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

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Research and development related issues
31.Treatment of trial batches in development
Relevant guidance
Company A, a commercial laboratory, is manufacturing a stock
of 20,000 doses (trial batches) of a newly developed drug, using
various raw materials. The doses can only be used in patient trials
during Phase III clinical testing, and cannot be used for any other
purpose. The raw materials can be used in the production of other
approved drugs.
The costs of materials (whether from the entity’s normal
inventory or acquired specially for research and development
activities) and equipment or facilities, that are acquired or
constructed for research and development activities and that have
alternative future uses (in research and development projects or
otherwise) shall be capitalized as tangible assets when acquired
or constructed…
However, the cost of materials, equipment or facilities that
are acquired or constructed for a particular research and
development project and that have no alternative future uses
(in other research and development projects or otherwise)
and therefore no separate economic values are research
and development costs at the time the costs are incurred
[ASC 730–10–25–2(a)].
How should Company A account
for the raw materials and
trial batches? 
Company A should initially recognize the raw materials acquired for the production of trial batches as inventory since the raw
materials have alternative future use in the production of other approved drugs. As the trial batches do not have any alternative
future use and the technical feasibility of the drug is not proven (the drug is in Phase III), the trial batches (including the cost of raw
materials used in production) should be charged to development expense when they are produced.