Trueblood Case 09 2
Case 09-2
Issue: Decide how to account for the funding of the R&D and royalty payments. Identify the authoritative literature applicable to this funding arrangement and discuss the appropriate accounting for the agreement in accordance with that guidance.
Facts:
Pharmagen is a pharmaceutical company
Company XYZ is an unrelated third-party private equity investor with no prior relationship or business operations related to Pharmagen
Pharmagen and Company XYZ have entered into a funding agreement
The agreement states Pharmagen will receive up to $500 million funding for R&D costs as they are incurred solely for the research efforts of a potential new drug “X”
Any funding received is non-refundable and Pharmagen is not obligated to successfully complete the development of X
Pharmagen is operating under a “best efforts” arrangement
Pharmagen estimates the R&D costs will total $1 billion and will take 3 years to complete
Company XYZ receives royalties associated with future revenues of X and future royalties associated with an existing commercialized drug for a defined period of time but Pharmagen retains all intellectual property rights
Position: I believe it is obvious that this agreement is applicable to the treatment of ASC 730-20 as a research and development arrangement based on ASC 730-20-20’s definitions. It now becomes important to determine the nature of the obligation and distinguish if the funding is a liability to repay the PEI or an obligation to perform contractual services. According to ASC 730-20-25-4, “To conclude that a liability does not exist, the transfer of the financial risk involved with research and development from the entity to the other parties must be substantive and genuine.” You can then look to ASC 730-20-25-6 for the four conditions that will lead to the presumption that the entity will repay the other party. If any of these conditions are met, the funding would create a liability. The fact that Pharmagen has no indent to repay the
Issue: Decide how to account for the funding of the R&D and royalty payments. Identify the authoritative literature applicable to this funding arrangement and discuss the appropriate accounting for the agreement in accordance with that guidance.
Facts:
Pharmagen is a pharmaceutical company
Company XYZ is an unrelated third-party private equity investor with no prior relationship or business operations related to Pharmagen
Pharmagen and Company XYZ have entered into a funding agreement
The agreement states Pharmagen will receive up to $500 million funding for R&D costs as they are incurred solely for the research efforts of a potential new drug “X”
Any funding received is non-refundable and Pharmagen is not obligated to successfully complete the development of X
Pharmagen is operating under a “best efforts” arrangement
Pharmagen estimates the R&D costs will total $1 billion and will take 3 years to complete
Company XYZ receives royalties associated with future revenues of X and future royalties associated with an existing commercialized drug for a defined period of time but Pharmagen retains all intellectual property rights
Position: I believe it is obvious that this agreement is applicable to the treatment of ASC 730-20 as a research and development arrangement based on ASC 730-20-20’s definitions. It now becomes important to determine the nature of the obligation and distinguish if the funding is a liability to repay the PEI or an obligation to perform contractual services. According to ASC 730-20-25-4, “To conclude that a liability does not exist, the transfer of the financial risk involved with research and development from the entity to the other parties must be substantive and genuine.” You can then look to ASC 730-20-25-6 for the four conditions that will lead to the presumption that the entity will repay the other party. If any of these conditions are met, the funding would create a liability. The fact that Pharmagen has no indent to repay the