Enforcing Financial Reporting Standards: The Case of White ...

With FREP’s concluding letter in his hand, Peter Schmidt was walking towards Mr.
Muller’s office. He prepared to tell his boss what had gone wrong. The FREP stated that
White Pharmaceuticals AG had incorrectly expensed 55 million Euros in 2006. This amount
should have been recognized because it represented the costs of a separately acquired
intangible asset. In exchange for their payment, White had received a fully developed product
which could reasonably be expected to result in an inflow of economic benefits. Therefore,
White’s income and assets had been understated by 55 million Euros. In addition, the FREP
indicated that they had serious doubts about the treatment of the milestone payments.
However, these doubts did not result in an additional finding. The letter further read that if
White Pharmaceuticals AG accepted the statement, the error would be released in the
electronic German Federal Gazette. If White wanted to object, they had to address this issue
with the Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht,
BaFin) who would then carry out their own investigation. Knocking on the CFO’s door, Peter
wondered how investors would react upon learning that the examination had been concealed
from them.
Research and Development Costs
REQUIREMENTS
1. The central issue of the case is the treatment of White Pharmaceuticals’ payments to
Neurocentral, Inc.
(1) How are research and development costs treated (a) according to IFRS and
(b) according to US-GAAP?
(2) How are separately acquired intangible assets treated (a) according to IFRS and
(b) according to US-GAAP?
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