To find the text in the Roadmap that corresponds to a former Q&A, select the “Business Combinations” tab at the bottom of the Q&A to Roadmap Quick Reference Guide and search for the Q&A’s number or title. Highlights of the Update FASB Issues PCC Alternative for Identifiable Intangible Assets in a Business Combination 2 of 13 2. Question: What is the unit of account for the acquired 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. 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. 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. In IFRS, the guidance related to accounting for business combinations is included in IFRS 3, Business Combinations. 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. Thus, the useful lives of such intangible assets cannot exceed the length of their legal rights and may be shorter. Company A is the owner of patented intellectual property used in medical devices that it currently markets and sells to customers. 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. Company A owns the rights to several drug compound candidates that are currently in Phase I of development. Company B believes there is potential for additional enhancements that may be included in the next generation scanner, including new software Version 3.0. This guide explains the principles of accounting and financial reporting for business combinations and noncontrolling interests (ASC 805) under U.S. GAAP and IFRS. 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. 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. Established businesses often have many different types of inputs, processes, and outputs, whereas new businesses often have few inputs and processes and 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. Company A determines that this meets the definition of an asset acquisition and the license has no alternative future use. 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. acquired in a business combination. 5. Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. Throughout this guide, the phrase “the Standards” is used to refer to ASC 805 and IFRS 3. Another approach is to record a single global asset. Company A expenses the $3 million as incurred as in-process R&D costs. The expected use of the asset by the entity. Company A’s activities primarily consist of research and development (R&D) on these compounds. The classification of amortization expense should generally be determined based on the asset’s intended use and recorded in the income statement accordingly. The following PwC people contributed to the contents or served as technical reviewers of this publication: Kassie Bauman Cathy Benjamin Nicole Berman Wayne Carnall Brett Cohen Larry Dodyk Donald Doran 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. At the acquisition date, Company B produced and sold a medical scanner that includes Version 1.0 of its proprietary software. PwC Not-for-profit entities – mergers and acquisitions • Provides guidance for - Combinations of two or more NPOs - NPO acquisitions of for-profit organizations - Noncontrolling interests (minority interests) - Goodwill - Intangible assets • Codified in ASC 958-805 If abandoned, the carrying value of the IPR&D asset is written off. 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. ii PwC Acknowledgments The Business Combinations and Noncontrolling Interests, ... Business combinations and noncontrolling interests. 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 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. 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 US Pharmaceutical & Life Sciences Assurance Leader, PwC US. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Company A should consider the nature of the underlying cash flow in determining its classification. 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. 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. The Prospective application is required. 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. Question: How should Company B account for the acquired IPR&D? Please see www.pwc.com/structure for further details. 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. If the screen test is not met, then a company must perform further assessment. Factors to consider may include: the employees’ roles, whether the workforce is subject to contracts with employers or service organizations, as well as the nature and stage of the assets acquired. 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. This is a very important determination as the accounting for a business combination and an asset acquisition differs! 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. Enabling technology is…underlying technology that has value through its combined use or reuse across many product or product families. 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). 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. 805-20-35-4C . 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. The project has been scaled to allow for additional trials to meet the regulatory requirements in each future jurisdiction. Set preferences for tailored content suggestions across the site, US GAAP - Issues and Solutions for Pharmaceutical and Life Sciences: Chapter 4, Chapter 1 - Capitalization and Impairment, Chapter 3 - Manufacturing & Supply Chain, Phase of development of the related IPR&D project, Nature of the activities and costs necessary to further develop the related IPR&D project. Company A acquires Company B in a business combination accounted for under ASC 805. 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? 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. Company B acquires the rights to the drug compound candidates along with Company A’s workforce composed primarily of scientists. Question: What is the appropriate presentation of the up-front licensing fee in the statement of cash flows? 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. 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 an income approach is used to measure the fair value of an intangible asset, Company A should consider the period of expected cash flows used to measure fair value adjusted as appropriate for the entity-specific factors noted above. 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. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. Company B is developing a drug compound that is expected to become a leading product for its therapeutic indication. This Roadmap provides Deloitte’s insights into and interpretations of the guidance in ASC 805 1 on business combinations, pushdown accounting, common-control transactions, and asset acquisitions as well as an overview of related SEC reporting requirements. As a result, the AICPA concluded that these assets should be accounted for in accordance with their nature (e.g., market-related, technology-based). Applicability. ASC 805-10-55-5A through 55-5C introduce a screen test to be performed prior to the full assessment. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. Non-public business entities who have not yet adopted this guidance must make an assessment under the previous guidance. Company A is in the pharmaceutical industry and owns the rights to several product (drug compound) candidates. Company that is involved with a business combination; Company that presents goodwill in its financial statements; Relevant dates c.      Any legal, regulatory, or contractual provisions that may limit the useful life. If enabling technology meets the criteria for recognition as an intangible asset, it could be a separate unit of account if it does not share the useful life, growth, risk, and profitability of the products in which it is used. As a result, all of the consideration will be allocated to the IPR&D project. Company A is also using the intellectual property in certain ongoing R&D activities. Amortization of intangible assets should begin on the date the asset is available for its intended use, which is generally the acquisition date. Even seemingly straightforward M&A transactions and non-controlling investments can introduce complex issues under ASC 805. The intellectual property acquired by Company A does not represent IPR&D. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 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. Rather than merely describing these standards, we endeavor to explain 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. 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. 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. 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. 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. Company B acquires Company A in a business combination. What Are the Main Provisions? Therefore, there is no fair value associated with these arrangements. Company B would not assign the acquired patent an indefinite life upon acquisition because it is not solely being used for the purpose of an ongoing R&D. In general, Company A should classify the cash outflow based on what is likely to be the predominant use of cash. 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. Risks associated with the further development of the related IPR&D project; Amount and timing of benefits expected to be derived from the developed asset, Expected economic life of the developed asset, Whether there is an intent to manage advertising and selling costs for the developed asset separately or on a combined basis, Once completed, whether the product would be transferred as a single asset or multiple assets. Many stakeholders provided feedback that the definition of a business in Topic 805, Business Combinations, is applied too … 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? 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. None of the acquired drug compounds are similar. 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. 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. If Company A expects to utilize the technology to support the commercialization process or to manufacture goods, the presumption is that amortization would be recorded as part of cost of goods sold. This example assumes adoption of Accounting Standards Update 2017-01, Clarifying the Definition of a Business. 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