized
to the extent of the increase. Capitalized patent defense costs are amortized over the remaining life of the relatedpatent.
46 PwC
Sales and Marketing
PwC 47
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The company should not recognize its advertising and promotional costs as an intangible asset, even though the expenditure
incurred may provide future economic benefits. Depending on the policy it selected, the company should charge all promotional
costs to the income statement as incurred or the first time the advertising takes place. Promotional costs should be included within
sales and marketing expenses.
48 PwC
Sales and Marketing
Solution
Advertising and promotional expenditure (i.e., all costs to develop and produce the marketing campaign and related materials,
including the television and internet advertisements) should be treated as an expense when incurred or the first time the
advertisement takes place, whichever is the Companys consistently applied policy. Amounts paid to television broadcast providers
should be accounted for as a prepayment and expensed when the advertisement airs in 20X4. Costs for hits to Company As internet
site should be expensed based upon the click-through rate in 20X4.
Please note that the above solution assumes the advertising and promotional activities would be deemed to be Other than Direct
Response Advertising under ASC34020.
PwC 49
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
CompanyB will manufacture the product and sell it to Participants in a collaborative arrangement shall report
CompanyA. CompanyA will also pay CompanyB 20% of its net costs incurred and revenue generated from transactions
sales of Compound Y. The promotion and commercialization of with third parties (that is, parties that do not participate
drugs are CompanyAs main activities, although in this case they in the arrangement) in each entitys respective income
are performed jointly with a third party. statement pursuant to the guidance in [ASC]60545
[ASC80810451].
The primary purpose for CompanyB entering into the
co-marketing arrangement with CompanyA was to allow For costs incurred and revenue generated from third parties,
CompanyB to utilize CompanyAs experienced sales force with the participant in a collaborative arrangement that is deemed
extensive knowledge of the Japanese market. CompanyB does to be the principal participant for a given transaction under
not have a presence in Japan. [ASC]60545 shall record that transaction on a gross basis in its
financial statements [ASC80810452].
50 PwC
Sales and Marketing
Solution
CompanyB first needs to evaluate whether the co-marketing agreement represents a collaborative arrangement between two
parties who are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial
success of the activity.
In this case, CompanyB concluded that the co-marketing agreement is not a collaborative arrangement since CompanyA is not an
active participant in the arrangement. In particular, CompanyA was not involved in the research and development of CompoundY;
it did not participate on a steering committee or other oversight or governance mechanism, nor does it have a legal right to the
underlying intellectual property.
Since the co-marketing agreement is not a collaborative arrangement, the agreement represents an arrangement between
third parties and CompanyBs accounting for its co-marketing income will depend on whether it is the principal or agent in the
arrangement based on the factors in ASC60545452. In this case, CompanyB determines that CompanyA is the principal for
sales in the Japanese market. Therefore, CompanyB should recognize 100% of the sales of Compound Y to CompanyA as sales
revenue and the corresponding costs of production as cost of sales. The co-marketing income, at 20% of CompanyAs sales, would
typically be presented as royalty income and disclosed separately as a component of revenue, if material.
PwC 51
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
CompanyB will manufacture the product and sell it to Participants in a collaborative arrangement shall report
CompanyA. CompanyA will also pay CompanyB 20% of its costs incurred and revenue generated from transactions
netsales of Compound Y. The promotion and commercialization with third parties (that is, parties that do not participate
of drugs are CompanyAs main activities, although in this case in the arrangement) in each entitys respective income
they are performed jointly with a third party. statement pursuant to the guidance in [ASC]60545
[ASC80810451].
The primary purpose for CompanyB entering into the
co-marketing arrangement with CompanyA was to allow For costs incurred and revenue generated from third parties,
CompanyB to utilize CompanyAs experienced sales force with the participant in a collaborative arrangement that is deemed
extensive knowledge of the Japanese market. CompanyB does to be the principal participant for a given transaction under
not have a presence in Japan. [ASC]60545 shall record that transaction on a gross basis in its
financial statements [ASC80810452].
52 PwC
Sales and Marketing
Solution
CompanyA first needs to evaluate whether the co-marketing agreement represents a collaborative arrangement between two
parties who are both active participants in the activity and exposed to significant risks and rewards dependent on the commercial
success of the activity.
