Considering the facts given in this case, I would argue that ASC 470-10 is not applicable in this situation. Product “X” is undeveloped and the status is undetermined, therefore, payments are not guaranteed through the future revenues of this particular product (ASC 470-10-25-1). Further, based on ASC 470-10-25-2, these factors do not apply in this case to qualify as a debt.
However, the facts below would show why it is more appropriate to account for the financing of the research and development for product “X”, under ASC 730-20:
1. The main reason behind PEI investment in providing funding for the research and development for product “X”, is to purchase the rights to receive future royalties from Pharmagen, even if product “X” is not successfully completed and developed. Further, based ASC 730-20-05-3 through 6, Pharmagen has incurred a liability, and has promised to repay this loan using future revenues from either or both product “X” and “Y”, regardless of the outcome of product “X”. There are also no financial risks transferred over to PEI, as they would be paid no matter what the result of product “X”.
2. Another factor is that Pharmagen is also partially financing the research and development for product “X”. Plus, they had already started the research and development process prior to the contract agreement, and therefore, the success or failure of this product can have a great impact on this Pharmagen.
3. They have also retained all intellectual property rights to product “X. And once Pharmagen continues to perform its duties on a “best effort” basis, in the research and development process of product “X”, they will continue to receive financing from PEI, without having the obligation to complete the product. Moreover, this proves that Pharmagen is not fulfilling a contract to perform services to PEI, but is working on a project, which can bring future economic benefits to its company (ASC 730-20-05-4).
Ques 2:
ASC