Question

"R&D costs are expensed as incurred. These expenses indude the costs of our proprietary R&D efforts, as well as costs incurred in connection with certain licensing arrangements. Before a compound receives regulatory approval, we record upfront and milestone payments made by us to third parties under licensing arrangements as expense. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Once a compound receives regulatory approval, we record any milestone payments in Identifiable intangible assets, less accumulated amortization and, unless the asset is determined to have an indefinite life, we amortize the payments on a straight-line basis over the remaining agreement term or the expected product life cycle, whichever is shorter."

What in the GAAP Codification justifies after regulatory approval, that the costs incurred can be capitalized? (Citing where in the codification please)

What is the GAAP Codification's rule about reporting contingencies, especially as it relates to patents. What are the possible effect of contingencies on financial statements?

Answer 1

(a)

The important distinction is whether the above activities represent research and development costs subject to the guidance in ASC 730 and the AICPA Practice Aid on IPR&D. Because the construction activities pertain to tangible assets that will be used to produce the end product at commercially viable levels, rather than costs associated with testing the product or the construction of a pilot facility or preproduction prototype not involving a scale that is economically feasible for commercial production, the construction project would not be considered a research and development cost as contemplated in ASC 730. Accordingly, the costs are subject to the more general concepts of fixed asset accounting and impairment considerations. In this fact pattern, it would be appropriate for Company to capitalize the construction costs incurred as plant and equipment. The assets would be subject to impairment testing based on the expected future cash flows of the assets, which would consider the various potential outcomes of the regulatory approval process and their associated likelihoods.

Company should consider the facts and circumstances involved in a particular research and development arrangement and determine the nature of the obligation it incurs when it enters into an arrangement with other parties that fund its research and development. In this fact pattern, the financial risk associated with the research and development remains with Company B. Therefore, Company A should not recognize a liability associated with this funding. Further, as the intellectual property transfers to Company B, Company A determines that it is appropriate to account for this arrangement as contract research and development services for others. Accordingly, the research and development funding should be recorded as contract revenue. This scenario assumes the research and development services are the only deliverable in the arrangement. If other deliverables existed, revenue should be allocated to each deliverable, applying the guidance for multiple element arrangements. Other facts and circumstances may result in a conclusion that a liability or an offset to research and development expenses is more appropriate. If Company A provided research and development services for the federal government on a fixed price, best efforts basis and the federal government is the sole customer for such research and development, the funding should be recognized as a reduction of research and development expenses, as discussed in the AICPA industry guide, Audits of Federal Government Contractors

(b)