In this case, CompanyA concluded that the co-marketing agreement was not a collaborative arrangement since it was not an
active participant in the arrangement. CompanyA was not involved in the research and development of Compound Y, there is
no participation by CompanyA on a steering committee or other oversight or governance mechanism, and it has no legal right
to the underlying intellectual property. In addition, CompanyA was not exposed to significant risks and rewards as part of this
arrangement since Compound Y was approved for sale by the regulatory authorities prior to the execution of the co-marketing
agreement and the rewards that CompanyA can obtain are limited to the Japanese market.
Since the co-marketing agreement is not a collaborative arrangement, the agreement represents an arrangement between third
parties and CompanyAs accounting for its co-marketing expenditures will depend on whether it is the principal or agent in the
arrangement based on the factors in ASC60545452. If CompanyA determines it is the principal for sales in the Japanese
market, CompanyA should present the payments received from customers as sales revenue, and the cost of purchasing CompoundY
from CompanyB as inventory and then cost of goods sold. The co-marketing amounts paid to CompanyB, 20% of net sales of
Compound Y, represent a royalty in return for the product rights in that territory and should be presented as cost of goods sold.
If CompanyA determined it was the agent in the Japanese market, it would recognize revenue calculated as payments due from
customers less payments owed to CompanyB.
PwC 53
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
54 PwC
Sales and Marketing
Solution
CompanyA follows a practice of accruing the sales based milestone payment when it becomes probable that it will be paid. The
obligation to make the milestone payment, while contingent on the company reaching a specified sales level, is considered to be
established on the date the agreement to make the payment is entered into. Accordingly, at that date Company A concludes that it
has a contractual contingent obligation, based on having received the intellectual property license rights, and accrues the additional
amount when payment is no longer contingent. In this case, that occurred when it became probable that the payment will be made.
After concluding that the sales based milestone should be accrued, CompanyA would then consider the economics of the
arrangement to determine the expense recognition pattern. Because $25 million is the total consideration paid for the intellectual
property rights, it would be appropriate to adjust the carrying value of the intellectual property rights on a cumulative catch-up
basis as if the additional amount that is no longer contingent had been accrued from the outset of the arrangement when the
obligation for that amount was established. Accordingly, CompanyA would immediately expense 20% (3 out of 15 years) of the
$10 million sales based milestone and capitalize the remainder of the payment. At the end of the third year, CompanyA would have
expensed an aggregate of $5 million, and $20 million remains capitalized on the balance sheet. Alternatively, if the economics of
the arrangement were such that the payment appeared to be the equivalent of an additional royalty to be paid annually, it would be
appropriate to expense the $10 million payment over the relevant annual period. This might be the case, for example, if there were
similar sales based milestone targets in each year of the arrangement.
As a general rule, a view to amortize the $10 million payment prospectively over the remaining term (twelve years in this
example) would only potentially be supportable if the payment was in exchange for additional intellectual property rights under
thearrangement.
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US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The cost of product distributed for free and not associated with any specific sale transaction should be classified as an expense
according to the Companys policy, which would generally be either marketing expense or cost of sales. CompanyA should account
for the sample product to be given away at conventions and during sales calls as an expense in accordance with its policy, which
would generally be either when the product is packaged as sample product or upon distribution of the sample.
56 PwC
Healthcare Reform
PwC 57
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyA would record a $4 million liability, and a corresponding deferred cost, once it sells a branded prescription drug to the
US government in 20X3, which thereby obligates it to pay the annual fee. The deferred cost would typically be amortized to the
income statement as an operating expense over the calendar year that it is payable (e.g., over the course of 20X3 for the 20X3 fee)
using a straight-line method.
58 PwC
Healthcare Reform
Solution
There are two models that CompanyA can utilize to account for the Medicare coverage gap: (i) the spreading model or (ii) the
point of sale model. The model chosen by CompanyA represents an accounting policy election that should be consistently applied.
