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In Process Randd - Online Essay

In Process Randd


PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
When one company purchases another, it absorbs the acquired firm’s assets and liabilities onto its balance sheet. One part of the acquired company that belongs to neither area is in-process research and development. “Acquired in-process research and development (IPR&D) that is written-off represents purchased research and development that has not yet demonstrated technological feasibility and has no alternative future use”(http://usserve.us.kpmg.com/valserv/tech/html/page1.htm). In other words, it is work that has not yet been used to produce an output and is questionable if it ever will. For this reason, according to ...

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and development for products not yet developed, generally accepted accounting principles (GAAP) allow the acquirer to allocate a portion of the purchase price to IPR&D. If IPR&D were an asset, it would have to be subtracted little by little from future earnings. Amounts paid in the business combination are written-off immediately as purchased R&D. A large up-front write-off avoids future amortization and depreciation expense. Since the rules are not yet clear, and there is still some question as to whether IPR&D is an asset, a company can simply take an excessive loss up-front to the benefit of future periods. The misleading result in periods immediately after the acquisition are higher earnings, higher earnings per share, higher return on assets, and higher return on equity (http://www.sec.gov/news/speeches/spch251.htm).
Past to Present

The first widely reported use of a sizable IPR&D write-off occurred in 1990 when Lotus Corporation acquired Samna in a $65 million ...

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technology companies coming into the market. The reason technology companies are the main culprits in the loophole is that a large percentage of their business is comprised of R&D. Unlike steel mills, bottlers, or construction companies whose main assets are tangible, like property and equipment, a technology company's assets are mostly intangibles. For the most part, they make their money from ideas and research. When a business combination occurs, there is no a sure-fire way to put a price on R&D, which may or may not serve some purpose in the future.
SEC AND FASB POSITION

The SEC's concerns regarding the potential abuse of this special accounting treatment afforded acquired ...

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PAPER DETAILS
Added: 4/3/2005 01:09:53 PM
Category: Miscellaneous
Type: Premium Paper
Words: 2347
Pages: 9

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