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Introducing our latest quarterly industry insights tailored for pharmaceutical, life sciences, medtech, and healthcare entities. This edition features our enhanced US GAAP guide, providing valuable solutions for the pharma and life sciences sectors. We also delve into SEC comment letter themes, offer accounting and reporting reminders, conduct an extensive analysis of medical cost trends for 2025, provide an update on IRA drug price negotiations, and explore other pertinent topics that significantly influence the health industry.
US GAAP – Issues and solutions for pharmaceutical and life sciences
Check out our recently enhanced US GAAP – Issues and solutions for pharmaceutical and life sciences guide. Covering a wide range of topics including revenue recognition, leases, intangible assets, business combinations, inventory, research and development costs, income taxes, financial instruments, and more.
The latest edition features a new interactive format for navigating our FAQs, which provides practical explanations of the relevant accounting guidance along with valuable insights and potential challenges for common industry transactions.
Regulatory and accounting updates
- SEC comment letter trends
- Segments
- Disaggregation of Income Statement Expenses (DISE)
- R&D funding arrangements
- New cybersecurity CD&Is
- New financial reporting model for governmental entities
SEC comment letter trends
Our analysis of SEC comment letters have been updated for letters made public through June 30, 2024. It identifies the top five comment letter themes for companies in the health industries sectors and provides example comments.
New this quarter is that MD&A (management’s discussion and analysis) is back in the top 5. The SEC staff’s comments in this area have emphasized the requirements in Item 303 of Regulation S-K, regarding the discussion and analysis of results of operations, with an emphasis on the following:
- the description and quantification of each material factor, as well as offsetting factors,
- unusual or infrequent events,
- economic developments causing changes in results between periods,
- the discussion of known trends or uncertainties (e.g., supply chain disruptions, inflation, increase in interest rates), and
- critical accounting estimates, including the judgments made in the application of significant accounting policies, sensitivity to change, and the likelihood of materially different reported results if different assumptions were used.
Consistent with the prior quarter, non-GAAP measures and accounting and disclosures related to research and development (R&D) activities continue to be the top two areas of SEC staff comments for health industries companies. Regarding non-GAAP, the Staff frequently asks among other comments for a better explanation of adjustments to the GAAP results that appear to be normal, recurring expenses and why these items are not related to the registrant’s ongoing operations.
Segments
ASU 2023-07, Segment Reporting – Improvements to Reportable Segment Disclosures, is effective for 2024 annual financial statements for calendar year public entities. Retrospective adoption of the new standard is required unless impracticable.
The most significant new disclosure is the requirement to disclose significant segment expenses that are regularly provided to the chief operating decision maker (CODM). This requirement applies to all public business entities, including those that only have a single operating segment.
Additionally, if the CODM uses multiple measures of a segment’s profit or loss to assess segment performance and allocate resources, the standard allows a reporting entity to disclose more than one measure of segment profit or loss. However, an entity must, at a minimum, disclose the measure of segment profit or loss that is most consistent with the amounts included in its consolidated financial statements (consistent with current guidance).
If a public entity includes multiple measures, and the additional measures are not prepared in accordance with GAAP, the SEC staff has expressed a view that such amounts would be non-GAAP financial measures given they are not required and not expressly permitted by ASC 280.
Notwithstanding that S-K Item 10(e) prohibits a registrant from presenting non-GAAP financial measures in the financial statement footnotes, the SEC staff has communicated to us that it will not object to the inclusion of additional non-GAAP measures of segment profit/loss in the financial statement footnotes provided that they meet the disclosure requirements in ASC 280 and the public entity complies with all the non-GAAP rules, including reconciliation requirements and the provisions that such measures are not misleading. Therefore, the SEC staff would expect the additional measures to be identified as non-GAAP, and the public entity must comply with S-K Item 10(e) and Regulation G disclosures.
Please refer to our recently issued In Depth for more information on the SEC staff’s views on this.
Disaggregation of Income Statement Expenses (DISE)
On June 26, 2024, the FASB completed its re-deliberations of the proposed new standard requiring disclosure of disaggregated income statement expenses and directed the staff to prepare a final standard.
While the FASB has not yet issued a final standard, we expect it to be issued by the end of the year. As an overview, we expect the new standard will require:
(1) A new tabular disclosure that disaggregates each expense line item presented in the income statement (e.g., cost of sales, SG&A, R&D) into the following categories
a. purchases of inventory,
b. employee compensation,
c. depreciation, and
d. amortization of intangibles.
The table will also include:
a. certain other categories of ‘by nature’ expenses that already require disclosure in the footnotes under existing standards and
b. certain cost-sharing and cost reimbursement amounts (e.g., from collaborations and R&D funding arrangements).
(2) Qualitative disclosure of all other expenses not included in the above categories.
