In process randd
In process randdPURCHASED 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 current accounting rules and standards, a company is allowed to write-off this part of the purchase price. The in-process technology can be a large factor in making the acquisition of a firm because reporting of earnings can be considerably influenced by the amount of purchase price allocated to an in-process R&D write-off.
Effects on Future Periods
Current and future results can be affected significantly by the allocation of the purchase cost of a business. When the acquired company is involved in research 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 transaction in which Lotus wrote off approximately $53 million of the purchase price. Five years later, Lotus was the target when IBM acquired Lotus in a $3.2 billion transaction and wrote off 57 % of the acquisition cost (http://www.tht.com/vuspring99_dirty_poolings.htm). An increasing amount of companies have found this loophole in accounting standards very lucrative and rewarding. Recent articles and research indicate that the amounts written-off by public companies as acquired in-process research and development (“IPR&D”) have increased dramatically both in magnitude and frequency over the last decade”(http://www.sec.gov/offices/account/aclr1009.htm). "Researchers at New York University's Stern School of Business found no more than three business combinations where purchased R&D was written-off during the 1980’s. But in only the first seven months of 1996, the researchers identified 147 such instances.
By 1998, the valuations had reached a magnitude and frequency that defied belief. Some have estimated that, in 1998 alone, perhaps more...
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