Question

What is In-Process Research and Development and how is it accounted for different from "normal" R&D? Does it make conceptual sense to account for in-process R&D and R&D differently?

Answer 1

In-Process Research and Development

In-process research and development (“IPR&D”) is one intangible asset that meets the FASB's definition of an intangible asset separately identifiable from goodwill.

Accounting guidance requires companies to capitalize assets acquired in a business combination that will be used in research & development (R&D) activities. IPR&D assets are treated as indefinite-lived until completion or abandonment of the R&D efforts. During this time, the assets are subject to impairment testing requirements under Accounting Standards Codification 350 (ASC 350).

Intangible assets that may involve R&D activities include:

• R&D efforts to be continued by the acquirer
• Defensive assets
• Licensed-out intangible assets with active involvement
• Temporarily idled assets

For the R&D activity to be deemed an asset, the project must meet the ASC 805 asset recognition criteria. Additionally, the R&D activity should exhibit persuasive evidence of having “substance” and being “incomplete” as of the valuation date.

Further, separately identifiable IPR&D assets that share similar characteristics may be segregated into a single unit of account. When determining the unit of account, the following characteristics of R&D assets may be considered:

• Phase of development
• Nature of activities and costs necessary to further develop the related IPR&D project
• Risks associated with further development
• Amount and timing of benefits expected
• Expected economic life of the developed assets
• Intention to manage costs for developed assets separately or on a combined basis
• Expectation for the asset to be transferred by itself or with other separately identifiable assets

While there are three primary approaches for valuing IPR&D assets including cost, market and income approaches, the cost and income approaches are most widely used.

In the context of commerce, research and development normally refers to future-oriented, long-term activities in science or technology, using similar techniques to scientific research but directed toward desired outcomes and with broad forecasts of commercial yield.

In-Process or R&D Activity Metrics

The first level of tracking projects is the activity or in-process metrics. Reporting such metrics helps teams and management track and measure their progress. When ideas are generated, they have to be selected and reviewed. Each idea will have a number of untested assumptions that have to be transformed into knowledge. Each team’s goal is to focus and test only the assumptions that are relevant to their innovation stage. This is true for both stage gate and agile / lean projects. As teams identify their assumptions and start running experiments, reporting KPI’s helps them see how much progress they are making in turning assumptions into knowledge, thus meeting the goals of their innovation stage.

Activity metrics for teams can include the number of ideas generated, the number of ideas selected, the number of ideas reviewed and the number of assumptions identified for testing. Once the teams start running experiments, the number of experiments being run, the number of customer conversations taking place, the number of customer observations and the number of usability tests can be counted. When the team begins testing solution ideas, they can count the number prototypes or minimum viable products (MVP) built, and the number of customers exposed to each product type or MVP. If the team is developing a software product and is using design sprints and hackathons, they can also track the number of these events, the number of people who participated, and the number prototypes that were created during each design Sprint.

Examples of activity / in-process metrics are:

1. Number of ideas generated
2. number of ideas chosen
3. number of assumptions
4. number of experiments
5. number of customer conversations
6. number of customer interviews
7. number of customer observations
8. number of prototypes developed
9. number of MVPs built
10. number of hackathons held

In-Process Metrics for Assessing R&D Knowledge Building, Fuzzy Front End or New Concept Development Model Projects:

Examples of anchored scales for rating “Knowledge Building”, “Fuzzy Front End (FFE)” or “New Concept Development Model (NCD)” projects on their pathway to technical and commercial success follow. An Overview of the Metrics for each of the FFE Activities can be summarized as: