Navigating the complexities of life sciences financial reporting

The complexity of impairment testing

Once IPR&D is recorded, companies face the ongoing cost of impairment testing, an annual requirement, plus additional tests when “triggering events” occur. As Rivera said, this burden weighs especially heavily on smaller biotech firms, which must divert funds from R&D to pay valuation experts and auditors. “If you’re small biotech,” he said, “you want that money going back into the business, not into really supporting accounting in order to meet the accounting standard.”

Triggering events themselves can arise from factors unrelated to the science, such as rising interest rates or trade tariffs. This can lead to situations where a company must announce an impairment charge, potentially alarming investors even though the underlying drug program remains scientifically on track. According to Mercier, this is a result of the accounting guidance that requires indefinite-lived classification and lead to complex valuation and impairment work.

The fair value ‘journey’

Business combinations often include contingent consideration: future payments tied to the success of the acquired project. Rivera calls this a “journey” that can last five or more years, from acquisition to settlement. Under current standards, these obligations must be re-measured at fair value each reporting period, creating non-cash gains or losses that may confuse investors.

In some cases, bad news about drug development can generate an accounting gain because the liability is reduced. Rivera proposed that the solution lies in greater disclosure rather than continuous fair value swings, providing transparency without distorting operational performance.

Mercier agreed that the current differences in accounting treatment between business combinations and asset acquisitions may add complexity. In the latter case, when not in the scope of ASC 815, companies often initially account for similar arrangements under a contingency model that recognizes costs only when payments become probable, avoiding the volatility of recurring fair value adjustments.

Given these challenges, it is no surprise that many life sciences companies prefer license deals over outright acquisitions. Rivera said these license deals are attractive because they are less risky, and the accounting is less complex. Payments are generally made when milestones occur, with no need to fair-value those future amounts on day one. This approach allows companies to “rent” intellectual property rather than own it outright, reducing both financial exposure and accounting headaches.

Full acquisitions, by contrast, often bring not only the IP but also manufacturing facilities, employees, and other “brick-and-mortar” assets. While these deals may be strategically important for certain large players, they carry heavier accounting requirements, especially when contingent consideration and indefinite-lived IPR&D are involved.