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Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. Further, to be capable of this, a business must have, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output. Amortization of intangible assets should begin on the date the asset is available for its intended use, which is generally the acquisition date. f.       The level of maintenance expenditures required to obtain the expected future economic benefits from the asset (for example, a material level of required maintenance in relation to the carrying amount of the asset may suggest a very limited useful life). © 2017 - Sat Dec 26 22:28:03 UTC 2020 PwC. Company B acquires the rights to the drug compound candidates along with Company A’s workforce composed primarily of scientists. Throughout this guide, the phrase “the Standards” is used to refer to ASC 805 and IFRS 3. This determination for acquired IPR&D can be complex when an approved drug may ultimately benefit various jurisdictions. None of the above factors should be considered more presumptive than any other, and companies should consider all the facts and circumstances when estimating an asset’s useful life. In IFRS, the guidance related to accounting for business combinations is included in IFRS 3, Business Combinations. ASC 230-10-45-13C: All of the following are cash outflows from investing activities...Payments at the time of purchase or soon before or after purchase to acquire property, plant, and equipment and other productive assets... ASC Master Glossary: Operating activities include all transactions and other events that are not defined as investing or financing activities (see paragraphs 230-10-45-12 through 45-15). If the initial accounting for a business combination is incomplete at the end of the financial reporting period in which the combination occurs, paragraph 805-10-25-13 requires that the acquirer recognize in its financial statements provisional amounts for the items for which the accounting is incomplete. Company A’s product candidate that has received FDA approval (it is no longer “in-process”) would be recognized as a finite-lived intangible asset at the date of acquisition, separate from the acquired IPR&D, and amortized over its estimated useful life. Question: Should Company B account for the transaction as a business combination or an asset acquisition? ii PwC Acknowledgments The Business Combinations and Noncontrolling Interests, ... Business combinations and noncontrolling interests. To determine the useful life, in addition to the factors in ASC 350-30-35-3, Company A should consider industry-specific factors, such as the following: a. ASC 805-10-55-5A through 55-5C introduce a screen test to be performed prior to the full assessment. Companies may pursue mergers and acquisitions for a variety of reasons. What Are the Main Provisions? However, the specific facts and circumstances would need to be assessed to determine if the risk of further development, along with the associated costs would be different in the two jurisdictions. As part of the business combination, Company A acquires the intellectual property of Company B that meets the criteria for separate recognition of an intangible asset apart from goodwill. If the screen test is not met, then a company must perform further assessment. While the IPR&D Guide is non-authoritative, it reflects the input of financial statement preparers, auditors, and regulators and serves as a US GAAP accounting and reporting resource for entities that acquire IPR&D. 3 ASC 805-10 (continued) 55-6 The nature of the elements of a business varies by industry and by the structure of an entity’s operations (activities), including the entity’s stage of development. [Content moved from paragraph 805-20-35-4A] 3. The AICPA’s Accounting and Valuation Guide on acquired intangible assets used in R&D activities a makes a distinction between complete and incomplete intangible assets used in R&D. Develop a clear roadmap of the economic objectives that will drive the transaction and can be used to communicate goals, both internally and with advisors. Start adding content to your list by clicking on the star icon included in each card. The IPR&D guide indicates that the enabling technology, in order to be separately identifiable, should exhibit the same characteristics between the various products in which it is used. Company A should consistently apply their classification conclusion to similar transactions. Therefore, there is no fair value associated with these arrangements. Identifying a Business combination Under ASC 805, A business is defined as: An integrated set of activities and assets that is capable of being conducted and managed or the purpose of providing a return. Another approach is to record a single global asset. Financial buyers often aim to extract value from the target, frequently by transforming key aspects of the business. An entity uses the definition of a business in ASC 805 in determining whether to account for a transaction as an asset acquisition or a business combination. We support the FASB’s ongoing efforts to address questions raised by stakeholders regarding how to apply ASC 805, Business Combinations, to a contract with a customer acquired in a business combination after the acquirer has adopted ASC 606. When arriving at cash flows from operating activities under the indirect method of reporting cash flows, best practices suggest that an acquiring entity should add back to net income the costs of assets acquired to be used in R&D activities that are charged to expense. Company A is the owner of patented intellectual property used in medical devices that it currently markets and sells to customers. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (consensuses of the Private Company Council [PCC]), which simplify the subsequent accounting for goodwill and the accounting for certain identifiable intangible assets in a business combinat ion. e.      The effects of obsolescence, demand, competition, and other economic factors (such as the stability of the industry, known technical advances, legislative action that results in an uncertainty or changing regulatory environment, and expected changes in distribution channels). Company B also hires all of the scientists formerly employed by Company A, who are integral to developing the acquired product candidates. Two of the compounds are the predominant assets acquired. Duration of the patent right or license of the product, b.    Redundancy of a similar medication/device due to changes in market preferences, c.    Unfavorable court decisions on claims related to product liability or patent ownership, d.    Regulatory decisions over patent rights or licenses, e.    Development of new drugs treating the same disease, f.     Changes in the environment that make the product ineffective (e.g., a mutation in the virus that is causing a disease, which renders it stronger), g.    Changes or anticipated changes in participation rates or reimbursement policies of insurance companies, h.    