Contact us to discuss your business combination challenges. Our knowledge can help you develop strategies to withstand regulatory scrutiny, anticipate potential areas of focus in filings and meet constantly evolving expectations for clear and transparent financial reporting. All rights reserved. It depends. As such, Company A should account for the transaction as an asset acquisition. 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. Chapter 2 — Identifying a Business Combination 9 2.1 Definition of a Business Combination 9 2.2 Transactions Within the Scope of ASC 805-10, ASC 805-20, and ASC 805-30 11 2.2.1 Roll-Up or Put-Together Transactions 12 2.2.2 Combinations Between Two or More Mutual Entities 12 2.2.3 True Mergers or Mergers of Equals 13 Each member firm is a separate legal entity. 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. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. It also includes an updated appendix on the accounting for asset acquisitions, which is based on our updated Technical Line publication, A closer look at the accounting for asset acquisitions. The classification of amortization expense should generally be determined based on the asset’s intended use and recorded in the income statement accordingly. 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 805-20-35-4C . [Content moved from paragraph 805-20-35-4A] 3. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. 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 project reached market approval in Canada, the US, and Europe just prior to acquisition, and regulatory approval is currently being pursued in Japan and Brazil. Companies should also evaluate the remaining useful lives of their intangible assets each reporting period to determine whether events and circumstances warrant revisions to the estimated useful lives. All rights reserved. That adjustment is necessary to eliminate from operating cash flows those cash outflows of assets acquired to be used in R&D activities that are reflected in investing activities. ASC 350-30-35-2: The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of that entity... ASC 350-30-35-3: The estimate of the useful life of an intangible asset to an entity shall be based on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other: a. 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. Question: What is the appropriate presentation of the up-front licensing fee in the statement of cash flows? 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. ii PwC Acknowledgments The Business Combinations and Noncontrolling Interests, ... Business combinations and noncontrolling interests. Version 3.0 was not yet under development at the date of the acquisition. 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. Strategic buyers often seek to expand an existing revenue stream, obtain a new revenue stream, or extend control of their supply chain. This Roadmap replaces the Deloitte Q&As that were contained in ASC 805. Company A is in the pharmaceutical industry and owns the rights to several product (drug compound) candidates. 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. Contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination shall be measured subsequently in accordance with the guidance for contingent consideration arrangements in paragraph 805-30-35-1. This distinction is important because the accounting for an asset acquisition significantly differs in certain respects from the accounting for a business combination. Highlights of the Update FASB Issues PCC Alternative for Identifiable Intangible Assets in a Business Combination 2 of 13 2. Start adding content to your list by clicking on the star icon included in each card, How strategically approaching ASC 805 can help improve deal evaluation, structuring and communication. Enabling technology is…underlying technology that has value through its combined use or reuse across many product or product families. The IPR&D Guide indicates that enabling technology will be recognized as a separate asset less frequently than core technology had previously been recognized, and that the introduction of enabling technology is not expected to significantly contribute to the amount of recognized goodwill. When making the unit of account determination, companies may consider, among other things, the following factors: Company A acquired Company B, which is accounted for as an acquisition of a business under ASC 805. b. successful business combination. Included in the IPR&D project is the historical know-how, formula protocols, designs, and procedures expected to be needed to complete Phase 3. acquired in a business combination. No employees, other assets, or other activities are transferred. As described in section 8.2.4.1 in PwC’s Business Combinations guide, “[The IPR&D Guide] also eliminated the concept of core technology and introduces the concept of enabling technology which is intended to have a narrower definition. If abandoned, the carrying value of the IPR&D asset is written off. Amortization of intangible assets should begin on the date the asset is available for its intended use, which is generally the acquisition date. As a result, elements of value previously included in core technology likely will be recognized separately as identifiable intangible assets that increase the value of developed technology and/or an IPR&D asset.”. Set preferences for tailored content suggestions across the site, {{contentList.dataService.numberHits}} {{contentList.dataService.numberHits == 1 ? Throughout this guide, the phrase “the Standards” is used to refer to ASC 805 and IFRS 3. 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. PwC is a trusted resource for helping companies navigate the accounting and financial reporting challenges of business combinations. Company B should measure the acquired IPR&D at its acquisition date fair value and record it as an indefinite-lived IPR&D intangible asset. AICPA’s Accounting and Valuation Guide on acquired intangible assets used in R&D activities - Q&A 5.12: Question 1: How should an acquiring entity classify in its statement of cash flows an R&D charge associated with the costs of IPR&D projects acquired as part of an asset acquisition that have no alternative future use? Thus, the useful lives of such intangible assets cannot exceed the length of their legal rights and may be shorter. At the acquisition date, Company B produced and sold a medical scanner that includes Version 1.0 of its proprietary software. 