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

and development did not have alternative future use (SFAS No. 141 and FIN 4). However,
due to the convergence of accounting standards, SFAS No. 141 was revised in 2007 and
adopted the requirements of IFRS 3. Thus, current US-GAAP standards require an entity to
capitalize all acquired research and development assets regardless of whether these assets can
be used alternatively in the future. Subsequent to the initial recognition, acquired in-process
R&D is considered indefinite-lived until the R&D is completed or abandoned (EITF 09-2).
(3) This part gives students the opportunity to apply the results of part (1) and (2). Students
should use precise and logical argumentation concerning the treatment of the payments in
order to base their judgment of the transaction on a well-structured and logical assessment.
As the case is constructed to present a transaction that is open to managerial judgment, there
is not one solution to this question. Instructors may also discuss what to do if IFRS lacks
regulation, i.e. point students towards the application of IAS 8.7-.11.
The key issue concerning the payments made to Neurocentral, Inc. is whether White
Pharmaceuticals AG can assess the payments as an outsourcing of R&D. In that case, the
payments may be expensed. However, if White acquires an intangible asset, the payments
would have to be recognized according to IAS 38.25-.26. In the following, we present an
analysis of the three payments:
(i) Upfront Payment:
The upfront payment of five million Euros should be expensed regardless of how the
payment is interpreted. If the transaction is considered an outsourcing of R&D, the payment
should be assessed as if the research was undertaken by White’s research team. Thus, the five
million Euros represent costs that occurred in the research phase. According to IAS 38.54,
such costs are to be expensed when incurred.
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