(3) Disclosure of ‘selling expenses’ based on how the company defines selling expenses.
With respect to the “purchases of inventory” expense category, the Board decided that only amounts accounted for in accordance with ASC 330, Inventory should be included in this category. Amounts may be recognized on a costs-incurred basis or an expenses-incurred basis and should exclude costs arising from a business combination, joint venture formation or an initial consolidation of a variable interest entity that is not a business combination.
The disclosures will be required in annual financial statements for fiscal years beginning after December 15, 2026, and in interim periods within fiscal years beginning after December 15. 2027. Early adoption will be permitted.
R&D funding arrangements
The FASB proposed new accounting guidance that would create an exception for certain contracts from being accounted for as derivatives and clarify the accounting for share-based payments received from customers in revenue arrangements. The proposed amendments would reduce the number of contracts accounted for as derivative instruments and reduce the number of embedded derivatives that are required to be bifurcated from host contracts and separately accounted for as derivatives. The proposed ASU includes examples of contracts with embedded derivatives that would qualify for this scope exception, including research and development funding arrangements. The proposed amendments would also reduce diversity in practice in how to account for share-based consideration received from a customer as consideration for the transfer of goods and services. The comment period closes on October 21, 2024. Please see our In Brief for further information.
New cybersecurity CD&Is
Cybersecurity disclosures continue to be a focus area for the SEC staff and cybersecurity incidents affect companies in all industries. In June, the staff of the Division of Corporation Finance of the SEC issued five new Compliance and Disclosure Interpretations (C&DIs) related to evaluating the materiality of cybersecurity incidents and the Form 8-K reporting requirements of cybersecurity incidents.
New financial reporting model for governmental entities
In May 2024, the Governmental Accounting Standards Board (GASB) issued Statement No. 103, ‘Financial Reporting Model Improvements’ (GASB 103) to achieve greater consistency in the presentation of the statement of revenues, expenses, and changes in net position (SRECNP) for governments engaged in business-type activities. Impacted entities include public colleges and universities and municipal hospitals, among others.
GASB 103 changes the required sections and subtotals to be included in the SRECNP. The Statement also creates new definitions for subsidies and operating and nonoperating revenues and expenses. Upon adoption, impacted entities may find that these new definitions cause reclassifications of revenues and expenses within the SRECNP. GASB 103 does not affect the presentation of the statement of net position or the statement of cash flows.
GASB 103 also impacts other financial statement reporting requirements, including:
- Presentation of unusual or infrequent items
- Presentation of major component unit information
- Form and content of management’s discussion and analysis (MD&A)
The new standard is effective for fiscal years beginning after June 15, 2025, and all reporting periods thereafter. Early adoption is permitted. Please see our In Depth for further details.
Health industries accounting and reporting hot topics year-end webcast
Upcoming live webcast: December 12 | 1pm ET
Save the date for our highly anticipated accounting and reporting year-end webcast where we will also have a post-election assessment of the potential impact on health industries. Your invitation will be arriving shortly, so be sure to mark your calendars accordingly.
IRA drug price negotiation maximum fair price
On August 15, the Biden Administration released the first set of negotiated Maximum Fair Prices (MFPs) from the initial round of drug price negotiations, stating MFPs would save the government $6B compared to 2023 net prices. For drugs that were already highly rebated under Part D and/or facing near term generic or biosimilar competition, the impact is likely to be mild. There are, however, drugs in areas like oncology that were lesser rebated where the MFPs represent a larger impact.
CMS will release a public explanation behind the final prices before March 2025, and MFPs will go into effect in 2026. The second round of negotiations begins in February 2025 when CMS will select 15 Part D drugs. Please see our publication for background on what happened, what this means, and the outlook for future negotiations.
Medical cost trend: Behind the numbers 2025
PwC's Health Research Institute (HRI) has released its latest findings on annual medical cost trends, predicting that commercial health care spending growth will reach its highest level in 13 years. The research estimates an 8% year-on-year increase in medical costs for the Group market and 7.5% for the Individual market in 2025. Factors driving this near-record trend include inflationary pressure, prescription drug spending, and behavioral health utilization. Today’s medical cost trend signals urgency to various healthcare players to rethink their organizational strategies to more effectively manage the total cost of care. Discover the latest findings.
Tune in as PwC specialists discuss how emerging companies (private, pre-IPO) are navigating growth in the health industry.
Explore how emerging companies are driving transformation by harnessing cutting-edge technologies, utilizing data analytics, and prioritizing patient engagement.
Prepare, respond and emerge more resilient from healthcare cyber-attacks. Read our discussion guide.
PwC’s Not-For-Profit Organization Insights is a summary of year-end accounting reminders for not-for-profit organizations. See our 2024 updated guide here.
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Health Industries Assurance Leader, Global Engagement Partner, PwC US
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