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

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36. Pre-launch inventory—Treatment of ‘in-development’ drugs (continued)
How should the costs
associated with the production
of pre-launch inventory for
‘in-development’ drugs be
accounted for? 
Pre-launch inventory can be capitalized if it has probable future economic benefit. The assessment of whether pre-launch inventory
has probable future economic benefits depends on individual facts and circumstances. Factors to consider include whether key
safety, efficacy and feasibility issues have been resolved, status of any advisory committee reviews, and understanding of any
potential hurdles to regulatory approval or product reimbursement.
Company A believes that the filing for regulatory approval indicates that future economic benefit is probable. Accordingly, the
pre-launch inventory can be capitalized at the lower of cost or market. Periodic reassessments should be made to determine
whether the inventory continues to have a probable future economic benefit (e.g., whether regulatory approval is still probable and
whether product will be sold prior to expiration of its useful life). If the value of inventory is written down based on this
reassessment, the reduced amount is the new cost basis (i.e., if regulatory approval is ultimately obtained, the inventory is not
written back up). If at any time regulatory approval is deemed to not be probable, the inventory should be written down to its net
realizable value, which is presumably zero assuming that the product cannot be sold.
Companies should consider whether additional financial statement disclosures are necessary related to the capitalization of
pre-launch inventory, including the accounting policy and total amount capitalized. Further, if inventory that had previously been
written down is ultimately sold, companies should consider disclosing the impact on margins.