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

we acquire R&D, that’s a different story. In that case, we follow SFAS No. 141 and SFAS
No. 142 and capitalize the acquired in-process R&D. But I’m not really sure what I would do
in your situation. Besides, you’re an IFRS guy and, as far as I know, R&D accounting still
differs on our continents.” Peter didn’t feel like his American counterpart had fully
understood his problem but was still thankful for Jeff’s quick assessment of the situation.
Feeling that he had to solve the issue himself, Peter considered the nature of the
upfront compensation. White Pharmaceuticals AG conducted the payment to profit from the
research carried out by Neurocentral, Inc. While White Pharmaceuticals AG received all
rights to the research performed, Peter did not perceive the five million Euros as an
acquisition of an intangible asset. Instead, he felt that White only provided Neurocentral with
the funding for research activities that the company performed. Following this reasoning, the
payment had to be regarded as if White’s researchers were conducting the research. And,
considering the status the research was in at that time, no one could tell if the project would
eventually yield a product that White would be able to sell. Therefore, the up-front payment
would fall under the definition of research expenditure which IAS 38 prohibits from
capitalizing. Although being skeptical of his argumentation, he charged the five million Euros
to White’s R&D expenses.
Thereafter, the project proceeded as expected and Neurocentral, Inc. started the
clinical studies in 2002. In the same year, they were able to complete the first phase of the
studies which provided them with a safety profile of the transdermal patch. Acting upon their
role in the collaboration agreement, White transferred the first milestone payment of ten
million Euros as soon as they received the latest research report from their partner. As a
consequence of the payment, Peter was again confronted with the accounting for the alliance.
Considering that the project had progressed to the development phase which, according to
IAS 38, meant that incurred costs should be recognized, he wanted to discuss a possible
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