Factors to consider may include: the employees’ roles, whether the workforce is subject to contracts with employers or service organizations, as well as the nature and stage of the assets acquired. Question: When should Company A begin amortizing the acquired intellectual property, what factors should be considered in determining the amortization period, and how should the costs be classified in the income statement? Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. Question: Should Company B account for the transaction as a business combination or an asset acquisition? Company B would likely conclude that there are no outputs acquired because the compounds are in early stage of development. Examples of enabling technology provided in the IPR&D Guide include a portfolio of patents, a software object library, or an underlying form of drug delivery technology. 4. Company B believes there is potential for additional enhancements that may be included in the next generation scanner, including new software Version 3.0. Question: What is the appropriate presentation of the up-front licensing fee in the statement of cash flows? Arrangements; or Update 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. Add paragraphs 805-20-15-2 through 15-4, and the new Subsection title, None of the acquired drug compounds are similar. d.      The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. Detailed analysis can be necessary to determine the scope of the accounting guidance as well the entity that is subject to its requirements. Included in the IPR&D project is the historical know-how, formula protocols, designs, and procedures expected to be needed to complete Phase 3. If enabling technology meets the criteria for recognition as an intangible asset, it could be a separate unit of account if it does not share the useful life, growth, risk, and profitability of the products in which it is used. Company A acquires Company B in a business combination accounted for under ASC 805. c.      Any legal, regulatory, or contractual provisions that may limit the useful life. When making the unit of account determination, companies may consider, among other things, the following factors: Company A acquired Company B, which is accounted for as an acquisition of a business under ASC 805. When arriving at cash flows from operating activities under the indirect method of reporting cash flows, best practices suggest that an acquiring entity should add back to net income the costs of assets acquired to be used in R&D activities that are charged to expense. business combinations. Company A’s product candidate that has received FDA approval (it is no longer “in-process”) would be recognized as a finite-lived intangible asset at the date of acquisition, separate from the acquired IPR&D, and amortized over its estimated useful life. As a result, all of the consideration will be allocated to the IPR&D project. Please see www.pwc.com/structure for further details. It depends. Prospective application is required. The project has been scaled to allow for additional trials to meet the regulatory requirements in each future jurisdiction. Operating activities generally involve producing and delivering goods and providing services. Some examples include accounting and financial reporting for common control (or "put-together") transactions, assessing the necessity for push-down accounting and distinguishing between equity and cost method investments. That adjustment is necessary to eliminate from operating cash flows those cash outflows of assets acquired to be used in R&D activities that are reflected in investing activities. In this regard, an acquiring entity should treat assets acquired to be used in R&D activities similar to how it reports other acquired assets in the statement of cash flows. The intellectual property acquired by Company A does not represent IPR&D. Develop a clear roadmap of the economic objectives that will drive the transaction and can be used to communicate goals, both internally and with advisors. Enabling technology is…underlying technology that has value through its combined use or reuse across many product or product families. under common control is outside the scope of the business combinations guidance in ASC 805-10,1 ASC 805-20, and ASC 805-30 and is addressed in the “Transactions Between Entities Under Common Control“ subsections of ASC 805-50. AICPA’s Accounting and Valuation Guide on acquired intangible assets used in R&D activities - Q&A 5.12: Question 1: How should an acquiring entity classify in its statement of cash flows an R&D charge associated with the costs of IPR&D projects acquired as part of an asset acquisition that have no alternative future use? It is complex and may require CPAs to face new issues and apply certain accounting principles for the first time (see the sidebar, "Accounting Quick Tips," below). Contact us to discuss your business combination challenges. Company A should consistently apply their classification conclusion to similar transactions. The intellectual property acquired by Company A does not represent IPR&D. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. Contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination shall be measured subsequently in accordance with the guidance for contingent consideration arrangements in paragraph 805-30-35-1. Company B acquires the rights to the drug compound candidates along with Company A’s workforce composed primarily of scientists. The AICPA’s Accounting and Valuation Guide on acquired intangible assets used in research and development activities (the IPR&D Guide) notes that value should be allocated to all identifiable assets, which could include IPR&D. This Roadmap replaces the Deloitte Q&As that were contained in ASC 805. The patent would be accounted for under ASC 350-30-25 and treated as a single intangible asset or grouped with other intangible assets associated with the currently marketed product and would be amortized over a finite life. What Are the Main Provisions? Question: How should Company A account for the various versions of the technology? Company B is developing a drug compound that is expected to become a leading product for its therapeutic indication. The authoritative accounting and reporting guidance for business combinations under US GAAP is included in Topic 805, Business Combinations, of the FASB Accounting Standards Codification. