Glossary
Biotech accounting, in plain English.
The terms that come up in board meetings, audit kickoffs, and term sheets at clinical-stage companies, explained the way I would explain them across a table. Written for founders and directors, useful for new finance hires.
42 entries6 areas
R&D and clinical
- ASC 730 (research and development costs)The rule that makes nearly every dollar a biotech spends on science an expense in the period it is spent.
- Clinical trial accruals (CRO accruals)The estimate of trial costs incurred but not yet invoiced, and the single most common source of audit adjustments at clinical-stage companies.
- In-process research and development (IPR&D)Acquired drug candidates that are expensed immediately in an asset acquisition but capitalized in a business combination.
- Asset acquisition vs. business combination (ASC 805)The judgment call that decides whether a deal creates an expense or an intangible, and whether contingent payments are liabilities.
- CMC and pre-approval manufacturing costsWhy drug product made before approval is R&D expense, and when it can become inventory.
Revenue and deals
- Collaboration revenue (ASC 808)How cost-sharing and co-development deals are split between revenue, contra-expense, and expense.
- ASC 606 for license and collaboration agreementsThe five-step model applied to the deals biotechs actually sign: licenses, research services, supply, and options.
- Milestone payments and variable considerationWhy a $50 million milestone can be received in cash long before, or after, it appears as revenue.
- Upfront payments and deferred revenueCash received at signing that supports runway now but reaches the income statement over years.
- Royalty monetization and synthetic royaltiesSelling future royalties for cash today, which is usually debt on the balance sheet no matter what the contract calls it.
- Grant income and government assistanceNIH, BARDA, CPRIT, and foundation funding, and why there is no single US GAAP rule for it.
Equity and financing
- Stock-based compensation (ASC 718)The non-cash expense from options and RSUs that makes net loss larger than cash burn.
- 409A valuationThe independent appraisal of common stock that sets option exercise prices and the ASC 718 fair value.
- Cap table reconciliationAgreeing the equity management system, the board minutes, and the general ledger, share by share.
- Preferred stock classification and mezzanine equityWhy venture preferred stock is usually shown between liabilities and equity rather than inside stockholders' equity.
- SAFEs and convertible notesSeed instruments that are simple to sign and surprisingly hard to account for.
- Warrants and embedded derivatives (ASC 815)The instruments that create quarterly fair-value gains and losses unrelated to the science.
- Reverse merger and reverse recapitalizationGoing public by merging into a listed company whose main asset is its cash, and why the private company's history survives.
- Contingent value rights (CVRs)A promise to pay former shareholders if a program hits a milestone, and the liability that comes with it.
Audit and reporting
- Going concern (ASC 205-40)Management's own evaluation of whether cash covers the next twelve months, and the disclosure that follows when it does not.
- Material weakness in internal controlA control deficiency serious enough that a material misstatement might not be caught, disclosed by public companies and noticed by everyone.
- SOX 404 and internal control reportingWhat a newly public biotech must say about its controls, and which parts an emerging growth company can skip.
- Emerging growth company (EGC)The JOBS Act status that lets most biotech IPOs file two years of audits and defer auditor control attestation.
- PCAOB audits vs. private company auditsTwo sets of auditing standards, and why the switch between them is a planning decision rather than a formality.
- IPO readiness and the S-1The finance work that has to be done before a biotech can file, most of which is invisible until it is missing.
- Audit readinessThe state of having books, estimates, memos, and documents that let a first audit finish on time and on budget.
- Non-GAAP measuresAdjusted figures that strip out non-cash and one-time items, and the SEC rules on presenting them.
- XBRL and EDGAR filingsThe tagged data behind every public filing, and why it is the raw material of public-company analysis.
Tax
- Section 174 and 174A (research expenditures)The tax rule that forced R&D to be amortized from 2022 through 2024, and the 2025 law that restored expensing for domestic research.
- R&D tax credit and the payroll tax offsetA federal credit that pre-revenue biotechs can use against payroll taxes, worth up to $500,000 a year in cash.
- Orphan drug tax creditA 25 percent credit on clinical testing costs for rare disease indications, which can be carried forward for twenty years.
- Net operating losses and Section 382The accumulated tax losses that make a biotech attractive to a profitable acquirer, and the rule that limits their use after ownership changes.
- ASC 740 and the income tax provisionThe tax footnote a loss-making biotech still has to prepare, valuation allowance included.
Finance operations
- Cash runwayThe number of months until the cash runs out at the current burn, and the number every biotech board asks about first.
- Burn rateNet cash spent per month or quarter, which is not the same as net loss and is usually smaller.
- Month-end closeThe monthly process that turns transactions into reliable financial statements, and the foundation everything else stands on.
- Prepaid expensesCash paid before the service arrives, held as an asset and released as the work is done.
- Leases (ASC 842)Lab and office leases on the balance sheet as right-of-use assets and liabilities, with the tenant improvement allowance handled correctly.
- Capitalization policyThe written threshold and useful lives that decide what becomes a fixed asset and what is expensed.
- Board reporting packageThe monthly or quarterly financial view a biotech board actually needs, which is shorter than most companies produce.
- FP&A for biotechFinancial planning built around trials, milestones, and readouts rather than sales forecasts.
- Fractional controller vs. fractional CFOTwo part-time roles that companies confuse, and the stage at which each one is the right hire.