In-process research and development (IPR&D)

When a company buys a program, a license, or another company, the value assigned to unfinished research is in-process R&D. Its accounting depends entirely on the form of the deal. In an asset acquisition, which covers most in-licenses and many small acquisitions, IPR&D with no alternative future use is expensed on day one. In a business combination under ASC 805, it is recorded as an indefinite-lived intangible asset, tested for impairment each year, and reclassified to a finite life when the program is approved.

The distinction turns on whether what was acquired is a business, which under the screen test in ASC 805 means substantially all of the fair value is not concentrated in a single asset. A company with one lead program, a small team, and cash often fails that screen and is accounted for as an asset acquisition, producing a large IPR&D expense that has nothing to do with operations.

Investors and boards should expect the expense and read past it, and the finance team should have a written memo supporting the screen-test conclusion before the auditors ask.