Accounting guidance requires companies to capitalize assets acquired in a business combination that will be used in research & development (R&D) activities. IPR&D assets are treated as indefinite-lived until completion or abandonment of the R&D efforts. During this time, the assets are subject to impairment testing requirements under Accounting Standards Codification 350 (ASC 350).

Intangible assets that may involve R&D activities include:

  • R&D efforts to be continued by the acquirer
  • Defensive assets
  • Licensed-out intangible assets with active involvement
  • Temporarily idled assets

For the R&D activity to be deemed an asset, the project must meet the ASC 805 asset recognition criteria. Additionally, the R&D activity should exhibit persuasive evidence of having “substance” and being “incomplete” as of the valuation date.

Further, separately identifiable IPR&D assets that share similar characteristics may be segregated into a single unit of account. When determining the unit of account, the following characteristics of R&D assets may be considered:

  • Phase of development
  • Nature of activities and costs necessary to further develop the related IPR&D project
  • Risks associated with further development
  • Amount and timing of benefits expected
  • Expected economic life of the developed assets
  • Intention to manage costs for developed assets separately or on a combined basis
  • Expectation for the asset to be transferred by itself or with other separately identifiable assets

While there are three primary approaches for valuing IPR&D assets including cost, market and income approaches, the cost and income approaches are most widely used.