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. As such, Company A should account for the transaction as an asset acquisition. The amendments in this Update make the guidance in Updates 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. Other than the stage of development, the compounds have no other similarities and are designed to treat disparate conditions. No employees, other assets, or other activities are transferred. Risks associated with the further development of the related IPR&D project; Amount and timing of benefits expected to be derived from the developed asset, Expected economic life of the developed asset, Whether there is an intent to manage advertising and selling costs for the developed asset separately or on a combined basis, Once completed, whether the product would be transferred as a single asset or multiple assets. They may also introduce. The late stage of development combined with the plan to scale trials to meet regulatory requirements in each future jurisdiction may suggest that disaggregation by jurisdiction of the intellectual property being developed is warranted. Question: Should Company A account for the transaction as a business combination or an asset acquisition? When IPRD involves enhancements to existing technologies, the allocation of value between a proven technology and an unproven (incomplete) research project can be difficult to measure. Non-public business entities who have not yet adopted this guidance must make an assessment under the previous guidance. FASB ASC Topic 805, Business Combinations, is a specialized accounting area that has evolved over the years and continues to be the subject of simplification initiatives by FASB. The AICPA’s Accounting and Valuation Guide on acquired intangible assets used in R&D activities a makes a distinction between complete and incomplete intangible assets used in R&D. 'result' : 'results'}}. Company A’s activities primarily consist of research and development (R&D) on these compounds. Set preferences for tailored content suggestions across the site, US GAAP - Issues and Solutions for Pharmaceutical and Life Sciences: Chapter 4, Chapter 1 - Capitalization and Impairment, Chapter 3 - Manufacturing & Supply Chain, Phase of development of the related IPR&D project, Nature of the activities and costs necessary to further develop the related IPR&D project. Our knowledge can help you develop strategies to withstand regulatory scrutiny, anticipate potential areas of focus in filings and meet constantly evolving expectations for clear and transparent financial reporting. Please see www.pwc.com/structure for further details. As in determining the useful life of depreciable tangible assets, regular maintenance may be assumed but enhancements may not. In this comprehensive update, KPMG provides detailed guidance on and interpretation of ASC 805, including illustrative examples and Q&As, and addresses specific acquisition-related accounting issues. © 2017 - Sat Dec 26 22:15:47 UTC 2020 PwC. In general, Company A should classify the cash outflow based on what is likely to be the predominant use of cash. This two-day seminar covers accounting for acquisitions (ASC 805), non-controlling interests (ASC 810), intangible assets (ASC 360), goodwill (ASC 350), and the related deferred tax effects. Some examples include accounting and financial reporting for common control (or "put-together") transactions, assessing the necessity for push-down accounting and distinguishing between equity and cost method investments. An entity uses the definition of a business in ASC 805 in determining whether to account for a transaction as an asset acquisition or a business combination. Company that is involved with a business combination; Company that presents goodwill in its financial statements; Relevant dates 805-20-35-4C . The fully developed and commercialized technology present in Version 1.0 would be recognized as a separate software technology asset and amortized over its useful life. Overview of ASC 805: Business Combinations ASC 805-10-20 Defines a Business Combination as: “A transaction or other event in which an acquirer obtains control of one or more businesses .” For US GAAP, the general rule is that one reporting entity that directly or indirectly holds more than 50% of the outstanding voting shares of another entity has [Content moved from paragraph 805-20-35-4A] 3. Company A would also consider whether a separate enabling technology asset should be recognized for Version 1.0. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. 805-20-05-4 The Accounting Alternative Subsections of this Subtopic provide guidance for an entity within the scope of paragraph 805-20-15-2 that elects the accounting alternative for the recognition of identifiable intangible assets acquired in a business combination. For example, Complex capital structures as well as puts, calls and other contingent provisions can require classification of ownership interests outside of equity. Determine the appropriate commercial, legal, tax, financial reporting, valuation and regulatory skills needed to complete the transaction and involve the appropriate professionals early in the process. acquired in a business combination. Company B also hires all of the scientists formerly employed by Company A, who are integral to developing the acquired product candidates. The cash flows and useful lives of intangible assets that are based on legal rights are constrained by the duration of those legal rights. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (consensuses of the Private Company Council [PCC]), which simplify the subsequent accounting for goodwill and the accounting for certain identifiable intangible assets in a business combinat ion. Intangible assets are amortized over their estimated useful lives. successful business combination. In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension, consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph. It also includes an updated appendix on the accounting for asset acquisitions, which is based on our updated Technical Line publication, A closer look at the accounting for asset acquisitions. While the IPR&D Guide is non-authoritative, it reflects the input of financial statement preparers, auditors, and regulators and serves as a US GAAP accounting and reporting resource for entities that acquire IPR&D. Company A owns the rights to several drug compound candidates that are currently in Phase I of development. Company A purchases a legal entity from Company B that contains the rights to a Phase 3 (in the clinical research phase) compound being developed to treat diabetes, or the in-process research and development (IPR&D) project. assets or businesses. The screen test states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business and no further analysis is required. Company B acquires Company A in a business combination. Once the IPR&D asset becomes available for use, it should be amortized over its estimated useful life. The production, testing and developing equipment would generally be separately recognized as tangible assets, measured at fair value, and depreciated over their estimated useful lives. Company B would not assign the acquired patent an indefinite life upon acquisition because it is not solely being used for the purpose of an ongoing R&D. To do so, Company B may elect to perform a qualitative impairment assessment under ASC 350-30-35-18A. 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