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

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Business combination
59.Asset Acquisition versus Business Combination
Relevant guidance
Company A owns the right to several drug compound candidates
that are currently in Phase I. Company A’s activities consist
of research and development that is being performed on the
early stage drug compound candidates. Company A employs
management and administrative personnel as well as scientists
who are vital to performing the research and development.
Company B acquires the rights to the drug compound candidates
along with the scientists formerly employed by Company A who
are developing the acquired Phase I drug compound candidates.
ASC 805–10–20 indicates that a business is an integrated set
of activities and assets that is capable of being conducted and
managed for the purpose of providing a return…. This definition
of a business can result in a broad range of transactions qualifying
as business acquisitions.
Should Company B account
for the transaction as a
business combination or
an asset acquisition? 
Businesses consist of assets/resources, and systems, standards, or
protocols applied to those assets/resources, that have the ability
to create economic benefits.
Additionally, as noted in ASC 805–10–55–5, to be considered a
business, not all of the inputs and associated processes used by
the seller need to be transferred, as long as a market participant
is capable of continuing to manage the acquired group to provide
a return (e.g., the buyer would be able to integrate the acquired
group with its own inputs and processes) or readily obtain those
inputs and processes.
Company B should consider the stage of development of the drug compound candidates in determining whether a business has
been acquired. In most cases, there are likely to be more processes associated with later stage drug compounds than those in earlier
stages. However, a transaction involving the acquisition of drug compound candidates in early stage development can still be a
business combination.
Company B acquired the Phase I drug compounds, along with the scientists who are vital to performing the research and
development. The scientists have the necessary skills and experience, and provide the necessary processes (through their skills and
experience) that are capable of being applied to inputs to create outputs.
While Company B did not acquire a manufacturing facility, testing and development equipment, or a sales force, it determined
that the likely market participants are other large pharmaceutical companies that already have these items or could easily
replicate them.
These factors would likely lead Company B to account for this acquisition as a business combination.