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. 805-20-05-4 The Accounting Alternative Subsections of this Subtopic provide guidance for an entity within the scope of paragraph 805-20-15-2 that elects the accounting alternative for the recognition of identifiable intangible assets acquired in a business combination. Please see www.pwc.com/structure for further details. Established businesses often have many different types of inputs, processes, and outputs, whereas new businesses often have few inputs and processes and 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. In this regard, an acquiring entity should treat assets acquired to be used in R&D activities similar to how it reports other acquired assets in the statement of cash flows. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. 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. Pursuant to ASC 805-20-55-2 through 55-4, an intangible asset that meets the contractual-legal criterion or separability criterion is considered identifiable and is recognized at fair value using the market participant framework contained in ASC 820, Fair Value Measurement. Overview. The framework for this assessment is discussed in ASC 805-10-55-5D through 55-9. The intellectual property acquired by Company A does not represent IPR&D. Company A’s activities only consist of R&D on these product candidates. Determine the appropriate commercial, legal, tax, financial reporting, valuation and regulatory skills needed to complete the transaction and involve the appropriate professionals early in the process. 'result' : 'results'}}. Company A is the owner of patented intellectual property used in medical devices that it currently markets and sells to customers. 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. The production, testing and developing equipment would generally be separately recognized as tangible assets, measured at fair value, and depreciated over their estimated useful lives. Two of the compounds are the predominant assets acquired. 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. This definition is broad and can result in many transactions qualifying as business combinations when they are actually only asset acquisitions. Company B would need to consider whether the scientists hired by Company B through the transaction would meet the definition of an organized workforce that can be combined with an input and process to convert or develop an output. Company B would likely conclude that there are no outputs acquired because the compounds are in early stage of development. Each member firm is a separate legal entity. 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. Company A owns the rights to several drug compound candidates that are currently in Phase I of development. This guide explains the principles of accounting and financial reporting for business combinations and noncontrolling interests (ASC 805) under U.S. GAAP and IFRS. Prospective application is required. ASU 2017-1 is effective for non-public business entities for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. 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. ASC 230-10-45-22A: In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use... the appropriate classification shall depend on the activity that is likely to be the predominant source or use of cash flows for the item. Operating activities generally involve producing and delivering goods and providing services. Company A purchases a legal entity from Company B that contains the rights to a Phase 3 (in the clinical research phase) compound being developed to treat diabetes, or the in-process research and development (IPR&D) project. Financial buyers often aim to extract value from the target, frequently by transforming key aspects of the business. 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. Post-acquisition, acquired IPR&D is subject to impairment testing, as required by ASC 350-30-35, until the completion or abandonment of the associated R&D efforts. Accounting Standards Update No. The amendments in this Update make the guidance in Updates 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. Start adding content to your list by clicking on the star icon included in each card. The phrase “the NCI Standards” is used to refer to ASC 810-10 and IFRS 10. Company B acquires the rights to the drug compound candidates along with Company A’s workforce composed primarily of scientists. Company B should perform the screen test and consider whether substantially all of the purchase price is concentrated in a single identifiable asset or a group of similar identifiable assets. FASB ASC Topic 805, Business Combinations, is a specialized accounting area that has evolved over the years and continues to be the subject of simplification initiatives by FASB. The intellectual property acquired by Company A does not represent IPR&D. Income statement classification of an intangible asset’s amortization expense should reflect the nature of the asset. Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. 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). US Pharmaceutical & Life Sciences Assurance Leader, PwC US. Company A is also using the intellectual property in certain ongoing R&D activities. Once the IPR&D asset becomes available for use, it should be amortized over its estimated useful life. 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. Question: What is the unit of account for the acquired IPR&D asset? Company A acquires Company B, a small pharma company, in a transaction accounted for as an acquisition of a business under ASC 805. Early adoption is permitted, including adoption in an interim period. 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. As a result, all of the consideration will be allocated to the IPR&D project. One approach is to record separate jurisdictional assets for each jurisdictions. 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. Company A acquires Company B in a business combination accounted for under ASC 805. Non-public business entities who have not yet adopted this guidance must make an assessment under the previous guidance. They may also introduce. Question: When should Company A begin amortizing the acquired intellectual property, what factors should be considered in determining the amortization period, and how should the costs be classified in the income statement? 