Spreading Model
Under the spreading model, the estimated impact of the coverage gap rebate expected to be incurred for the annual period is
recognized ratably using an effective rebate percentage for all sales to Medicare patients throughout the year. If CompanyA elects
to use the spreading model, appropriate estimates of both the impact of the Medicare coverage gap rebate and its total expected
applicable sales will need to be made as both amounts are needed to compute the effective rebatepercentage.
Under the point of sale model, the revenue reduction is recognized at the time the specific sales of drugs into the channel occur that
are expected to ultimately be resold to Medicare patients who are in the coverage gap. If CompanyA elects to use the point of sale
model, it will need to estimate when the specific sales to Medicare patients who are in the coverage gap will occur, and consider
both its pharmaceutical products, as well as other pharmaceutical products that its typical end consumer may be acquiring to
determine the specific timing of when the end consumer is likely to enter into the coverage gap.
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Revenue recognition
Multiple element arrangements
60 PwC
Revenue recognitionMultiple element arrangements
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US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyA should assess the following in determining whether a delivered item has standalone value:
Whether a customer could resell the deliverables (e.g., considering legal restrictions that preclude resale)
Whether a hypothetical customer would use the deliverable for its intended or another productive purpose (a deliverable that
could only be sold for scrap value would not be considered to have standalone value).
When a customer can resell a deliverable or sublicense its rights to the deliverable for a reasonable amount of consideration,
the assessment that the delivered item has standalone value is driven by the fact that the customer or a third party could derive
economic benefit from the delivered item. When there is not a secondary market, companies will have to use judgment to determine
whether it could resell the delivered item for reasonable consideration on a standalone basis. The assessment should consider
whether the company could recover a significant portion of its original purchase price in a hypothetical sale (rather than only
for salvage or scrap value). If it could resell or sublicense the deliverable for reasonable consideration, it would be appropriate to
conclude that there is standalone value for the delivered item.
Another factor that impacts if a delivered item has standalone value is whether the research services are required to be performed
by the vendor or if they could be performed by a third party. If the vendor must perform the research services because it has
proprietary know-how or specialized expertise that another vendor is not able to provide, the delivered item might not have
standalone value. If the research services do not require any specialized expertise, and could be performed by a third party, this
might indicate that the delivered item has standalone value separate from the research services.
Whether a delivered item has standalone value could also be impacted by contractual rights that prohibit a company from
transferring the delivered item. Such legal restrictions are common in the pharmaceutical and life sciences industries. Companies
need to consider all relevant facts and circumstances when there is a legal restriction before concluding whether a delivered item
has standalone value. If a customer could exploit the delivered item through its own use or development, it may be appropriate to
conclude the item has standalone value, regardless of whether a transfer restriction exists. In instances where additional services
can only be obtained from the vendor in order for the customer to exploit the delivered item, this is an indicator that standalone
value may not exist.
62 PwC
Revenue recognitionMultiple element arrangements
Solution
License
The appropriate model for estimating the selling price will depend on the nature of and specific rights associated with the license.
Historically, models have been used with respect to valuation for tax or business combination purposes that might be useful in
making this estimate. For example:
Income approach
Examples of the income approach include the discounted cash flow method and the transfer pricing or profit split method. Key
areas of judgment in this approach may include: cash flow projections, risk adjustment for stage of development, discount rate
selection, and level of expected returns.
Cost approach
In applying a cost approach, companies should consider costs incurred to date in developing the intellectual property and an
amount that constitutes a reasonable profit margin or return on investment. Key areas of judgment in this approach may include
identifying relevant direct or indirect costs and determining the appropriate return rate.
Because the income approach relies heavily on cash flow projections, it may be more relevant in instances where a license is already
in use or is expected to be exploited within a relatively short timeframe. Alternatively, the cost approach may be more relevant to
licenses in the early stage of their life cycle, where reliable forecasts of revenue or cash flows may not exist.
PwC 63
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution (continued)
Research services
Many companies may consider the amount of effort necessary to perform research services as the most appropriate unit of
measurement. This might include cost rates for full time equivalent (FTE) employees and the expected amount of resources to
be committed. Key areas of judgment regarding pricing may include: selection of FTE rates for different levels of commitment or
experience, inclusion of appropriate levels of profit margin, and comparisons to similar services offered in the marketplace. Key
areas of judgment regarding quantity may include: estimated total number of FTE hours, potential contractual requirements and
the estimated period over which the development process will occur.
