Question

How has accounting for in Process R&D Costs (in acquisitions) changed in the last few years?

Answer 1

In-process research and development is a complicated accounting concept that deserves a high level of scrutiny from investors and other users of financial statements. The accounting principle is not necessarily bad, it is simply the accounting profession's best attempt to provide accurate financial information about complex business transactions. Investors who have a thorough understanding of the principle and know its limitations have the opportunity to make more informed investment decisions.

Paying top dollar for another company only to turn around and expense a large portion of the acquisition price may cause investors to wonder whether it was worth making the acquisition. In the above example, it really doesn't seem to be logical, especially because the product was almost ready to be introduced to the market.

However, although the requirement to expense in-process research and development costs appears unreasonable, it is actually consistent with the treatment of similar costs incurred by a company seeking to internally develop new products. GAAP requires that all research and development costs be expensed. One may argue that this violates the matching principle of accounting, which requires that costs be recognized in the same period as the revenues they create, but research and development costs are expensed because the future economic benefit generated by the resulting product can be highly uncertain.