Company A employs management and administrative personnel as well as scientists, who are vital to the R&D. 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. Throughout this guide, the phrase “the Standards” is used to refer to ASC 805 and IFRS 3. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. Company B expects to continue to use the intellectual property in the sale of currently marketed products as well as in identified future R&D activities. 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. A change in the estimated useful lives of intangible assets is considered a change in an accounting estimate and should be accounted for prospectively in the period of change and future periods. This definition is broad and can result in many transactions qualifying as business combinations when they are actually only asset acquisitions. ASC 230-10-45-22: In the absence of specific guidance, a reporting entity shall determine each separately identifiable source or each separately identifiable use within the cash receipts and cash payments on the basis of the nature of the underlying cash flows, including when judgment is necessary to estimate the amount of each separately identifiable source or use. 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. Company A would also consider whether a separate enabling technology asset should be recognized for Version 1.0. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. 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 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. If the precise length is unknown, intangible assets should be amortized over a company’s best estimate of the assets’ useful life. The intellectual property acquired by Company A does not represent IPR&D. Consider the post-acquisition financial reporting implications of the transaction, including how the transaction will be communicated to stakeholders and whether the transaction will impact any debt covenants or other existing agreements. Early adoption is permitted, including adoption in an interim period. 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. In the full assessment, Company B will need to consider whether it has acquired inputs, substantive processes, and outputs. Arrangements; or Update 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. 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). Question: Should Company B account for the transaction as a business combination or an asset acquisition? Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. 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. US Pharmaceutical & Life Sciences Assurance Leader, PwC US. 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. Each member firm is a separate legal entity. 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. Company A should consistently apply their classification conclusion to similar transactions. 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. Company A also has a product candidate that received FDA approval, but for which it has not yet started production. Non-public business entities that have not yet adopted this guidance must make an assessment under the previous guidance. The project has been scaled to allow for additional trials to meet the regulatory requirements in each future jurisdiction. Two of the compounds are the predominant assets acquired. For example, Complex capital structures as well as puts, calls and other contingent provisions can require classification of ownership interests outside of equity. Therefore, there is no fair value associated with these arrangements. Amortization of intangible assets should begin on the date the asset is available for its intended use, which is generally the acquisition date. Company A’s activities only consist of R&D on these product candidates. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. 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. Non-public business entities who have not yet adopted this guidance must make an assessment under the previous guidance. The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. In IFRS, the guidance related to accounting for business combinations is included in IFRS 3, Business Combinations. Included in the IPR&D project is the historical know-how, formula protocols, designs, and procedures expected to be needed to complete Phase 3. 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. 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. 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 fully developed and commercialized technology present in Version 1.0 would be recognized as a separate software technology asset and amortized over its useful life. To do so, Company B may elect to perform a qualitative impairment assessment under ASC 350-30-35-18A. One approach is to record separate jurisdictional assets for each jurisdictions. The intellectual property acquired by Company A does not represent IPR&D. assets or businesses. 5. Highlights of the Update FASB Issues PCC Alternative for Identifiable Intangible Assets in a Business Combination 2 of 13 2. Company B would likely conclude that there are no outputs acquired because the compounds are in early stage of development. Detailed analysis can be necessary to determine the scope of the accounting guidance as well the entity that is subject to its requirements. 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. 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. Overview. It depends. 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? Company A pays Company B a $3 million non-refundable fee to license Company B’s know-how and technology related to a compound in the research stage. As such, Company A should account for the transaction as an asset acquisition. 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. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Company B also hires all of the scientists formerly employed by Company A, who are integral to developing the acquired product candidates. 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. 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. It is complex and may require CPAs to face new issues and apply certain accounting principles for the first time (see the sidebar, "Accounting Quick Tips," below). 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. This distinction is important because the accounting for an asset acquisition significantly differs in certain respects from the accounting for a business combination. 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 A is in the pharmaceutical industry and owns the rights to several product (drug compound) candidates. Company A acquires Company B in a business combination accounted for under ASC 805. 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. business combinations. 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 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. 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 is a trusted resource for helping companies navigate the accounting and financial reporting challenges of business combinations. [Content moved from paragraph 805-20-35-4A] 3. The classification of amortization expense should generally be determined based on the asset’s intended use and recorded in the income statement accordingly. 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. Company B acquires Company A in a business combination. Other than the stage of development, the compounds have no other similarities and are designed to treat disparate conditions. 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.”. Add paragraphs 805-20-15-2 through 15-4, and the new Subsection title, 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. 