This publication summarizes pertinent accounting solutions for the pharmaceutical, life sciences and medical device industry and highlights how industry-specific factors should be considered in relation to the authoritative literature. Because the accounting and financial reporting for specific transactions will reflect each company’s specific facts and circumstances, we cannot address every nuance in this publication. For example, the structure in licensing, manufacturing, and research and development arrangements leads to variations in contracts, corporate structures, and accounting requirements. Therefore, the solutions we present are meant to provide a general framework for determining the appropriate accounting for situations that are commonly encountered in the industry; however, individual facts and circumstances may give rise to a different answer. The contents of this publication are based on guidance that is effective as of January 1, 2024. Therefore, whenever considering the solutions contained in the publication in future periods, it is important to keep in mind that the accounting guidance may have been superseded.
Chapter index
- Chapter 1: Capitalization & impairment
- Chapter 2: Intellectual property
- Chapter 3: Manufacturing & supply
- Chapter 4: Business combinations & asset acquisitions
- Chapter 5: Leases
- Chapter 6: Revenue recognition
- Chapter 7: Warranty
- Chapter 8: Research & development
- Chapter 9: Income taxes
- Chapter 10: Other areas
Chapter 1: Capitalization & impairment
This chapter addresses accounting considerations for research & development costs, intangible assets, and sales and marketing costs. FAQs within this chapter explore, among other things, the following:
- When is it appropriate to capitalize internal development costs?
- How should entities account for regulatory and sales-based milestones paid to others?
- How should entities account for indefinite lived intangibles and in-process research & development (IPR&D)?
Chapter 2: Intellectual property
This chapter addresses the accounting considerations for disputes between two parties related to intellectual property rights. FAQs within this chapter explore, among other things, the following:
- How should entities account for the proceeds or payments in a patent infringement settlement that has multiple elements?
- How should entities account for settlement payments to a customer?
- Should legal costs incurred for patent applications or patent defense be capitalized?
Chapter 3: Manufacturing & supply
This chapter addresses accounting considerations for manufacturing and supply. FAQs within this chapter explore, among other things, the following:
- Should costs to validate new machinery be capitalized or expensed?
- How should entities account for supplies and raw materials used in development when their ultimate use is not known at the time of acquisition?
- How should entities account for costs associated with production of pre-launch inventory?
Chapter 4: Business combinations & asset acquisitions
This chapter addresses accounting considerations for business combinations and asset acquisitions. FAQs within this chapter explore, among other things, the following:
- Should the transaction be accounted for as an asset acquisition or business combination?
- What is the unit of account for acquired IPR&D?
- How should cash flows related to up-front licensing fees be presented in the statement of cash flows?
Chapter 5: Leases
This chapter addresses accounting considerations for leases from both a lessee and lessor perspective. FAQs within this chapter explore, among other things, the following:
- How are leases embedded in another arrangement, such as a contract manufacturing arrangement or a medical device arrangement, identified and accounted for?
- How should contract consideration be allocated between lease and non-lease components?
- How should entities account for issues that arise in real estate leases such as modifications of leased space, subleases, and build-to-suit transactions?
Chapter 6: Revenue recognition
This chapter addresses accounting considerations for revenue from contracts with customers. FAQs within this chapter explore, among other things, the following:
- Is a license to intellectual property distinct from research and development services?
- How is the transaction price determined for arrangements that contain upfront payments, milestone payments, and cost reimbursements?
- When is revenue recognized for each performance obligation in a contract?
- When does an option to obtain a good or service provide a material right to the customer?
Chapter 7: Warranty
This chapter addresses accounting considerations for warranty obligations in a contract. FAQs within this chapter explore, among other things, the following:
- What is the accounting for standard warranty obligations for products sold to customers?
- What is the accounting for extended warranty obligations offered to customers?
- How should a distributor account for warranty costs?
Chapter 8: Research & development
This chapter addresses accounting considerations for research and development arrangements. FAQs within this chapter explore, among other things, the following:
- Should upfront payments be capitalized or expensed?
- What is the accounting treatment for research and development funding arrangements?
- When is it appropriate to recognize raw materials as inventory versus R&D expense?
Chapter 9: Income taxes
This chapter addresses key income tax accounting considerations. FAQs within this chapter explore, among other things, the following:
- What are the current and deferred tax implications, including valuation allowance considerations, of acquiring or transferring in-process research and development (IPR&D)?
- Should a refundable R&D tax credit be accounted within the scope of ASC 740?
- How should tax holidays be accounted for?
Chapter 10: Other areas
This chapter addresses accounting considerations for advertising and promotional expenditures and product recalls.
PwC Pharmaceutical and Life Sciences Practice
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Copyrights:
This publication has been prepared for general informational purposes and does not constitute professional advice on facts and circumstances specific to any person or entity. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The information contained in this publication was not intended or written to be used, and cannot be used, for purposes of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss sustained by any person or entity that relies on the information contained in this publication. Certain aspects of this publication may be superseded as new guidance, or interpretations emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretative guidance.
The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
Questions
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