Question

Interpreting Acquisition Footnote with In-Process Research and Development

On October 3, 2017, Gilead Sciences, Inc. (Gilead) acquired 100% of the outstanding common stock

of Kite Pharma, Inc. (Kite). According to Gilead’s December 31, 2017 Securities and Exchange Com-

mission Form 10-K, “[t]he acquisition of Kite was accounted for as a business combination using the

acquisition method of accounting.” The following excerpt is from Note 5 (i.e., Acquisitions) of Gilead’s

2017 10-K:

The following table summarizes the preliminary acquisition date fair values of assets acquired and

liabilities assumed, and the consideration transferred (in millions):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 652

Identifiable intangible assets

Indefinite-lived intangible assets—IPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,950

Outlicense acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,606)

Other assets acquired (liabilities assumed), net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Total identifiable net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,168

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987

Total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,155

a. What did Gilead need to demonstrate for the Kite acquisition to qualify as a business

combination? (In answering this question, ignore the information in part d of this problem.)

b. Given the individual identifiable net assets acquired, describe why business combination

accounting might seem unusual for the Kite acquisition. (In answering this question, ignore the

information in part d of this problem.)

c. For this question only, assume the Kite acquisition qualified as an asset acquisition that is not a

business combination. How would the accounting for the acquisition of Kite’s net assets differ?

d. According to Gilead’s 2017 10-K, in October 2017, after the acquisition date of Kite, the “FDA

approv[ed] Yescarta for the treatment of adult patients with relapsed or refractory DLBCL after

two or more lines of systemic therapy.” (This technology was technically considered unproven

and presented as part of in-process research and development at the balance acquisition date.)

The footnote states that the fair value of the technology for this proven Yescarta therapy is $6,200

million. If this technology was proven and patented, how will the above-presented information in

the acquisition footnote change in the December 31, 2017 financial statements of Gilead?

THIS IS ALL THE INFORMATION THE BOOK GIVES DONT ASK FOR MORE

Answer 1

a)To qualify as a business combination Gilead should see over two elements:

- the aquirer obtains cotrol of an acquired

- the aquiree is a business

b) Because of business combination involves Obtaining control of a business by aquirng net assets or aquirng it's significant equity interest

Asset aquisition involves aquirer shall identify and recognise the individual identifiable assets aquired and liabilities aasumed

In the given problem Gilead takeover net assets from kite

But there is no point for given for obtaining control

Hence it is just asset aquisition

c) The cost of the group shall be allocated to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase

d) Since technology was proved and patented it is no more in foonote, we wil considered them in our financial statements and show them under intangible assets classification