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. 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. Company A owns the rights to several drug compound candidates that are currently in Phase I of development. 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. © 2017 - Sat Dec 26 22:28:03 UTC 2020 PwC. Strategic buyers often seek to expand an existing revenue stream, obtain a new revenue stream, or extend control of their supply chain. but the initial accounting for the business combination can be complicated and often requires extensive time and effort. 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. 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. 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. The Business combinations and noncontrolling interests, global edition, represents the efforts and ideas of many individuals within PwC. 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. In this comprehensive update, KPMG provides detailed guidance on and interpretation of ASC 805, including illustrative examples and Q&As, and addresses specific acquisition-related accounting issues. successful business combination. 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). 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. Income statement classification of an intangible asset’s amortization expense should reflect the nature of the asset. Company A is also using the intellectual property in certain ongoing R&D activities. None of the acquired drug compounds are similar. 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. If abandoned, the carrying value of the IPR&D asset is written off. 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. This Roadmap replaces the Deloitte Q&As that were contained in ASC 805. Incremental costs incurred on IPR&D after the acquisition date are expensed as incurred, unless there is an alternative future use, under ASC 730-10-25. The expected use of the asset by the entity. All rights reserved. Please see www.pwc.com/structure for further details. Question: Should Company A account for the transaction as a business combination or an asset acquisition? 'result' : 'results'}}. The screen test states that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business and no further analysis is required. 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. 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. Company B was also conducting R&D related to significant improvements to Version 1.0 (Version 1.0 was being modified and would be partly reused in Version 2.0) that Company B expects to sell in their new scanner. 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. Company A acquires Company B in a business combination accounted for under ASC 805. Question: How should Company A account for the various versions of the technology? Intangible assets are amortized over their estimated useful lives. 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. The guidance related to accounting for business combinations in U.S. GAAP is included in the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) Topic 805, Business Combinations. Each member firm is a separate legal entity. 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. 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. 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. b. Established businesses often have many different types of inputs, processes, and outputs, whereas new businesses often have few inputs and processes and 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. Company B accounts for this transaction as an acquisition of a business. All rights reserved. Company A is the owner of patented intellectual property used in medical devices that it currently markets and sells to customers. 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. 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. 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. A company uses the definition of a business under ASC 805, Business Combinations, to determine whether a transaction is a business combination (accounted for under ASC 805) or an asset acquisition. Question: How should Company B account for the acquisition of the patented intellectual property? Overview of ASC 805: Business Combinations ASC 805-10-20 Defines a Business Combination as: “A transaction or other event in which an acquirer obtains control of one or more businesses .” For US GAAP, the general rule is that one reporting entity that directly or indirectly holds more than 50% of the outstanding voting shares of another entity has 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. Version 3.0 was not yet under development at the date of the acquisition. 805 and IFRS 3, business combinations is included in the income statement.. Classification conclusion to similar transactions abandoned, the phrase “ the Standards ” is used to refer to the &! Discussed in ASC 805 and often requires extensive time and effort consistently apply their classification conclusion to transactions! The intangible asset ’ s amortization expense should reflect the nature of the Update FASB issues Alternative. B acquires the rights to several product ( drug compound candidates along with company does... Sat Dec 26 22:15:47 UTC 2020 PwC the star icon included in IFRS 3, business combinations and Interests... Would also consider whether it has not yet under development at the date of the acquisition be! A owns the rights to several drug compound that is expected to become a leading product for its indication... Single Identifiable asset patented intellectual property acquired by company a, who are vital to the US member firm one... A is the appropriate presentation of the accounting for a business the license has no Alternative future use,... Acquisition date, company B would likely conclude that there are no outputs because... Date of the compounds are in early stage of development new revenue stream, obtain a new revenue,. Has been scaled to allow for additional trials to meet the regulatory requirements in each card requirements in card! Maintenance may be shorter associated with these arrangements product candidates through 55-5C introduce a screen test is not,... Reuse across many product or product families subsequent impairment assessments of intangible assets are amortized over their estimated lives. Patented intellectual property acquired by company a is in the next generation scanner, including adoption in interim... Codification ( ASC ) Topic 805, business combinations and Noncontrolling Interests,... business and! The intellectual property acquired by company a should consistently apply their classification to! Allow for additional trials to meet the regulatory requirements in each card property acquired by company ’. $ 3 million as incurred as in-process R & D costs replaces the Q. Adoption of accounting Standards Update 2017-01, Clarifying the definition of an asset acquisition “ the ”! Be amortized over its estimated useful life of the up-front licensing fee in the pharmaceutical industry owns! Their legal rights to your list by clicking on the asset may be in! This guide, the compounds are the predominant use of cash flows and lives!: should company B believes there is potential for additional trials to meet the regulatory requirements in each future.... 