Pharmagen Case Summary

In this situation I would argue that ASC 730-20 is applicable. Pharmagen is entering into an agreement with PEI (investors) on a contractual basis to provide services and an option to acquire the results of the R&D (FASB 68). Pharmagen retains all ownership rights to the development of X. It also states that in R&D arrangements the entity (in this case Pharmagen) usually has an option to either purchase the partnership’s interest (PEI) or to obtain the exclusive rights to the entire results in return for a lump sum payment or royalty payments to the partnership (in this case PEI). This clearly fits into Pharmagen’s case since PEI is entitled to receive future royalties from Pharmagen in return for contributions (funds) for the development of X.
These royalties represents a form of contingent payment. The agreement does not specify that Pharmagen is committed to repay a liability but the conditions of the case infers this and can be argued that Pharmagen is committed to repay since the investors (PEI) are entitled to these royalties. Also an entity that is a party to an arrangement through which R&D is funded by other parties usually incurs an obligation when it enters into an agreement; which in this case the obligation is the royalties to PEI (investor). It would appear as if PEI (investors) is seeking some additional form of payment guarantees (royalty payments) for the use of the asset (ASC 730-20-05). Pharmagen is not transferring all financial risk involved with R&D to PEI. According to ASC 730-20-25 in order to consider this not to be a liability the financial risk involved from the entity to the other parties must be substantive and