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US GAAP—Issues and Solutions for the Pharmaceuticals and Life Sciences Industries
60.Accounting for acquired IPR&D
Background
Relevant guidance
Company A is in the pharmaceutical industry and owns the rights
to several product (drug compound) candidates. Its only activities
consist of research and development performed on the product
candidates. Company B, also in the pharmaceutical industry,
acquires Company A, including the rights to all of Company A’s
product candidates, testing and development equipment, and
hires all of the scientists formerly employed by Company A, who
are integral to developing the acquired product candidates.
Company A also had a product candidate that received Food and
Drug Administration (“FDA”) approval, but for which it had not
yet started production at the time of acquisition by Company B.
Company B accounts for this transaction as an acquisition
of a business.
Under ASCÂ 805, acquired IPR&D continues to be measured at
its acquisition date fair value but is accounted for initially as an
indefinite-lived intangible asset (i.e., not subject to amortization).
Post-acquisition, acquired IPR&D is subject to impairment testing
until the completion or abandonment of the associated research
and development efforts. If abandoned, the carrying value of
the IPR&D asset is written off. Once the associated research
and development efforts are completed, the carrying value of
the acquired IPR&D is reclassified as a finite-lived asset and is
amortized over its useful life.
The requirement to recognize acquired IPR&D in an acquisition as
an indefinite-lived intangible asset does not apply to incremental
costs incurred on the IPR&D project after the acquisition date.
These incremental costs continue to be expensed as incurred
under ASC 730–10–25.
How should Company B account
for the acquired IPR&D? 
Solution
Company B will measure the acquired IPR&D at its acquisition date fair value and record it as an indefinite-lived IPR&D intangible
asset. Subsequent to the acquisition, the acquired IPR&D would be tested for impairment annually or more frequently if events
or changes in circumstances indicate that the asset might be impaired. This impairment test would compare the fair value of the
IPR&D asset to its carrying value. Incremental research and development costs subsequent to the acquisition would be expensed.
With regard to Company A’s product candidate that received FDA approval, any such completed product development (i.e., no
longer “in-process”) would be recognized as a finite-lived intangible asset at the date of acquisition, separate from the acquired
IPR&D. The testing and developing equipment would be separately recognized as tangible assets, measured at fair value, and
depreciated over their estimated useful lives.
80
PwC