Steering committees, as well as certain upgrade rights, were not historically valued by many companies due to the fair value
requirement of the prior accounting guidance, thus, the inclusion of these deliverables in an arrangement often resulted in either
full deferral or ratable revenue recognition. Companies may find valuing these items particularly challenging as it may be difficult
to determine the expected level of hours to be incurred and rates to be used. Depending on the nature of the services, some
companies may determine that steering committee efforts include time related to meeting preparation, attending the steering
committee meetings, and working on any follow-up matters that result from the meetings. In addition, examples (not all inclusive)
of information that might be considered when establishing rates may include an evaluation of compensation paid to individuals of
similar experience or fees paid to consultants on an advisory board. These assessments will need to consider the specific facts and
circumstances in each arrangement.
64 PwC
Revenue recognitionMultiple element arrangements
Solution
Notional options for a customer to purchase additional products or services at agreed-upon prices in the future should be treated
as deliverables if the option is not substantive and the customer is essentially obligated to purchase the optional items. When
determining whether an option is substantive, a company should evaluate if the exercise of that option represents a separate
buyingdecision.
Even when an option is substantive, a company needs to evaluate whether that option has been offered at a significant incremental
discount. When it is, the in-the-money option would be considered a separate deliverable requiring a portion of the arrangement
consideration to be deferred at inception. For example, an option to buy unrelated additional products or services at a price equal
to fair value may be a separate buying decision and, if so, would not be a deliverable in the original arrangement. However, if the
additional products or services are essential to the functionality of another deliverable in the arrangement, and no other vendor
could provide the necessary products or services, the customer would effectively be required to exercise the option and, therefore,
it would not be considered a substantive option. In such a case, the products or services to be delivered upon the exercise of that
option would be accounted for as a deliverable in the original arrangement.
Customer B appears to have sole discretion when, or if, to exercise the option. In addition, the option is not being offered at a
significant incremental discount, nor is the option essential to the functionality of the current deliverable. The decision to exercise
the option is therefore a separate economic purchasing decision by CompanyB and the option would not be a deliverable in the
original arrangement.
PwC 65
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
In making this assessment, CompanyA needs to consider which payments are fixed or determinable at the inception of the
arrangement. It is common for arrangements in the pharmaceutical and life sciences industries to include contingent consideration
such as milestone payments. These and other similar types of additional arrangement consideration need to be carefully assessed
before being included in the arrangement consideration at the inception of an arrangement.
In this case, CompanyA concludes that there are two deliverables in the arrangement: a license and research and development
services. Further, CompanyA views all consideration aside from the upfront payment to be contingent at the inception of the
arrangement, such that only the upfront fee is fixed or determinable at the inception of the arrangement. Based on the estimated
selling price for the two deliverables, the following represents the initial relative selling price allocation (in millions):
CompanyA determined that the license has stand alone value because the research services could be completed by other vendors.
As the license has standalone value, CompanyA recognizes $15 million upon delivery of the license and will recognize revenue for
the research and development services as the services are performed. As CompanyA achieves the subsequent milestones, it would
allocate them to both the delivered and nondelivered items within the arrangement given the Company has not made the election
to apply the milestone method of revenue recognition.
66 PwC
Revenue recognitionMultiple element arrangements
Solution
The license to CompanyAs intellectual property would be the first delivered element. CompanyA will evaluate whether the license
to the intellectual property has standalone value. Typically a license is not sold separately (i.e., without any other elements). Some
arrangements allow the customer to sublicense, or resell the rights, which is an indicator that the license has standalone value.
However, a careful read of the contract is necessary to determine whether the right to sublicense is substantive and not a limited
right. If the customer is prohibited from reselling or sublicensing its right to the license, or if the right to sublicense is limited, it may
indicate that the license does not have standalone value.
This arrangement also includes ongoing research and development activities. When the customer is contractually required to use
the seller for ongoing research and development or other services, a license will have standalone value only if the customer would
(hypothetically) be able to reap the benefits from the license without further involvement from the seller. If only the seller has the
requisite technical capabilities to perform the services, that would suggest the license does not have standalone value.
