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

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Appendix: Research Phase & Safety Profile & Efficacy & Safety & Pre-Clinical Phase Tests in Everyday Dosage Range Side Effects Effectiveness Healthcare (50 – 100 (100 – 300 (up to several Environment volunteers) patients) thousand patients) Research Development 5 Million Euros (2001) Phase I 10 Million Euros (2002) Phase II Phase III Phase IV 10 Million Euros (2004) Authorization by FDA or EMEA 55 Million Euros (2006) Payment Structure Figure 1: Drug Development Process and Payment Structure (Own depiction based on information from FDA). 15
Case Synopsis TEACHING NOTES Our study draws from an actual case of financial reporting enforcement in Germany. White Pharmaceuticals AG 4 , a pharmaceutical company listed on the German stock exchange, enters a partnership with a U.S.-based company, Neurocentral, Inc. While White aims to profit from Neurocentral’s research and wants to access the American market, they provide their partner with funding that includes three forms of compensation: an upfront payment, two milestone payments and a lump-sum payment after all clinical studies are completed. Peter Schmidt, head of White’s accounting department, expenses all payments as they are made. A few years later, the German Financial Reporting Enforcement Panel (FREP) selects White Pharmaceutical AG for an examination. For the year 2006, they find that the lump-sum payment to Neurocentral, Inc. should have been recognized as it represents an acquisition of an intangible asset. White receives a notification stating that both income and intangible assets are understated by 55 million Euros which is the amount the company paid as a lump-sum. The case ends with Peter Schmidt thinking about the consequences of a possible restatement. Assignments Research and Development Costs 1. (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? 4 All names, dates and locations have been changed, as have the “characters” involved in the case. 16
Page 1 and 2: Enforcing Financial Reporting Stand
Page 3 and 4: Enforcing Financial Reporting Stand
Page 5 and 6: same time, he made his intention qu
Page 7 and 8: Accounting for the Agreement Soon a
Page 9 and 10: capitalization of the payment with
Page 11 and 12: The Discussion with White’s Audit
Page 13 and 14: weeks. The short time frame surpris
Page 15 and 16: (3) Assess the payments made by Whi
Page 17: (5) Now, imagine that White’s CFO
Page 21 and 22: (3) Who is to take responsibility f
Page 23 and 24: Exceptions to this rule are most no
Page 25 and 26: In addition, the transaction may ha
Page 27 and 28: had filed for it and it seems like
Page 29 and 30: eversed as students sometimes imagi
Page 31 and 32: predictive role of accounting infor
Page 33 and 34: (2) The impact of an adoption of IF
Page 35 and 36: considered part of the matching pri
Page 37 and 38: selected by one of three ways: Eith
Page 39 and 40: monetary penalties and a publicatio
Page 41 and 42: number of oppositions by companies.
Page 43 and 44: conduct their audit in a way that m
Page 45 and 46: Thus, it is also obvious that revis
Page 47 and 48: the transaction. Instructors who wi
Page 49 and 50: HHL-Arbeitspapiere / HHL Working Pa
Page 51 and 52: 77 La Mura, Pierfrancesco; Swiatcza
Page 53 and 54: 47 Fischer, Thomas M.; Schmöller,
Page 55 and 56: 15 Hungenberg, Harald (1998) Kooper

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