Paragraph Pharmaceutical Development Funding According to the Accounting Standards Codification, the funding arrangement between Paragraph (Pharmacy) and the private equity investor (PIE) would be applicable under the Research and Development Arrangements standard (ASS 730-20). This standard provides guidance for entitles 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 (ASS 730-20-15-2).
In this case, Pharmacy is receiving funding up to the amount of $500 million from PIE for sots of the $1 billion of R&D costs Pharmacy estimates to Incur for the development of their potential new drug X. This standard would be also relevant to pharmacy’s case because the funds received from the PIE 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 agreement, it must be established whether the entity must repay funds regardless of the outcome of the R;D (ASS 730-20-25-1). The PIE is obligated to receive loyalties from Pharmacy not only with future revenues of drug X but also royalties associated with an existing commercialese drug. Therefore, Pharmacy must repay funds in the form of royalties to the PIE regardless of the outcome of drug X because they have an agreement to still pay royalties for an existing commercialese drug.
If funds will be replayed regardless of the outcome, then a liability must be estimated and recognized no matter the means of settlement (ASS 730-20-25-3). Though the Agreement between Pharmacy and the PIE did not specify whether Pharmacy is committed to repay a liability, it can be assumed Pharmacy is committed to repay since he PIE is obligated to royalties. The liability would be recognized on Pharmacy’s books because they did not transfer the R&D rights to the PIE.
Pharmacy would debit the cash received from the PIE for R&D and credit the corresponding liability. To recognize the R&D costs, “an entity that incurs a liability to repay the other parties shall charge the research and development costs to expense as Incurred (ASS 730-20-25-7). ” Therefore, Pharmacy would debit R&D expense as it incurred costs for research and development and credit the cash paid out for those costs.