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JV Accounting for R&D

Allan Kaplan's Profile

We are in the process of negotiating a development license where a big pharma company would pay the costs of continuing R&D on our project.  Can someone provide guidance on how this would be accounted for? - is it revenue to us, then our costs incurred, or a reimbursement of our expenditures, or what.

Answers

Topic Expert
Vernon Reizman
Title: CFO
Company: RCM Industries, Inc.
(CFO, RCM Industries, Inc.) |

I would consider this a grant and net against expenditures. See SSAP #4 regarding government grants. Whether funds come from govenrment or pharmaceutical company the treatment would seem to be the same to me.

Topic Expert
Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Perhaps you could provide a little more information, but it sounds like you expect to end up with a situation where you will end up with a royalty bearing licence on future shipments of the project, plus receive a cash contribution up front to cover your costs of developing the project, which could be structured as either NRE fees, or an advance on future royalties.

If this is a pe paid royalty, I would suggest capitalising in your balance sheet, and then amortising against royalties on shipment.

If an NRE fee I would suggest traeting as deferred revenue and amortising over the project life.

Harold D. Tamayo
Title: Vice President of Finance
Company: MHA Inc., a Roper Technologies Company
LinkedIn Profile
(Vice President of Finance, MHA Inc., a Roper Technologies Company) |

You need to provide more info. Is the pharma company providing an up-front payment only for development? Or is it on anticipation of revenues? In my view the structure of the contract would dictate the accounting treatment. I think Simon put it best but more information needs to be provided.

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