In process randd

Essay by EssaySwap ContributorUniversity, Master's February 2008

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PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT When one company purchases another, it absorbs the acquired firm's assets and liabilities onto its balance sheet. One part of the acquired company that belongs to neither area is in-process research and development. "Acquired in-process research and development (IPR&D) that is written-off represents purchased research and development that has not yet demonstrated technological feasibility and has no alternative future use"( In other words, it is work that has not yet been used to produce an output and is questionable if it ever will. For this reason, according to current accounting rules and standards, a company is allowed to write-off this part of the purchase price. The in-process technology can be a large factor in making the acquisition of a firm because reporting of earnings can be considerably influenced by the amount of purchase price allocated to an in-process R&D write-off.

Effects on Future Periods Current and future results can be affected significantly by the allocation of the purchase cost of a business.

When the acquired company is involved in research and development for products not yet developed, generally accepted accounting principles (GAAP) allow the acquirer to allocate a portion of the purchase price to IPR&D. If IPR&D were an asset, it would have to be subtracted little by little from future earnings. Amounts paid in the business combination are written-off immediately as purchased R&D. A large up-front write-off avoids future amortization and depreciation expense. Since the rules are not yet clear, and there is still some question as to whether IPR&D is an asset, a company can simply take an excessive loss up-front to the benefit of future periods. The misleading result in periods immediately after the acquisition are higher earnings, higher earnings per share, higher return on assets, and higher return on equity (