In January 2017, the FASB issued new guidance narrowing the definition of a business. The new guidance is highly relevant to pharmaceuticals and life sciences companies where transactions are frequently targeted solely at acquiring intellectual property — which sometimes includes the intellectual capacity of an organized workforce, such as scientists and manufacturing rights.
This change in accounting will not have any direct cash flow implications. However, financial statement preparers may want to also consider the implications of its non-gaap measures, presentation and accounting for a number of areas including:
The FASB’s new definition was developed in response to feedback that the previous definition could result in too many transactions being accounted for as business combinations. Going forward, our expectation is that more transactions will be accounted for as asset acquisitions.
As there is no measurement adjustment period for asset acquisitions, recognition of the transactions would be finalized sooner. Without an equivalent period to finalize amounts, it can often be challenging to complete the accounting for certain asset acquisitions as companies may still need to perform a valuation for the asset acquisition, especially if a deal closes near a period end. This may accelerate the post-deal reporting timeline.
The diagram below illustrates how the relative complexity of an acquisition can impact accounting treatment. While the classification of acquisitions at either end of the spectrum may seem clear-cut, the number of variables involved with an acquisition can quickly create gray areas that require careful analysis to determine the appropriate accounting treatment.
These hypothetical examples are provided for illustrative purposes only and are not intended to provide guidance for any particular situation. Consult a professional advisor for guidance related to your circumstances.
The standard is already effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Prospective application is required. Other companies have an additional year, but early adoption is permitted. The new definition can also be applied to transactions that occurred before the guidance was issued as long as the applicable financial statements have not been issued.
Incorporating the new definition of a business into your deals strategy is critical. The deal strategy and process should also contemplate the implications of the new tax reform act. The best place to start is training and education so that your entire team understands the new guidance and its impact on a range of accounting areas, including:
For more details on accounting and deals impacts, including guidelines on structuring transactions and the effects of recent tax reform legislation, download a copy of the full report, The FASB’s new definition of a business: Pharmaceutical and life sciences industry impacts, or talk to your PwC advisor.
US Pharmaceutical and Life Sciences Leader, PwC US
Brandon Campbell Jr.
Managing Director, PwC Deals Practice, PwC US