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2018 Life Sciences Accounting and Financial Reporting Update

Insights on new accounting standards and more

Deloitte’s annual life sciences accounting and financial reporting update offers interpretive guidance and addresses relevant issues that affect today’s finance professionals in biotech, medical device, and pharmaceutical companies as well as contract research organizations.

Emerging technologies, transformative opportunities

Emerging technologies are creating transformative opportunities for life sciences companies. Scientific breakthroughs are being achieved at a record pace. And the geopolitical climate is ushering in a new era, led by tax reform in the United States and Brexit in the United Kingdom.

At the same time, biotech, medical device, and pharmaceutical companies as well as contract research organizations need to consider new accounting standards (e.g., revenue recognition, leases, and the definition of a business). They must also exercise significant judgment in applying existing rules related to research and development (R&D) costs, acquisitions and divestitures, consolidation, contingencies, income taxes, financial instruments, and financial statement presentation and disclosure.

Download the full 2018 Life Sciences Accounting and Financial Reporting Update or individual sections and explore highlights below.  

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Featured highlights

Revenue recognition
In May 2014, the FASB and IASB issued their new standard on revenue from contracts with customers. As a result of the new revenue guidance, entities will need to reassess their current revenue accounting policies and determine whether changes are necessary. The Revenue recognition section of our 2018 edition explores some of the key accounting considerations for life sciences entities under the new and legacy revenue standards, including considerations relevant to life sciences entities that are parties to collaborative arrangements.

Research and development
New product development in the life sciences industry is necessary, but it can be time-consuming and costly. As R&D arrangements become increasingly more complex, so do the accounting requirements and considerations that entities must evaluate. Biotech and pharmaceutical companies need to consider the substance of the R&D relationship, risks associated with R&D arrangements, and related deliverables to determine the appropriate accounting models and literature that will apply. The Research and development section of our 2018 edition explores various R&D issues that many life sciences companies encounter.

Acquisitions and divestitures
Worldwide, the growing demand for health care services—fueled by aging populations, burgeoning middle classes, expectations of higher-quality care, and a squeeze on funding—is driving a need for new business models. Life sciences companies must find new ways to improve the efficiency of their operations, increase their R&D capabilities, tap into alternative sources of innovation, and acquire new customers. As a result of these challenges, significant merger and acquisition activity has occurred in the life sciences industry in recent years. The Acquisitions and divestitures section of our 2018 edition explores some of the accounting issues related to acquisitions and divestitures that life sciences entities frequently encounter.

Consolidation
Biotech, medical device, and pharmaceutical companies 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 the risks and rewards of other parties, they must carefully analyze their arrangements with those parties to determine whether to consolidate them. The Consolidation section of our 2018 edition contains guidance on consolidation matters that frequently affect life sciences entities.

Contingencies
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); and compliance issues related to pricing, promotions, or manufacturing standards.

For biotech and pharmaceutical firms, environmental issues and remediation proceedings have been the subject of considerable public and legislative discussion and initiatives. The Contingencies section of our 2018 edition explores guidance on contingency-related topics that frequently affect life sciences entities.

Non-GAAP measures
A non-GAAP measure is a historical or future measure of financial performance, financial position, or cash flows. It either excludes amounts that are included in the most directly comparable GAAP measure, or it includes amounts that are excluded from the most directly comparable GAAP measure.

Among life sciences companies, common non-GAAP adjustments 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. The Non-GAAP measures section of our 2018 edition gives an overview of SEC guidance on non-GAAP measures that is particularly relevant to life sciences entities.

Financial instruments
Drug development is challenging, complex, time-consuming and costly. To fund the cost of drug development, life sciences entities frequently seek external financing. Many of the financing transactions include complex terms and conditions that require a careful accounting analysis. The Financial instruments section of our 2018 edition highlights guidance on the accounting for financial instruments that frequently affects life sciences entities.

Leases
In February 2016, the FASB issued its new standard on accounting for leases. As a result of the new lease guidance, entities will need to address a range of questions, such as whether an arrangement is a service or a lease, what amounts should be initially recorded on the lessee’s balance sheet for the arrangement, and how to apply the resulting accounting in a cost-effective manner. The Leases section of our 2018 edition explores some of the key accounting and implementation considerations that life sciences entities should thoughtfully address while transitioning to the new lease standard.

More accounting and disclosure topics

Our 2018 report also discusses the following topics (available for download):

For a detailed analysis of the opportunities and challenges facing biotech, medical device, and pharmaceutical companies, see Deloitte’s 2018 Global Life Sciences Outlook.

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