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1. Explain Why the Arrangement Can Be Said to Provide Funding for a Product in the R&D Phase (X) and Should Be Accounted for Under Asc730-20 (Statement 68), but Not Asc 470-10-25-1 Through 25-2 (Issue 88-18). 2. Explain

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BONER
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REST OF PAPER IS LEGIT
Deloitte Trueblood 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 and genuine
(ASC 730-20-25-4).
To determine whether risk has been transferred and several factors must be taken into consideration. ASC 730-20-25-6 gives four conditions that lead to the presumption that Pharmagen will repay, and thus creating a liability. Based on the fact pattern given in the case, none of…...

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