Download US GAAP: Issues and Solutions for the Pharmaceuticals and Life Sciences Industries

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Externally sourced research and development
17.Accounting for receipt of listed shares in exchange for a patent
Background
Relevant guidance
Company A agrees to acquire a patent from Company B in order
to develop a drug. Company A will pay for the right it acquires by
giving Company B 5% of its shares (which are listed). Company B
is in the business of licensing and selling patents in its patent
portfolio. The listed shares are considered to be equal in value to
the patent. If Company A is successful in developing a drug and
bringing it to the market, Company B will receive a 5% royalty on
all sales. Company B expects to classify the shares as available-forsale securities.
An investment in the stock of an investee… shall be measured
initially at cost [ASC 325–20–30–1].
If a security is acquired with the intent of selling it within hours
or days, the security shall be classified as trading. However, at
acquisition an entity is not precluded from classifying as trading
a security it plans to hold for a longer period. Classification
of a security as trading shall not be precluded simply
because the entity does not intend to sell it in the near term
[ASC 320–10–25–1a].
Investments in debt securities and equity securities that have
readily determinable fair values not classified as trading securities
or as held-to-maturity securities shall be classified as availablefor-sale securities [ASC 320–10–25–1b].
The cost of a non-monetary asset acquired in exchange for
another nonmonetary asset is the fair value of the asset
surrendered to obtain it, and a gain or loss shall be recognized on
the exchange. The fair value of the asset received shall be used to
measure the cost if it is more clearly evident than the fair value of
the asset surrendered [ASC 845–10–30–1].
How should Company B
account for this transaction? 
Solution
Company B should initially recognize the shares received as available-for-sale securities at their fair value. Company B should also
derecognize the patent that is transferred to Company A, and recognize any gain arising from the sale of the patent. The fair value
of the shares received represents the amount of the consideration received, which would likely be used to measure this transaction
as it is more readily determinable (market quoted value) than the value of the patent given up. As Company B is in the business of
routinely licensing and selling patents in its patent portfolio, it would be appropriate to recognize a gain on the sale of the patent as
revenue. Transaction costs, if any, would be recorded as a reduction of the gain on the sale of the patent.
Company B should not yet recognize any asset relating to the future royalty stream from the potential sales of the drug because
this stream of royalties is contingent upon the successful development of the drug. The revenue will generally be recognized on an
accrual basis in the period that the royalties are earned (e.g., when the related sales on which the royalties are determined occurs),
if Company B has an ability to reasonably estimate such royalties.
PwC
19