PwC 67
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution (continued)
In assessing whether the customer could develop the technology without the sellers involvement, the experience and capabilities of
the customer and the stage of development of the technology should be considered. A license to technology can mean many things,
and understanding the rights associated with the license is key to the analysis. Is the customer purchasing all rights associated with
the technology, including rights to develop, manufacture, and commercialize the license? Or is the customer obtaining only limited
rights? Do these rights revert to the vendor under any circumstances? It is important to have an accurate understanding of these
factors in order to properly evaluate if the license has standalone value.
In this fact pattern, CompanyA concludes the license to the intellectual property does not have standalone value apart from
the research and development services because of its unique know-how with respect to the services and the inability of the
counterparty to sublicense the intellectual property. However, the combined license to the intellectual property and research
and development services collectively has standalone value from the manufacturing services because CompanyB has the right to
manufacture the drug or outsource it to another manufacturer. The arrangement would be treated as having two separate units
of accounting, one being the combined license to the intellectual property and research and development services, and the other
being the manufacturing services. The total arrangement consideration would be allocated to each separate unit of accounting
using the relative selling price method. The revenue recognition pattern for each unit of accounting would need to reflect the
earnings process of all the deliverables in each unit of accounting.
68 PwC
Revenue recognitionMilestone method
PwC 69
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The proper timing of revenue recognition depends on whether the milestones in the arrangement are substantive. This
determination should be made at the inception of the arrangement. To be substantive, the consideration must (a) be commensurate
with either (i) the vendors performance to achieve the milestone or (ii) the enhancement of the value of the delivered item or
items as a result of a specific outcome resulting from the vendors performance to achieve the milestone; (b) relate solely to past
performance; and (c) be reasonable relative to all of the deliverables and payment terms (including other potential milestone
consideration) within the arrangement [ASC 605-28-25-2].
Each milestone must be analyzed separately to determine whether it meets the criteria to be considered substantive. If CompanyA
decides the milestones are substantive, such milestones would be recognized as revenue in full in the period in which the
milestones were achieved.
If a milestone payment is not substantive, that milestone payment may be treated as additional arrangement consideration. If the
multiple element arrangement is treated as a single unit of accounting, the non-substantive milestone will be allocated to the single
unit of accounting. If, however, the multiple element arrangement meets the criteria for separating deliverables and deliverables
are accounted for as separate units of accounting, the non-substantive milestone will be allocated to all deliverables using the
relative selling price method.
70 PwC
Revenue recognitionMilestone method
Solution
The $20 million milestone represents a sales based milestone that is similar to a royalty. Sales based milestones generally do not fall
within the scope of ASC60528 since the achievement of the targeted sales levels is not based in whole or in part on the vendors
performance and is not a research or development deliverable.
In most situations, all contingencies associated with sales based milestones have been resolved upon receipt of the sales based
milestone and no remaining performance obligations exist relating to the payment. As a result, sales based milestones could
be recognized in revenue when earned. However, if the vendor has remaining obligations to the customer at the time the sales
based milestone is achieved, the consideration received from the sales based milestone may need to be combined with any other
arrangement consideration and allocated to the deliverables in the arrangement.
In this example, CompanyA has no remaining obligations after the initial license is provided to CompanyB. As a result, when the
sales based milestone is achieved, CompanyA would recognize the full amount of the sales based milestone in revenue.
PwC 71
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The milestone payment is due under the contractual terms of the agreement based upon the resolution of a contingency. Under
Company As practice, it accrues the milestone payment when the achievement of the milestone is probable. Once CompanyA
concludes that the milestone payment due to CompanyB is probable of occurring, the amount of the payment ($2 million) would
be recorded in the financial statements.
Due to the uncertainties associated with the FDA approval process, it may be difficult for CompanyA to conclude that achievement
of this particular milestone is probable prior to the occurrence of the event that triggers the milestone (e.g., FDA approval). All
facts and circumstances regarding the nature of the milestone should be considered when evaluating when the achievement of a
milestone is probable.
