...funding that Pharmagen pharmaceutical company will receive from Company XYZ for research and development into a new drug, X. They also have to account for the royalty payments that Pharmagen will owe Company XYZ in the future. Pharmagen pharmaceutical company is working on developing a new drug, X. They have been self-funding the research and development costs. They entered into a Funding Agreement with Company XYZ, a private equity investor, who has agreed to provide Pharmagen with up to $500 million of the total cost needed to develop drug X over the estimated 3 year project time frame. Pharmagen is not obligated to successfully complete the drug and there are no performance obligations related to its development. The money received from XYZ is nonrefundable. However, the money provided by XYZ can only be used towards drug X. If Pharmagen successfully completed the drug and it is approved for public sale, XYZ will receive future royalty payments from both drug X and an existing drug that is already available for public sale. Pharmagen also retains the rights to drug X. Pharmagen should report their cash from XYZ Corporation as deferred income based on ASC 470-10-25-1 (Sales of Future Revenues). It states that when “an entity receives cash from an investor and agrees to pay the investor,” in this case a royalty of future sales, “it is assumed that immediate income recognition is not appropriate due to the facts and circumstances.” Therefore, I believe that Pharmagen should be...
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...Trueblood case 09-2: Pharmagen Pharmagen case describes a $500 million Research and Development (“R&D”) funding agreement between pharmaceutical company (“Pharma”) and third-party private investor (“PEI”). The issue is to decide on how to account for funding of the R&D and royalty payments, and identify authoritative literature applicable to the agreement. Case states the following facts about agreement: • Pharma will receive up to $500 million from PEI for R&D cost for new drug X • A non-refundable funding to be used solely for drug X development costs • PEI will provide incremental funding as long as Pharma is demonstrating progress, however Pharma is not obligated to successfully complete development, “best effort”arrangement • Pharma estimated completion of project will take 3 years (from agreement date), and will cost estimated $1 billion • Pharma retains all intellectual property rights to drug X • PEI is entitled to receive future royalties on drug X revenues • PEI is entitled to receive future royalties associated with an existing commercialized drug Facts presented in the case call for Accounting Standards Codification (ASC) section 730-20 to be applicable. This accounting standard provides clarification and guidance to entities that entered into R&D arrangements, and advises on proper recognition. To define how transactions in Pharma and PEI agreement should be recorded, we should take a close look...
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...Case 09-2 The case of “Pharmagen Pharmaceutical Development Funding” deals with a private equity investor who gives $500 million to Pharmagen Pharmaceutical for research and development of a new drug “X”. The issue at hand in this case is how the treatments of the R&D funding received and the subsequent royalty payments should be accounted for. The facts of this case are: * Pharmagen and the non-related PEI enter into a funding agreement where PEI will contribute $500 million for the R&D of a new drug being developed by Pharmagen. * The funding is restricted to the development of drug X and Pharmagen is not required to complete the drug. * If at any time the project is scrapped the amount received by Pharmagen is non-refundable. * After completion of drug X the PEI will receive future royalties based on the sales of the new product, and they will also receive royalties on an existing Pharmagen drug for a defined period of time. * Pharmagen will retain all intellectual property rights and there are no other agreements between the two parties. Based on this fact pattern I would argue that treatment related to ASC 730-20 is applicable. With regard to this accounting standard for research and development, the issue now lies with whether the funding is a liability to repay the PEI or an obligation to perform contractual services. In order to prove that a liability does not exist there must be a transfer of risk from Pharmagen to the PEI that is substantive...
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...Trueblood Case 9-2: Pharmagen 1.State the issue at hand. (Typically this is merely the question you are asked at the end of the case.) How to account for the funding of the R&D and royalty payments 2.State the fact pattern. BRIEFLY present the relevant facts. (Bullet points can be very useful here.) (This can be a challenge, given that some Trueblood cases are only a few paragraphs long, it can be hard to further summarize them.) •Pharmagen entered into a funding agreement with Company XYZ, an unrelated third-party private equity investor (PEI) •Pharmagen will receive $500 million from PEI for R&D costs associated with drug X •The funding is to be used solely for the development of X and may not be used for any other purposes •The funding is non-refundable and Pharmagen is not necessarily required to complete the development – “best efforts” arrangement •Pharmagen estimates $1 billion in total R&D costs over 3 years •Pharmagen retains the intellectual property rights of X •There are no other agreements that have been executed between Pharmagen and PEI •Pharmagen estimates it will take 3 years to complete drug X from the execution of the agreement •The PEI will contribute funds to the development of X and is entitled to receive future royalties from Pharmagen in return oThe PEI will receive royalties associated with future revenues of X (if/when it has been successfully developed) oThe PEI will also receive future royalties associated with an existing commercialized drug for...
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...The Pharmagen Corporation Setting As an employee of the Pharmagen Corporation, you have worked your way up to the position of Information Technology Director, and have finally taken some well-earned vacation time. back from your two weeks in Hawaii. The Pharmagen Corporation is a large, multinational pharmaceutical company that specializes in targeted drug delivery through genetics research as well as drug development. As the Director of the Information Technology department, you and your staff are responsible for satisfactorily answering questions for all researchers, technicians, negotiating with vendors for all useful databases, and maintaining relations with the different research, business, and administrative branches of the company in your physical location. You report to the Director of Information Services, Mr. Robert Flay (tech support and the library are also under this director). Three permanent staff members report to you: Jennifer, Ben and Ann. They share the tasks of the department. you have sole responsibility for all of the decisions presented.Delegation is allowed to any of your three other staff members, although a brief reply to the customer is required for each item, regardless of a delegated or delayed action. The organization chart of the company is below: [pic] Here are the objects found in various communication mediums. It is now October 15, and you left before receiving any of these. #1 – Memo The Pharmagen Corporation Office...
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...Final Exam Review- Hitzig parts 1-3 1. Revenue Recognition: General: 25-1 The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: ← a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. ← b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue is not recognized until earned. That paragraph states that an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events...
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