Pharmagen
Acct 712 James De La Torre
Professor Neal B. Hitzig
Case 09-2 Pharmagen
1. Since there is no obligation to the nonrefundable repayment of the $500 million of funding and Pharma retains intellectual rights (no financial risk for Pharma as per ASC 730-20-25-4), it can be seen as a Research and Development and expensed as incurred according to ASC 730-20-35-1 because no future service can be made. The funding for product X is specified by the investor to be used only for R&D of product X which is not commercialized and not for a future project. The royalties that come from product X are not for a defined period. Product Y is for a defined period. In both cases, both aren’t measured as to how much royalties will be received and whether it can be estimated. Unless there is royalties, the investor gets nothing Since royalties aren’t measurable and are obligations only if product is developed and entity actually receives it, R&D are expensed as incurred for product X as R&D. Incremental funding has the same appearance to be expensed because no future obligation is required.
2. The funding can be seen as a package deal for both X and Y and is said to be for sale of royalty rights of Y and also for future R&D for X. Royalties of Y can be seen as an incentive. Royalties for Y might be expected to receive royalties and conditions are probable because Y is commercialized already as per ASC 730-20-25-5. This is separate from R&D of product X. The entity “essentially completed the project before entering into the arrangement.” (ASC 730-20-25-6). Funding, when it comes to Y, can be seen as an interest in future revenue. It will be a deferred income for the entity and will be capitalized and proportionally used for the defined period.(ASC 470-10-25-1&2) as royalties are paid to the investor. Incremental funding is determined by the progress of product X and that progress is not measured in the case. It could be by development stage, increased marketability,
Professor Neal B. Hitzig
Case 09-2 Pharmagen
1. Since there is no obligation to the nonrefundable repayment of the $500 million of funding and Pharma retains intellectual rights (no financial risk for Pharma as per ASC 730-20-25-4), it can be seen as a Research and Development and expensed as incurred according to ASC 730-20-35-1 because no future service can be made. The funding for product X is specified by the investor to be used only for R&D of product X which is not commercialized and not for a future project. The royalties that come from product X are not for a defined period. Product Y is for a defined period. In both cases, both aren’t measured as to how much royalties will be received and whether it can be estimated. Unless there is royalties, the investor gets nothing Since royalties aren’t measurable and are obligations only if product is developed and entity actually receives it, R&D are expensed as incurred for product X as R&D. Incremental funding has the same appearance to be expensed because no future obligation is required.
2. The funding can be seen as a package deal for both X and Y and is said to be for sale of royalty rights of Y and also for future R&D for X. Royalties of Y can be seen as an incentive. Royalties for Y might be expected to receive royalties and conditions are probable because Y is commercialized already as per ASC 730-20-25-5. This is separate from R&D of product X. The entity “essentially completed the project before entering into the arrangement.” (ASC 730-20-25-6). Funding, when it comes to Y, can be seen as an interest in future revenue. It will be a deferred income for the entity and will be capitalized and proportionally used for the defined period.(ASC 470-10-25-1&2) as royalties are paid to the investor. Incremental funding is determined by the progress of product X and that progress is not measured in the case. It could be by development stage, increased marketability,