An acquirer identifies an in-process research and development (IPR&D) project with no alternative future use as part of the identifiable assets acquired. In Scenario 1, the acquirer obtains the IPR&D project as part of acquiring an entire operating business that meets the definition of a business under ASC 805. In Scenario 2, a different acquirer obtains an identical IPR&D project, but only as part of a group of assets acquired that does not meet the definition of a business. Under current US GAAP, how should each acquirer account for the IPR&D project at the acquisition date?
- In both scenarios, the IPR&D project must be expensed immediately at the acquisition date, because IPR&D with no alternative future use is always treated as a research and development cost under ASC 730 regardless of how it was acquired
- In both scenarios, the IPR&D project must be capitalized as an indefinite-lived intangible asset, tested for impairment until the associated research project is completed or abandoned, because acquired IPR&D is never subject to the immediate-expensing rule in ASC 730
- In Scenario 1, the IPR&D project is expensed immediately because it lacks an alternative future use; in Scenario 2, it is capitalized as an indefinite-lived intangible asset because asset acquisitions are always recorded using a fair-value model
- In Scenario 1 (a business combination), the IPR&D project is capitalized as an indefinite-lived intangible asset under ASC 805-20-25-13, tested for impairment until the associated project is completed or abandoned; in Scenario 2 (an asset acquisition that is not a business combination), the IPR&D project, having no alternative future use, is expensed immediately at the acquisition date under ASC 730-10-25
Why D? And why not the others?
Correct answer: D. In Scenario 1 (a business combination), the IPR&D project is capitalized as an indefinite-lived intangible asset under ASC 805-20-25-13, tested for impairment until the associated project is completed or abandoned; in Scenario 2 (an asset acquisition that is not a business combination), the IPR&D project, having no alternative future use, is expensed immediately at the acquisition date under ASC 730-10-25
The accounting for acquired IPR&D depends on whether it is obtained in a business combination or in an asset acquisition. ASC 805-20-25-13 requires an acquirer in a business combination to recognize acquired IPR&D as an indefinite-lived intangible asset at its acquisition-date fair value, regardless of whether it has an alternative future use; that asset is not amortized but is tested for impairment until the associated research and development project is completed (at which point it becomes a finite-lived amortizable asset) or abandoned (at which point it is written off). Outside a business combination, in an asset acquisition where the acquired group of assets does not meet the definition of a business, ASC 730-10-25 continues to require IPR&D with no alternative future use to be expensed immediately at the acquisition date, consistent with the general research and development cost model. The option expensing IPR&D in both scenarios ignores the specific business-combination exception created for IPR&D acquired in a business combination. The option capitalizing IPR&D as indefinite-lived in both scenarios ignores that the business-combination exception does not extend to asset acquisitions, where the ordinary ASC 730 expensing rule still applies. The option reversing the two treatments, expensing in the business combination and capitalizing in the asset acquisition, inverts the actual rule, which capitalizes IPR&D specifically because it arose in a business combination, not despite it.
Source: FASB ASC 805-20-25-13 (acquired in-process research and development in a business combination) and ASC 730-10-25 (research and development costs acquired other than in a business combination)