Canadian pharmaceutical and life sciences industry

The move from Canadian GAAP to International Financial Reporting Standards (IFRS) will fundamentally change the way Canadian companies report their business results to analysts, investors and other stakeholders. Many pharmaceutical and life sciences companies throughout Europe and Australasia have completed their transition and have been applying IFRS since January 1, 2005.

These companies understand that the new standards place a sizable responsibility on management to communicate effectively to the market in the new IFRS language, and the same will apply when companies in Canada make the transition. It has become apparent that IFRS raises significant accounting issues across the pharma and life sciences value chain – from research and development to manufacturing, sales and marketing.  

Key differences between IFRS and GAAP

Other than the complying with the requirements of IFRS 1 – First Time Adoption of IFRS, here are a few of the most significant differences between Canadian GAAP and IFRS that specifically affect pharmaceutical and life sciences companies:

• Revenue Recognition
  IFRS is more principles based than current Canadian GAAP with respect to revenue recognition. The application of these principles may allow for changes in accounting policies relating to revenue recognition that would be advantageous for companies to consider. Practically, the key areas will be in the evidence required to split multi-element contracts and in evidencing arrangements with customers.
  Certain pharmaceutical and life sciences companies generate revenue by entering into collaboration or licensing agreements. These arrangements often involve pharmaceutical companies providing the financial, marketing and development expertise and life sciences companies providing the new drug candidates, targets and cutting-edge science. In recent years this has led to the creation of a significant number of strategic alliances, collaboration agreements and other types of arrangements which may include upfront and milestone payments, participation in joint steering committees and royalties.
  Each agreement is unique and may contain complex clauses, and therefore it is difficult to provide a “one-size-fits-all” accounting solution. Each agreement should be evaluated on its own merits, and the accounting should reflect the substance and commercial reality of the arrangement. While Canadian GAAP and IFRS provide guidance on revenue recognition, as of yet there is no specific industry guidance or literature as to how these types of arrangements should be accounted for under IFRS.
• Impairment of long-lived assets: Under IFRS, there is no initial assessment of an asset’s recoverability based on undiscounted cash flows as there is under Canadian GAAP. Rather, the carrying value of the asset is compared to the higher of the asset’s “value in use” and its “fair value less costs to sell” in determining whether an impairment charge is required and, if so, the amount.
• Biological assets: If a pharma or life sciences company undertakes biological activity (for example, growing plants from which particular drugs are developed), then this activity will fall within the scope of IAS 41, Agriculture. There is no specific guidance under Canadian GAAP in connection with accounting for biological assets.
• Income taxes: Although there are no specific guidance on the treatment of R&D tax credits under IFRS, there appear to be opportunities to account for such credits as a reduction in tax expense or as a reduction of R&D expenditures under existing IFRS, depending on the specific facts and circumstances. Canadian GAAP, however, specifically requires that such credits be reported as a reduction of R&D expenditures.

How PwC can help

Our IFRS professionals can help Canadian pharmaceutical and life sciences companies with every step of their conversion — from diagnostic to final implementation. Our IFRS professionals know about the unique challenges facing this sector and can help your company make a smooth, seamless transition.

In addition, our experience helping numerous pharmaceutical and life sciences companies around the world complete their IFRS transition has provided us with a treasure trove of insight that can help companies here in Canada tackle the interpretation and application problems unique to this industry.

For more information on how we can assist you, please download Putting IFRS in Motion: The Impact of International Financial Reporting Standards on the Canadian Pharmaceutical and Life Sciences Sector or contact someone on our team today.