Changes in government reimbursement or policies (e.g., Medicare, Medicaid) for drugs and other medical products. assets or businesses. It depends. The clinical research organization contract and the clinical manufacturing organization contract are at market rates and could be provided by multiple vendors in the marketplace. When IPRD involves enhancements to existing technologies, the allocation of value between a proven technology and an unproven (incomplete) research project can be difficult to measure. The IPR&D activities related to the new technology to be included in Version 2.0 would be recognized as an indefinite-lived IPR&D asset. Under ASC 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). KPMG’s in-depth guidance on and interpretation of ASU 2017-01, which revised ASC 805 as part of the FASB’s definition of a business project.KPMG provides examples and analysis on the identification of a transaction as an acquisition of assets or a business combination. Arrangements; or Update 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. Our FRD publication on business combinations has been updated to reflect recent standard-setting activity and to further clarify and enhance our interpretive guidance in several areas. Company B believes there is potential for additional enhancements that may be included in the next generation scanner, including new software Version 3.0. If the enabling technology shares the same useful life, growth risk, and profitability of the products in which it is used, a separate asset would likely not be recognized. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. If the patent was solely used in ongoing R&D, the AICPA concluded that it may be appropriate to aggregate the patent with other intangible assets used in the R&D activities and capitalize it as an indefinite lived IPR&D asset. The project has been scaled to allow for additional trials to meet the regulatory requirements in each future jurisdiction. This is a very important determination as the accounting for a business combination and an asset acquisition differs! Question: Should Company A account for the transaction as a business combination or an asset acquisition? Examples of enabling technology provided in the IPR&D Guide include a portfolio of patents, a software object library, or an underlying form of drug delivery technology. The AICPA’s Accounting and Valuation Guide on acquired intangible assets used in research and development activities (the IPR&D Guide) notes that value should be allocated to all identifiable assets, which could include IPR&D. As Version 3.0 is not yet under development, and, therefore, lacks any substance as IPR&D, there would not be an asset recognized for Version 3.0. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. Non-public business entities who have not yet adopted this guidance must make an assessment under the previous guidance. ASC 805-10-55-3A defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. Completed intangible assets acquired in a business combination to be used in R&D activities lack the necessary characteristic of being incomplete to be recorded as IPR&D. Prospective application is required. For example, Complex capital structures as well as puts, calls and other contingent provisions can require classification of ownership interests outside of equity. Based on the fact that none of the acquired compounds are similar, and two of the compounds are the predominant assets acquired, the screen test is likely not met and a full assessment must be performed. Early adoption is permitted, including adoption in an interim period. Company A acquires Company B in a business combination accounted for under ASC 805. The patent would be accounted for under ASC 350-30-25 and treated as a single intangible asset or grouped with other intangible assets associated with the currently marketed product and would be amortized over a finite life. The late stage of development combined with the plan to scale trials to meet regulatory requirements in each future jurisdiction may suggest that disaggregation by jurisdiction of the intellectual property being developed is warranted. Once the associated R&D efforts are completed, the carrying value of the acquired IPR&D is reclassified as a finite-lived asset and amortized over its useful life. In the full assessment, Company B will need to consider whether it has acquired inputs, substantive processes, and outputs. 5. Applicability. ASC 350-30-35 provides factors to consider in determining the appropriate unit of accounting both for recognition and subsequent impairment assessments of intangible assets. PwC is a trusted resource for helping companies navigate the accounting and financial reporting challenges of business combinations. The intellectual property acquired by Company A does not represent IPR&D. Incremental R&D costs subsequent to the acquisition would be expensed. As a result, the value of the Version 1.0 technology that is able to be reused in later versions would be included as part of the Version 1.0 intangible asset as it is not considered to be a separate enabling technology asset. A reporting entity shall then classify each separately identifiable source or use within the cash receipts and payments on the basis of their nature in financing, investing, or operating activities. Industry practice would suggest that Company A may recognize at least two, and potentially up to five, separate assets: one intangible asset representing the rights to the compound in all market-approved jurisdictions (or a separate asset for each of the three market approved jurisdictions) and one IPR&D asset for the portion still being developed (or two, if separated by jurisdiction). The authoritative accounting and reporting guidance for business combinations under US GAAP is included in Topic 805, Business Combinations, of the FASB Accounting Standards Codification. Some examples include accounting and financial reporting for common control (or "put-together") transactions, assessing the necessity for push-down accounting and distinguishing between equity and cost method investments. acquired in a business combination. The legal entity also holds an at-market clinical research organization contract and an at-market clinical manufacturing organization contract. Add paragraphs 805-20-15-2 through 15-4, and the new Subsection title, Only intangible assets that are incomplete and used in R&D activities should be accounted for in accordance with ASC 350-30-35-17A (that is, assigned an indefinite useful life upon acquisition). A conclusion that an organized workforce was acquired would result in Company B acquiring a business as opposed to assets. Supersede paragraphs 805-50-05-1 and 805-50-05-8 and its related heading, amend paragraphs 805-50-05-2 and 805-50-05-6 through 05-7 and the Subsection title and add the General Note, and add paragraph 805-50-05-9 and the new Subsection title, with a link to transition paragraph 805-50-65-1, as follows: Business Combinations—Related Issues The classification of amortization expense should generally be determined based on the asset’s intended use and recorded in the income statement accordingly. Included in the IPR&D project is the historical know-how, formula protocols, designs, and procedures expected to be needed to complete Phase 3. Income statement classification of an intangible asset’s amortization expense should reflect the nature of the asset. Contact us to discuss your business combination challenges. All rights reserved. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. c.      Any legal, regulatory, or contractual provisions that may limit the useful life. Given that the nature of this cash flow has aspects of more than one class of cash flows as well as the lack of authoritative guidance in this area, we believe that classification in either operating or investing is acceptable. 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