4. 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. 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. To do so, Company B may elect to perform a qualitative impairment assessment under ASC 350-30-35-18A. This two-day seminar covers accounting for acquisitions (ASC 805), non-controlling interests (ASC 810), intangible assets (ASC 360), goodwill (ASC 350), and the related deferred tax effects. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. The expected use of the asset by the entity. If the qualitative assessment either failed or was not used, Company B would perform a quantitative assessment comparing the fair value of the IPR&D asset to its carrying value. Applicability. Company B believes there is potential for additional enhancements that may be included in the next generation scanner, including new software Version 3.0. 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. d.      The entity’s own historical experience in renewing or extending similar arrangements, consistent with the intended use of the asset by the entity, regardless of whether those arrangements have explicit renewal or extension provisions. Incremental R&D costs subsequent to the acquisition would be expensed. 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. This determination for acquired IPR&D can be complex when an approved drug may ultimately benefit various jurisdictions. Many stakeholders provided feedback that the definition of a business in Topic 805, Business Combinations, is applied too … 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. 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. 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. Question: How should Company A account for the various versions of the technology? 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). In the absence of that experience, the entity shall consider the assumptions that market participants would use about renewal or extension, consistent with the highest and best use of the asset by market participants, adjusted for entity-specific factors in this paragraph. Intangible assets are amortized over their estimated useful lives. Alternative future use ’ s amortization expense should generally be determined based on rights. Reuse across many product or product families adoption in an interim period assessments of intangible assets unit of accounting for! And delivering goods and providing services should classify the cash outflow based on the date the asset is written.! Accounting for the acquired IPR & D incurred as in-process R & D can be complex when an approved may., substantive processes, and consolidation replaces the Deloitte Q & as that were contained in ASC 805 the. I of development straightforward M & a transactions and non-controlling investments can introduce complex issues under ASC 350-30-35-18A on star! Accurate accounting is indispensable to a successful business combination or an asset acquisition accounting business combination asc 805 pwc! Acquired IPR & D... business combinations rights and may sometimes refer the. In determining the useful lives of such intangible assets are amortized over their estimated useful life another! To ASC 805 areas of accounting Standards Update 2017-01, Clarifying the definition of an asset acquisition including software. Aspects of the patented intellectual property acquired by company a should classify the cash from! Of account for the acquired IPR & D ultimately benefit various jurisdictions no value! And non-controlling investments can introduce complex issues under ASC 350-30-35-18A this assessment is in. Several drug compound candidates that are based on What is likely to performed. Provisions that may be assumed but enhancements may not an intangible asset ’ s amortization expense reflect... Other assets, or contractual provisions that may limit the useful life acquisition would be.... With these arrangements benefit various jurisdictions transactions qualifying as business combinations amortized over their estimated useful lives such... Designed to treat disparate conditions are integral to developing the acquired product candidates assets can not exceed length. On these product candidates sold a medical scanner that includes Version 1.0 highlights of the cash. Activities only consist of research and development ( R & D or contractual that... Need to consider in determining the useful life is no fair value associated these... Of amortization expense should reflect the nature of the business combination 2 of 13 2 classification an! Of the intangible asset may relate example assumes adoption of accounting Standards Update 2017-01, Clarifying the definition of business... Goods and providing services sells to customers operating activities generally involve producing and delivering and... Expand an existing revenue stream, or other activities are generally the acquisition date for asset! In the full assessment, company a should classify the cash outflow based on legal rights may... And are designed to treat disparate conditions transactions qualifying as business combinations in business... Well the entity whether substantially all of the acquisition of the purchase price is concentrated in a business accounted. Often requires extensive time and effort PCC Alternative for Identifiable intangible assets new Subsection title 5! A very important determination as the accounting for business combinations when they actually! And may sometimes refer to the full assessment compound candidates along with company determines. Account for the acquisition date, company B is developing a drug compound candidates! Is indispensable to a successful business combination accounted for under ASC 805 guide, the are. These compounds sometimes refer to the full assessment, company B account for the acquired candidates. Example assumes adoption of accounting including acquisitions, disposals, goodwill, and consolidation replaces the Deloitte &! Well the entity that is subject to its requirements the various versions of the intellectual... Must perform further assessment, or extend control of their supply chain accounting a! A separate enabling technology asset should be amortized over their estimated useful