72 PwC
Revenue recognitionGeneral
PwC 73
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
The ability to recognize revenue in this case depends on CompanyAs ability to estimate future returns. The lack of historical
experience is a key data point in the determination, but it is not the only data point to be considered and therefore does not
automatically preclude revenue recognition at the time of sale. Instead, CompanyA must evaluate all sources of available
information, including internal data (e.g., product return policy, product shelf life, and estimates of inventory sold into the
distribution channel) as well as external data (e.g., estimated wholesaler inventory levels, estimated market demand, history of
returns of comparable products, etc.) to determine whether adequate information exists to develop a reasonable estimate of future
returns. If CompanyA is unable to make a reasonable estimate of returns, it would be precluded from recognizing revenue until (i)
the product is sold through to the end customer, (ii) the returns window lapses or (iii) adequate information becomes available.
74 PwC
Revenue recognitionGeneral
PwC 75
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
If CompanyA can demonstrate it has sufficient historical evidence to support its estimates, it may elect to record revenue at the time
of sale along with a reserve for the portion of sales that will be refunded because they are not expected to meet the pre-determined
criteria, assuming all other revenue recognition criteria are met. Notwithstanding the above, CompanyA could continue to defer
recognition of the revenue until the contingency has lapsed. This is an accounting policy decision that should be consistently
applied and disclosed.
It should be noted that slight variations from the facts presented above may cause the model to change and preclude revenue
recognition before resolution of the performance contingency.
76 PwC
Revenue recognitionGeneral
countryin Europe?
Solution
It may be difficult in the current environment for CompanyA to determine whether its price to the governmental entity is fixed or
determinable or if collectibility is reasonably assured. This is particularly the case when customers have stopped paying for sales
on a timely basis or have demanded significant reductions in selling price as a condition to settle past invoices. Slow payment may
not necessarily preclude revenue recognition; however, it may impact the amount of revenue that can be recognized because the
receivable may need to be discounted at initial recognition. Revenue should not be recognized if collectibility is not reasonably
assured, or the amount of discounts and allowances (either due to potential price adjustments or to discounting for the time value
of money) cannot be reasonably estimated.
If CompanyA determines that it meets the four revenue recognition criteria, it will then need to evaluate whether it can record
revenue for the entire amount of the sale or for a discounted amount. If CompanyA did not expect to receive payment for a period
greater than one year, it would need to discount current sales transactions (i.e., sales are recorded net of the discount) for this
specific customer that has an established pattern of not paying amounts owed on a timely basis. The amount of the discount
applied, which relates to the time value of money, is based on the estimated collection date and the customers borrowing rate.
CompanyA should determine if additional financial statement disclosure is necessary surrounding concentration or risk. This may
include: (i) volume of business transacted in a particular market or geographic area; (ii) impact on liquidity; and (iii) discussion of
counterparty default risk. CompanyA should also consider qualitative factors in deciding whether its exposure to Europe sovereign
government is material.
PwC 77
Business combination
78 PwC
Business combination
forthe transaction as a
businesscombination or
anassetacquisition?
Solution
CompanyB should consider the stage of development of the drug compound candidates in determining whether a business has
been acquired. In most cases, there are likely to be more processes associated with later stage drug compounds than those in earlier
stages. However, a transaction involving the acquisition of drug compound candidates in early stage development can still be a
business combination.
CompanyB acquired the Phase I drug compounds, along with the scientists who are vital to performing the research and
development. The scientists have the necessary skills and experience, and provide the necessary processes (through their skills and
experience) that are capable of being applied to inputs to create outputs.
While CompanyB did not acquire a manufacturing facility, testing and development equipment, or a sales force, it determined
that the likely market participants are other large pharmaceutical companies that already have these items or could easily
replicatethem.
These factors would likely lead CompanyB to account for this acquisition as a business combination.
PwC 79
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
CompanyB will measure the acquired IPR&D at its acquisition date fair value and record it as an indefinite-lived IPR&D intangible
asset. Subsequent to the acquisition, the acquired IPR&D would be tested for impairment annually or more frequently if events
or changes in circumstances indicate that the asset might be impaired. This impairment test would compare the fair value of the
IPR&D asset to its carrying value. Incremental research and development costs subsequent to the acquisition would be expensed.
