Research and Development Acquired in a Business Combination

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805 requires that an acquirer of a business record, separately from goodwill, the identifiable assets (tangible and intangible) and liabilities assumed of the acquired entity at their acquisition date fair values.  In-process research and development (“IPR&D”) is one intangible asset that meets the FASB’s definition of an intangible asset separately identifiable from goodwill. This article provides some examples of IPR&D assets and a brief discussion of some common valuation methods used to determine the fair value of IPR&D acquired in business combinations.

As outlined in ASC 730, some examples of R&D activities include:

  • Laboratory research aimed at discovery of new knowledge;
  • Formulation and design of possible product or process alternatives; and
  • Design of tools, jigs, molds and dies involving new technology.

The Multi-Period Excess Earnings Method (“MPEEM”), a form of the Income Approach to valuation, is the most common method used to value IPR&D assets. The MPEEM first involves forecasting the cash flows attributable to the IPR&D assets. Next, contributory asset charges are removed from the cash flows to arrive at excess earnings attributable solely to the IPR&D. Contributory asset charges represent the cost of using assets (e.g., working capital, fixed assets and other intangible assets) needed to support the IPR&D cash flows. For example, a contributory charge for lab equipment would be necessary to support laboratory research IPR&D. Finally, the excess earnings are discounted to their present value to determine the fair value of the IPR&D. The value of the tax benefit from amortizing the asset for tax purposes should also be considered.

The Cost Approach establishes value based on the current costs needed to reproduce or replace the IPR&D. The purpose of IPR&D is normally to develop commercial products that are expected to generate future profits. When reliable earnings forecasts are available, the Income Approach (specifically, the MPEEM) normally provides a more appropriate indication of value as opposed to an analysis of the historical costs to produce the asset. However, the Cost Approach may be appropriate in certain instances. For example, if the products that are subject to the IPR&D are still undergoing significant testing, and it is far too early to forecast potential earnings generated by the products (if any), the Cost Approach may be appropriate.

The Market Approach to valuation estimates the fair value of IPR&D using sale prices of similar intangible property. However, IPR&D assets typically are not transferred individually without the rest of the business, and when they are transferred individually, they are rarely comparable to the subject IPR&D because it is often very unique. Therefore, the Market Approach is seldom used to value IPR&D.

Schneider Downs has significant experience in determining the fair value of intangible assets acquired through business combinations in order to comply with ASC 805.  For more information about Schneider Downs’ business valuation and other business advisory services, please contact Joel Rosenthal at 412.697.5387 or [email protected] or Tom Claassen at 412.697.5330 or [email protected].


You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2021 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Illegal Reception - Former NFL Wide Receiver Receives Fraudulent PPP Loans
Alley-OOPS! Former NBA Players Indicted on Alleged Insurance Fraud Charges
Soccer Kickbacks - Red Cards and Red Flags
International Fraud Awareness Week 2021
Flag on the Play - Football and Health Care Fraud
Foul Ball - John Ruffo Attends a Baseball Game
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.