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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
36.Pre-launch inventory—Treatment of ‘in-development’ drugs
Relevant guidance
Company A developed a new drug and needs to have sufficient
quantities of inventory on-hand in anticipation of commercial
launch once regulatory approval to market the product has been
obtained. Company A has filed for regulatory approval and is
currently awaiting a decision. Company A believes that final
regulatory approval is probable.
Assets are probable future economic benefits obtained or
controlled by a particular entity as a result of past transactions or
events [CON 6, par. 25].
Company A produced 15,000 doses following submission of
the filing for regulatory approval. If regulatory approval is not
obtained, the inventory has no alternative use.
Inventory is defined as the aggregate of those items of tangible
personal property that have any of the following characteristics:
(a) held for sale in the ordinary course of business, (b) in process
of production for such sale, or (c) to be currently consumed
in the production of goods or services to be available for sale
[ASC 330–10–20].
The primary basis of accounting for inventories is cost, which has
been defined generally as the price paid or consideration given to
acquire an asset. As applied to inventories, cost means in principle
the sum of the applicable expenditures and charges directly or
indirectly incurred in bringing an article to its existing condition
and location. It is understood to mean acquisition and production
cost, and its determination involves many considerations
[ASC 330–10–30–1].
A departure from the cost basis of pricing the inventory is
required when the utility of the goods is no longer as great as
their cost. Where there is evidence that the utility of goods, in
their disposal in the ordinary course of business, will be less
than cost, whether due to physical deterioration, obsolescence,
changes in price levels, or other causes, the difference shall
be recognized as a loss of the current period. This is generally
accomplished by stating such goods at a lower level commonly
designated as market [ASC 330–10–35–1].
A write-down of inventory to the lower of cost or market at the
close of a fiscal period creates a new cost basis that subsequently
cannot be marked up based on changes in underlying
circumstances [ASC 330–10–S99–2].