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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
32.Accounting for funded research and development arrangements
Relevant guidance
Company A partners with Investor B, an unrelated financial
investor, for the development of selected compounds that are
in Phase II development. Investor B commits a specified dollar
amount to fund the research and development of the selected
compounds. In exchange for the funding, Investor B will receive
royalties on future sales of product resulting from the compounds
being developed. Investor B will not receive any repayment if the
compounds are not successfully developed (i.e., the transfer of
financial risk for the research and development is substantive).
Investor B does not participate in any of the development or
commercialization activities.
ASC 730–20, Research and Development Arrangements, provides
guidance on accounting for research and development
arrangements through which a company can obtain the results
of the research and development funded partially or entirely
by others. This guidance requires a company to determine the
nature of the obligation it incurs when it enters into a research
and development funding arrangement to ascertain whether the
obligation is (i) a liability to repay the funding party or (ii) to
perform contractual services.
ASC 470–10–25, Debt, provides guidance on the accounting
for cash received from an investor when a company agrees to
pay the investor, for a defined period, a specified percentage or
amount of revenue of a particular product line, business segment,
trademark, patent, or contractual right. This guidance discusses
whether cash proceeds received from a sale of future revenues
should be classified as debt or deferred income.
What factors should Company A
consider to determine the
most appropriate accounting
model for the research and
development funding? 
While ASC 730–20 only relates to research and development funding, ASC 470–10–25 does not specifically exclude research and
development funding arrangements from its scope. If the research and development risk is substantive, such that it’s not probable
the development will be successful, the guidance in ASC 730–20 could be followed. However, if the successful completion of the
research and development is probable at the time the funding is received, the guidance in ASC 470–10–25 is most applicable.