Regnskabsmæssig behandling af licens- og udviklingsaftaler efter IAS 18: En analyse af sammensatte kontrakter mellem biotek- og farmavirksomheder

Mathias Helstrand & Claus Kirk Jensen

Student thesis: Master thesis


Licence and development agreements are common in the biotech and pharmaceutical industries. These agreements often comprise grant of licences to the production and sale of a not yet fully developed drug candidate, as well as partnering in relation to further development of the drug candidate. These multiple deliverables agreements contain complex accounting issues in relation to separation of transactions and fair value allocation as well as appropriate application of percentage of completion methods on the rendering of services. IAS 18 requires that revenue recognition criteria be applied to each transaction separately, but does not offer further guidance on the matter. Guidance compatible with IAS 18 can be sought in EITF 00-21 “Revenue Arrangements with Multiple Deliverables”. When applying this guidance determination of standalone value of the delivered items and procurement of objective and reliable evidence of fair value of the undelivered items pose a major challenge. If these criteria cannot be met the items must be treated as a single unit of accounting thereby deferring revenue recognition. Due to the complex nature of the agreements, assessment of fair value of the individual items must be performed carefully, as there is a risk that the individual payments, comprising amongst others upfront and milestone payments, in fact relate to more than one transaction. If so, part or all of the payment(s) must be deferred. As large upfront payments where no substantial deliveries are performed are often part of these agreements upfront payments are often deferred and recognised over the period of the development agreement. When applying percentage of completion methods to these agreements revenue recognition should not exceed the payments received since revenue from milestones does not meet the recognition criteria until they are receivable. Accounting procedures of licence- and development agreements are performed on a case contract constructed around elements and items identified in 60 actual contracts from listed US companies. The major impacts of changes in fair value assessments and separation of transactions are analysed to assess how revenue recognition is impacted by these changes. The accounting policies of IAS 18 are set to be replaced in the not-too-distant future by a new standard being developed by IASB and FASB as part of their convergence project. The proposed changes as of 17 December 2008 have been analyzed with a view to assessing how they will impact revenue recognition from licence- and development agreements. The findings show that the major changes result from acceptance of a greater degree of uncertainly in estimates making separation of transactions and measuring percentage of completion easier to do.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2008
Number of pages131