Assets Acquired to Be Used in Research and Development Activities - Accounting and Valuation Guide
This new guide provides guidance and illustrations regarding the initial and subsequent accounting for, valuation of, and disclosures related to acquired intangible assets used in research and development activities (IPR&D assets).
This is a valuable resource for preparers of financial statements, auditors, accountants and valuation specialists seeking an advanced understanding of the accounting, valuation, and disclosures related to acquired IPR&D assets.
Key topics covered:
- Initial and subsequent accounting for IPR&D assets acquired in a business combination and an asset acquisition.
- Key accounting considerations such as "used in R&D activities" criteria, unit of account, defensive IPR&D assets, useful life of completed intangible assets used in R&D activities, and elimination of core technology concept.
- Detailed information on subsequent Day 2 accounting for acquired IPR&D assets, including such issues as determining useful life, amortization, and impairment testing.
- Step-by-step guidance on how to measure fair value of IPR&D assets acquired in a business combination, asset acquisition, or for impairment testing and measurement purposes, including detailed discussions and examples of how to apply multiperiod excess earnings method, relief from royalty method and decision tree analysis.
- Comprehensive example which illustrates using the relief from royalty method to value trade name and patents, the “with and without” method to value customer relationships, and the multiperiod excess earnings method to value developed technology and IPR&D.
- Detailed discussion of steps to derive, prepare, and analyze the prospective financial information for IPR&D assets.
- And more!
This guide also discusses and illustrates GAAP and SEC disclosure requirements for both IPR&D assets acquired in a business combination and asset acquisition.
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.03 In a business combination, the recognition of assets used in R&D activities can significantly affect the financial reporting of current and future operating results of the reporting entity. Before the effective date of FASB Statement No. 141(R), an acquirer was required to measure and immediately expense tangible and intangible assets acquired to be used in R&D activities (including specific IPR&D projects) that had no alternative future use. ….This reduced the amount of excess purchase price that would otherwise be recorded as goodwill, as well as decreased net income of the reporting entity in the period following acquisition. Under the current guidance contained in FASB ASC 805, an entity no longer expenses assets to be used in R&D activities that have no alternative future use immediately after the acquisition date, but recognizes them at their acquisition-date fair values.
.04 In a transaction other than a business combination (subsequently referred to as an asset acquisition), accounting guidance for assets acquired for use in R&D activities remains unchanged. In accordance with FASB ASC 730-10, such assets are capitalized only if they have alternative future uses; otherwise, such assets are expensed. As a result, assets used in R&D activities acquired in a business combination and those acquired in an asset acquisition are still subject to different accounting treatment…..
.09 The guide provides incremental conclusions about what the task force members perceive as best practices related to initial accounting for (chapters 2 and 3), disclosing (chapter 5), and valuing (chapters 1 and 6) IPR&D assets, including specific IPR&D projects. In addition, this guide discusses best practices with respect to accounting for acquired IPR&D assets subsequent to the acquisition date (chapter 4). Although this subject was not included in the original practice aid, the task force believes that such information is needed due to the requirement to capitalize IPR&D assets acquired in a business combination.
.10 Given different accounting treatment of assets used in R&D activities acquired in a business combination and those acquired in an asset acquisition, this guide also addresses considerations related to assets acquired in an asset acquisition that are to be used in R&D activities (chapter 3).
2.25 In light of the current guidance under which identifiable intangible assets acquired in a business combination that are to be used in R&D activities are no longer charged to expense at acquisition and are generally assigned an indefinite life at the time of the acquisition (see the “Completed Intangible Assets Used in R&D Activities” section in paragraphs 2.36-.37 for further discussion), the task force reconsidered the original practice aid’s definition of core (or base) technology and its recommendation that an acquirer identify core technology as an asset to be recognized apart from IPR&D. The original practice aid defined core (or base) technology as “[t]hose technical processes, intellectual property, and the institutional understanding that exist within an organization with respect to products or processes that have been completed and that will aid in the development of future products, services, or processes that will be designed in a manner to incorporate similar technologies.” The task force believes that the central element of that definition of core technology is that it represents “technical processes, intellectual property, and the institutional understanding that exist within an organization . . .” The task force also believes that “technical processes, intellectual property, [and] institutional understanding”1 each generally meet the criteria of FASB ASC 805 for separate recognition. As a result, the task force believes that it is no longer necessary to recommend that core (or base) technology be separately recognized as an intangible asset.
6.185 This section includes a comprehensive example of a valuation analysis used for measuring fair value of IPR&D assets. In this example, assume that Acquirer Company (Acquirer) acquired in a business combination (the transaction) Target Company (Target), a California-based software and professional services company. Acquirer’s management has essentially identified the Target primarily as a technology company. All potential intangible assets of Target related to the transaction that may have existed at the date of valuation were initially considered in the valuation analysis. The purchase price is $75 million, and it is assumed to be a taxable transaction. As a result of the valuation specialist’s review, the following intangible assets were ultimately valued in the analysis: (a) trade name, (b) patents, (c) customer relationships, (d) developed technology, and (e) IPR&D.
Although institutional understanding is not generally recognized as an asset on an entity’s balance sheet, it would be reflected in items, such as unpatented processes and “know-how,” that would typically meet FASB ASC 805 requirements for separate recognition.
1Although institutional understanding is not generally recognized as an asset on an entity’s balance sheet, it would be reflected in items, such as unpatented processes and “know-how,” that would typically meet FASB ASC 805 requirements for separate recognition.
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