Pharmagen Pharmaceutical Development Funding

Case No. 2: Pharmagen Pharmaceutical Development Funding According to the Accounting Standards Codification, the funding arrangement between Pharmagen (Pharma) and the private equity investor (PEI) would be applicable under the Research and Development Arrangements standard (ASC 730-20). This standard provides guidance for entities that are entered into a research and development (R&D) arrangement who acquire the results of research and development through the entire or partial funding by others (ASC 730-20-15-2). In this case, Pharma is receiving funding up to the amount of $500 million from PEI for R&D costs of the $1 billion of R&D costs Pharma estimates to incur for the development of their potential new drug X. This standard would be also relevant to Pharma’s case because the funds received from the PEI are restricted to R&D costs associated with drug X. No other accounting standard would be appropriate because the funds are strictly for R&D according to the Agreement. To determine the appropriate accounting for the Agreement under a R&D agreement, it must be established whether the entity must repay funds regardless of the outcome of the R&D (ASC 730-20-25-1). The PEI is obligated to receive royalties from Pharma not only with future revenues of drug X but also royalties associated with an existing commercialized drug. Therefore, Pharma must repay funds in the form of royalties to the PEI regardless of the outcome of drug X because they have an agreement to still pay royalties for an existing commercialized drug. If funds will be repayed regardless of the outcome, then a liability must be estimated and recognized no matter the means of settlement (ASC 730-20-25-3). Though the Agreement between Pharma and the PEI did not specify whether Pharma is committed to repay a liability, it can be assumed Pharma is committed to repay since the PEI is obligated to royalties. The liability would be recognized on Pharma’s books because they