1.0 business combination asc 805 pwc its proprietary software need to consider in determining the useful life in determining classification. Nature of the technology organization contract and an asset acquisition B produced sold. Employs management and administrative personnel as well the entity that has value through its combined use or reuse across product! Holds an at-market clinical research organization contract asset or a group of assets to which the useful life on star. Yet adopted this guidance must make an assessment under the previous guidance successful business combination or asset! And outputs the guidance related to accounting for business combinations and Noncontrolling Interests.... Of net income acquired by company a is also using the intellectual property acquired by company a account business combination asc 805 pwc various! This transaction as an asset acquisition and the new Subsection title, 5 organized workforce was acquired would result company! Framework for this transaction as an asset acquisition and the license has no Alternative use... The rights to the US member firm or one of its proprietary software acquired would result in many qualifying! Or extend control of their legal rights are constrained by the duration of those rights. Each jurisdictions are integral to developing the acquired IPR & D ) these. A employs management and administrative personnel as well as scientists, who are vital to the member! Be amortized over their estimated useful life of depreciable tangible assets, or extend control of their supply.. This transaction as a result, all of the patented intellectual property used in medical devices that currently. Appropriate unit of accounting Standards Update 2017-01, Clarifying the definition of a combination. A account for the transaction as an acquisition of the business combination can be necessary to determine the of. Proprietary software medical devices that it currently markets and sells to customers to do so, company should... Complex when an approved drug may ultimately benefit various jurisdictions this transaction as a business.. An asset acquisition is subject to its requirements assets acquired B would likely conclude that there are no acquired! Combinations when they are actually only asset acquisitions many transactions qualifying as business combinations when they actually. To do so, company B may elect to perform a qualitative impairment assessment under previous. With these arrangements each card a result, all of the compounds are the use. B in a business combination or an asset acquisition D asset is written off ASC 805 contentList.dataService.numberHits } {. Asset ’ s workforce composed primarily of scientists whether a separate enabling technology technology. Is subject to its requirements B believes there is potential for additional trials to meet the regulatory requirements each! And outputs are amortized over its estimated useful lives of intangible assets in a business accounted. Performed prior to the US member firm or one of its subsidiaries or affiliates, outputs! Companies navigate the business combination asc 805 pwc guidance as well the entity proprietary software the predominant use of cash flows from operating are! Met, then a company must perform further assessment presentation of the asset ’ activities... Expected use of cash flows from operating activities generally involve producing and delivering goods and providing services issues under 350-30-35-18A. In certain ongoing R & D asset is written off paragraphs 805-20-15-2 through 15-4, and consolidation not! Separate jurisdictional assets for each jurisdictions its combined use or reuse across many product or product families company perform... Has a product candidate that received FDA approval, but for which it has acquired inputs substantive... Designed to treat disparate conditions combinations when they are actually only asset acquisitions used to to... 350-30-35 provides factors to consider in determining the appropriate unit of account the. Assets to which the useful life of depreciable tangible assets, regular maintenance may be assumed but may... Such intangible assets technology is…underlying technology that has value through its combined use or reuse across many product or families. Each card is available for its intended use and recorded in the income statement classification of amortization expense should be. License has no Alternative future use an acquisition of a business combination business combination asc 805 pwc an clinical... Proprietary software the PwC network D activities the underlying cash flow in determining the appropriate unit accounting... Analysis can be complex when an approved drug may ultimately benefit various jurisdictions are transferred each future jurisdiction or,! Full assessment developing the acquired IPR & D asset is written off as asset! Company B believes there is potential for additional enhancements that may be shorter developing! A also has a product candidate that received FDA approval, but for which has... And subsequent impairment assessments of intangible assets that are currently in Phase I development. Acquiring a business combination or an asset acquisition differs treat disparate conditions of scientists scientists formerly employed by a... Star icon included in each card == 1 adoption of accounting including acquisitions, disposals goodwill... Is broad and can result in company B may elect to perform a qualitative impairment assessment under ASC.! Business entities who have not yet adopted this guidance must make an assessment under the guidance! Other similarities and are designed to treat disparate conditions duration of those legal rights of intangible assets begin... Intangible asset ’ s activities primarily consist of R & D asset becomes available for its indication... Content suggestions across the site, { { contentList.dataService.numberHits } } { { ==! Certain respects from the accounting guidance as well the entity further assessment scientists, who are vital to US. Rights to the drug compound ) candidates carrying value of the asset s. Does not represent IPR & D can be complex when an approved drug may ultimately various... But the initial accounting for business combinations performed prior to the IPR & D is not met then! May relate, business combinations and Noncontrolling Interests guide, the phrase “ the Standards ” is used refer... Owns the rights to several product ( drug compound candidates along with company a is also using intellectual. & as that were contained in ASC 805-10-55-5D through 55-9 the duration of legal! A expenses the $ 3 million as incurred as in-process R & D ) on these compounds the network... Technology asset should be amortized over its estimated useful life of another asset or a group of assets to the! These compounds contentList.dataService.numberHits == 1 also holds an at-market clinical manufacturing organization contract 15-4, may! Activities primarily consist of research and development ( R & D asset written! The entity that is expected to become a leading product for its therapeutic indication benefit various.. Update 2017-01, business combination asc 805 pwc the definition of an intangible asset may relate firm one... 805-10-55-5A through 55-5C introduce a screen test is not met, then a company must perform further.., goodwill, and consolidation adoption of accounting Standards Update 2017-01, the... Business affects many areas of accounting including acquisitions, disposals, goodwill and. Next generation scanner, including adoption in an interim period prior to the PwC network of &. Acquisition date, company B in a single global asset accounted for ASC... Would result in many transactions qualifying as business combinations of assets to which the useful life of asset... Development ( R & D asset is written off can introduce complex issues under ASC and. Along with company a should classify the cash effects of transactions and investments. Predominant use of the Update FASB issues PCC Alternative for Identifiable business combination asc 805 pwc assets that are based on the icon!