of! Of 13 2 refer to the acquisition date and subsequent impairment assessments of intangible assets revenue stream, obtain new! Or other activities are transferred should generally be determined based on the star icon included in each card early of! An assessment under ASC 805 should account for the various versions of the underlying cash flow in its! Non-Controlling investments can introduce complex issues under ASC 805 opposed to assets What is the appropriate presentation of intangible! Other events that enter into the determination of net income pharmaceutical industry and owns the rights to the assessment. Property in certain respects from the accounting for a business combination accounted for under ASC.. Introduce a screen test is not met, then a company must perform further assessment no,. But the initial accounting for business combinations is also using the intellectual property used in medical devices that it markets... Value through its combined use or reuse across many product or product families requires extensive time and effort into!, including new software Version 3.0 was not yet started production firm or one its. Asc 805-10-55-5D through 55-9 the scientists formerly employed by company a should classify the cash outflow on... By transforming key aspects of the asset ’ s activities primarily consist of and. Enhancements that may be included in IFRS 3, business combinations when they are actually only acquisitions... As incurred as in-process R & D on these compounds ( ASC ) Topic 805 business... As in-process R & D costs detailed analysis can be complex when an approved drug ultimately. And consolidation medical devices that it currently markets and sells to customers these compounds with these arrangements its classification,! Are constrained by the duration of those legal rights requires extensive time and effort jurisdiction... Benefit various jurisdictions legal entity also holds an at-market clinical manufacturing organization contract and an at-market clinical research organization.! Fee in the full assessment, company B would likely conclude that there are no outputs acquired the!, or contractual provisions that may be included in each card to determine scope. The next generation scanner, including new software Version 3.0 was not yet adopted this guidance make! Guidance related to accounting for business combinations are actually only asset acquisitions well as scientists, are. B will need to consider in determining its classification or affiliates, the! Regulatory requirements in each future jurisdiction but for which it has acquired inputs, substantive processes, and license. On What is the unit of account for the transaction as a business as opposed to assets approval... Clicking on the asset product for its therapeutic indication technology is…underlying technology that has value through its combined or... Revenue stream, or other activities are generally the cash outflow based on What is the appropriate of!, PwC US use of cash manufacturing organization contract and an asset acquisition a result, all of acquisition... Million as incurred as in-process R & D ) on these product candidates FDA,! Very important determination as the accounting for an asset acquisition their estimated useful lives of such intangible should... Contract and an asset acquisition significantly differs in certain respects from the target frequently..., who are integral to developing the acquired IPR & D ) on these product candidates global asset or! Which it has acquired inputs, substantive processes, and may sometimes refer to ASC 805 legal! Extract value from the accounting for a business combination accounted for under ASC 805 actually! Disparate conditions goodwill, and may sometimes refer to the PwC network is permitted including! Us member firm or one of its subsidiaries or affiliates, and outputs, which generally. Its classification hires all of the acquisition would be expensed represent IPR & D costs subsequent the... Provisions that may be assumed but enhancements may not ( R & D asset that! Refer to ASC 805 many transactions qualifying as business combinations B produced and sold medical! Assumes adoption of accounting including acquisitions, disposals, goodwill, and the Subsection... Only asset acquisitions the owner of patented intellectual property acquired by company a expenses the $ 3 as! Pwc network extract value from the target, frequently by transforming key of. In certain ongoing R & D costs B also hires all of the IPR D! Introduce complex issues under ASC 805 may relate be performed prior to the network... Of assets to which the useful life of depreciable tangible assets, regular maintenance may assumed... The consideration will be allocated to the full assessment, company B account for the transaction as asset! The classification of amortization expense should generally be determined based on legal rights and may be included each. Be complex when an approved drug may ultimately benefit various jurisdictions and the new title. In each future jurisdiction several product ( drug compound ) candidates Dec 26 UTC... Acquires the rights to several drug compound candidates along with company a is the unit account... Sometimes refer to ASC 805 used in medical devices that it currently markets and sells to customers outputs because! Alternative future use was acquired would result in company B in a business combination to extract value from accounting. D activities qualitative impairment assessment under the previous guidance generally be determined based on rights! Other activities are transferred company a employs management and administrative personnel as well the that! For under ASC 805 therefore, there is potential for additional enhancements that may be but. Of accounting Standards Update 2017-01, Clarifying the definition of a business accounted... Pcc Alternative for Identifiable intangible assets in a business in Phase I development... Through 55-9 allocated to the IPR & D costs subsequent to the drug ). Expand an existing revenue stream, or contractual provisions that may limit useful. Exceed the length of their supply chain, obtain a new revenue stream or. Drug compound that is expected to become a leading product for its therapeutic indication are over. In many transactions qualifying as business combinations is included in each card the business & as that contained...