2017 Life Sciences Accounting and Financial Reporting Update
Including interpretive guidance
Deloitte’s 2017 Life Sciences Accounting and Financial Reporting Update addresses relevant issues that affect today’s life sciences finance professionals.
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- Revenue recognition
- New revenue standard
- Research and development
- Acquisitions and divestitures
- Non-GAAP measures
- Other new and relevant accounting guidance
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The latest accounting and financial reporting issues
Life sciences companies have always operated in a world of uncertainty. Each year brings changes and challenges, and 2017 is likely to follow suit. As life sciences companies confront these uncertainties, finance professionals are faced with additional challenges in financial reporting.
A wave of significant financial reporting changes—including those related to revenue recognition, leases, the definition of a business, and non-GAAP measures—will require the attention of these professionals to ensure that the implementation of the financial reporting changes is timely, appropriate, and transparent to financial statement users.
In this, our eighth annual accounting and financial reporting update for the life sciences industry, we address these and other topics affecting the industry. We hope this publication helps you navigate these challenges.
Revenue recognition topics that are particularly relevant to life sciences entities include the SEC Staff Accounting Bulletin (SAB) Topic 13 requirements (e.g., the sales price is fixed or determinable, collectibility is reasonably assured); the accounting for multiple elements; the ability to estimate returns; and the accounting for discounts, rebates, and incentives.
Further, biotech and pharmaceutical firms may sometimes encounter complexities related to the milestone method of accounting, the proportional performance method of revenue recognition, principal-agent considerations, license fees, contingent revenue, and up-front payments. Meanwhile, medical device companies may have to analyze warranties, shipping terms, consignment sales, customer financing, and the potential applicability of lease and software revenue recognition requirements.
Life sciences entities also rely heavily on collaborative arrangements to leverage expertise and manage risk. This section discusses guidance on some of the revenue recognition topics frequently encountered by life sciences entities.
New revenue standard (codified primarily in Accounting Standards Codification (ASC) 606)
In May 2014, the FASB and IASB issued their final standard on revenue from contracts with customers, which has since been amended. As a result of the Accounting Standards Update (ASU), as amended, entities will need to comprehensively reassess their current revenue accounting policies and determine whether changes are necessary. In addition, the ASU requires significantly expanded disclosures about revenue recognition.
This section discusses some of the key accounting considerations for life sciences entities.
Research and development
New product development in the life sciences industry is both time-consuming and costly. Life sciences companies are working to reduce research costs by outsourcing research to external partners, making acquisitions of promising products in late-stage development, and enhancing drug discovery and development platforms. In addition, companies are entering into various funding relationships to reduce the burden of research and development (R&D) expense through collaborations, licensing arrangements, partnerships, and other alliances. As these R&D arrangements become more complex, so do the accounting requirements and considerations that entities must evaluate.
In this section, we explore various R&D issues that many life sciences companies encounter, the related accounting guidance, and recent SEC observations regarding registrants’ accounting for and disclosure of R&D costs.
Acquisitions and divestitures
Significant merger and acquisition (M&A) activity has occurred in the life sciences industry in recent years. An entity must use significant judgment in applying the guidance on accounting for M&A transactions. For example, the application of the guidance in ASC 805 on accounting for business combinations can differ significantly depending on whether the acquired entity is considered a “business” or an “asset.” Similarly, application of the guidance in ASC 205 on the presentation and disclosure of discontinued operations related to divestiture transactions fundamentally affects financial statement presentation.
This section discusses some of the accounting issues related to acquisitions and divestitures that life sciences entities frequently encounter, as well as recent SEC comment letter feedback and FASB standard-setting developments related to this topic.
Life sciences entities enter into a variety of arrangements with other parties to facilitate the research, development, or sale of their intellectual property or products. Because life sciences entities may absorb risk and rewards of other parties through interests other than those based on traditional voting equity, they must carefully analyze their arrangements with those parties to determine whether to consolidate them.
The discussions and examples in this section contain guidance on consolidation matters that frequently affect life sciences entities.
In the life sciences industry, contingencies often arise as a result of product liability issues; patent litigation cases, such as suits filed against the entity for patent infringement (e.g., generic at-risk launches); the uncertainty of achieving regulatory approval for a new drug; and compliance issues related to pricing, promotions, or manufacturing standards.
This section discusses guidance on contingency-related topics that frequently affect life sciences entities.
A non-generally accepted accounting principles (GAAP) measure is a historical or future measure of financial performance, financial position, or cash flows that either:
- Excludes amounts that are included in the most directly comparable GAAP measure or,
- Includes amounts that are excluded from the most directly comparable GAAP measure.
Common non-GAAP measures include adjusted earnings; earnings before interest, taxes, depreciation, and amortization (EBITDA); core earnings; and free cash flow, among others. Among life sciences companies, common non-GAAP adjustments in these measures include up-front and milestone payments for license and asset acquisitions, amortization, and impairment of intangibles and adjustment of contingent consideration arising from prior business combinations, restructuring and litigation charges, and gains or losses from divestitures.
This section gives an overview of SEC guidance on non-GAAP measures; provides a summary of certain new and amended Compliance and Disclosure Interpretations (C&DIs), together with examples of related SEC comments to registrants; and discusses considerations for using non-GAAP measures.
Other new and relevant accounting guidance
- Statement of cash flows
- Income taxes
- Employee share-based payment accounting improvements
- Financial instruments
- Government assistance
- Going concern
- Common control transactions
- Discontinued-operations reporting