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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
18.Accounting for receipt of unlisted shares in exchange for a patent
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 10% of the shares in an unlisted
subsidiary. Company B does not typically sell patents in its patent
portfolio. 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 these shares as
An investment in the stock of an investee… shall be measured
initially at cost [ASC 325–20–30–1].
available-for-sale securities.
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].
How should Company B account
for this transaction?  
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].
Generally, the fair value of the patent given up will likely be more readily determinable than the fair value of the shares because
these shares are of an unlisted subsidiary. ASCÂ 320 states that fair value is only deemed readily determinable if sales prices or
bid-and-asked quotations are currently available on a securities exchange registered with the Securities and Exchange Commission
or in the over-the-counter market, or similar foreign market.
Company B would generally be expected to conclude that the fair value of the shares is the same value as the patent given up. As
Company B is not in the business of licensing and selling patents in its portfolio, Company B should recognize the gain arising
from the sale of the patent (fair value less carrying value of the patent) as a gain on sale of long-lived assets (separately stated, if
material) or as other income. Transaction costs would be recorded as a reduction of the gain.
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 (i.e., when the related sales on which the royalties are determined occurs),
if Company B has an ability to reasonably estimate such royalties.