"R&D and IPR&D in the financial statement of medical biotech companies, IAS/IFRS and US GAAP - Theoretica & empirical analysis"

The sector of medical biotech companies is characterized by a significant development in terms of dimensional growth of the enterprises, market value of stocks, operations of merger & acquisition. Such entities are strongly characterized by a model of business focused on research and development activity that, trough the definition of new genes or drugs, allows the possibility of producing future economic benefits in terms of cash flows to confer equilibrium to the company system. The activity of research and development effected by this companies is countersigned by an extremely long trial, articulated in the different classical phases of definition and approval of a pharmaceutical drug. The trial is submitted further to the riskiness of the results that generally go along with the advanced development of every remarkable scientific discovery. How to conjugate this business model with a representation of the performances in the Biotech Companies Financial Statement? The answer to this question is different according to the normative contexts of reference. According to the Italian domestic principles costs related to research and development activities could be capitalised, otherwise can be considered as an investment that subsequently to its completion it will compete to produce profits. The International accounting standards, instead, consent the possibility of capitalizing exclusively the expenses of development of a new medicine, costs sustained after the achievement of certain conditions (that generally are verified only in the last part of the process of definition of a new drug). The US principles don't actually contemplate the possibility to consider the investments in research and development sustained by a biotech company as balance sheet asset intended to transfer economic utility in the future. From these rules emerges a notable difference of treatment in a sector that, considering the internationality of the medical scientific community from which is supported, should have homogeneous representation in the biotech financial statements. The themes to which this work wants to bring contribution, refer to the opportunity of standardisation of financial and economic communication relative to companies belonging to a sector where territorial and/or market differences don't have importance and for which the possibility to be able to correctly represent huge investment results consistent with the logics of economic and financial communication of the company. Further it is necessary to also consider how in the operations of business combination, extremely frequent in the sector, the IPR&Ds are accounted. The possibility to recognise the fair value of IPR&D results very important in those aggregations where the acquired entity is a biotech that is developing new drugs and for which large part of the price paid is represented by the portfolio of searches rather than from the goodwill. The non possibility of separately recognition of such assets like in the US GAAP involves an increase of goodwill recorded in business combination. The goodwill, as is well known, cannot be anymore amortized and the future economic benefits of the “new product” in the first years of employment cannot be compensated with amortizations (consumption) of the assets (goodwill) but this will subsequently happen when impairment tests bring to a rectification of the value of goodwill in a irregular and volatile way. The work, after having faced from a theoretical point of view the thematic related to the recognition and measurement in biotech companies of research and development costs in different contexts introduces an approach on the field related to the economic and financial information presented by a sample of biotech companies using different rules. The purpose of this paper is to verify, through the comparison among different rules: • The impact of different criteria on the biotech company account; • The influence onto the performance ratio of different gaap; • The possible improvement due to convergence on the comparability of the company balance (IFRS vs US GAAP); • The possible effect on the income and equity volatility. The paper analyses the different R&D rules: Italian GAAP, IFRS and US GAAP, underlying the difference in the accounting, amortisation and impairment. A special focus is related to the accounting of IPR&D in business combination. There is also an on field analysis concerning the evaluation of R&D in the most relevant Italian, European and US medical biotech Companies.