Buyers often look for potential targets that may be in the process of performing research and development for a new product or products. Those “in-process” research and development (IPR&D) activities can have significant value and, therefore, drive a significant component of the acquisition price. These types of deals are particularly common in the software, technology, and pharmaceutical and life sciences industries.
The M&A Standards significantly changed the accounting for acquired IPR&D. It used to be valued as part of the acquisition and immediately charged to expense, just like ongoing research and development costs. But today acquired IPR&D is generally considered an indefinite-lived asset. This, along with changes in the fair value standards governing how IPR&D is valued, has led to evolving practice with respect to the initial valuation of IPR&D and its subsequent accounting. This edition of Mergers & acquisitions — a snapshot provides an overview of the accounting rules and a glimpse into some of the issues companies face in the accounting and valuation of acquired IPR&D.