With regard to Company As product candidate that received FDA approval, any such completed product development (i.e., no
longer in-process) would be recognized as a finite-lived intangible asset at the date of acquisition, separate from the acquired
IPR&D. The testing and developing equipment would be separately recognized as tangible assets, measured at fair value, and
depreciated over their estimated useful lives.
80 PwC
Business combination
Solution
The acquired IPR&D project would likely be recorded as two separate jurisdictional IPR&D assets. While there may be other
factors to consider, CompanyAs assessment may lead it to believe that the development risks, the nature of the remaining activity
and costs, the risk of not obtaining regulatory approval, and, as noted above, expected patent lives for the acquired IPR&D are not
substantially the same in both countries. Finally, CompanyA intends to manage the drug separately, including separate advertising
and selling costs in each country.
PwC 81
US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
82 PwC
Business combination
Solution
As the terms at the date of acquisition are assumed to be the same as in the original agreement ($300 million of payments plus a
5%royalty) if CompanyA were to license the IP retained by CompanyB, there is no settlement gain or loss to be recognized as a
result of the acquisition.
This view is consistent with the market value of the same or similar items being the market value of the intellectual property
retained by CompanyB. The value of the intellectual property in total has increased due to the successful development efforts
and clinical trials conducted by CompanyA in moving the compound from Phase I to Phase III. These incremental developments,
including the efforts expended and funded to move from Phase I and enter into Phase III are already owned by CompanyA. As such,
the gain or loss from settlement of the pre-existing licensing relationship should be based solely on the value of the same or similar
intellectual property asset that was originally licensed to CompanyA by CompanyB. Determination of the gain or loss should not
include the value developed between the date CompanyA in-licensed the compound and the date CompanyA acquired CompanyB
because this value is already owned by CompanyA. In this fact pattern, the 15% increase in royalty rate (20% for the Phase III
asset compared to 5% for the Phase I asset) relates to the value attributable to the research and development and regulatory
developments undertaken, owned and funded by CompanyA, and would not be included in the measurement of the settlement
gain or loss.
If the fair market terms of an in-license for the intellectual property owned by CompanyB, exclusive of the value of the asset owned
by CompanyA, had changed such that the terms of the original in-license arrangement were favorable or unfavorable at the time of
the business combination, the favorable or unfavorable value would be recorded by CompanyA as a settlement of the pre-existing
relationship (gain or loss).
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US GAAPIssues and Solutions for the Pharmaceuticals and Life Sciences Industries
Solution
When determining the useful life of an intangible asset, CompanyA should consider the factors included in ASC35030353.
Some of these factors include: the expected use of the asset, historical experience with similar arrangements, and the expected
future cash from the asset.
In addition to these factors, pharmaceutical and life sciences companies should consider industry-specific factors, such as
thefollowing:
Changes in the environment that make the product ineffective (e.g., a mutation in the virus that is causing a disease, which
renders it stronger);
Changes or anticipated changes in participation rates or reimbursement policies of insurance companies; and
Changes in government reimbursement or policies (e.g., Medicare, Medicaid) for drugs and other medical products.
84 PwC
Acknowledgements
This publication would not be possible without
the contribution of the partners and staff
of PwCsPharmaceutical and LifeSciences
industryteam, including:
PwC 85
Contacts
To have a deeper conversation about
how this subject may affect your business,
please contact:
Karen C. Young
Partner, US Pharmaceutical and Life Sciences
Assurance Leader Florham Park, NJ
973 236 5648
[email protected]
Adrian Beamish
Partner, Pharmaceutical and Life Sciences
Assurance San Jose, CA
408 817 5085
[email protected]
Jim Connolly
Partner, Pharmaceutical and Life Sciences
Assurance Boston, MA
617 530 6213
[email protected]
John Hayes
Partner, Pharmaceutical and Life Sciences
Assurance Florham Park, NJ
973 236 4452
[email protected]
Denis Naughter
Partner, Pharmaceutical and Life Sciences
Assurance Florham Park, NJ
973 236 5030
[email protected]
86 PwC
About
PricewaterhouseCoopers
2013 PwC. All rights reserved. PwC and PwC US refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm
of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only,
and should not be used as a substitute for consultation with professional advisors. NY-14-0286