How the FASB’s new definition of a business impacts pharma/life sciences deals

April 18, 2018

By Shurjo Sen, PwC Deals Partner, Accounting Advisory

In January 2017, the Financial Accounting Standards Board (FASB) issued new guidance narrowing the definition of a business. The new guidance is highly relevant to pharmaceuticals and life sciences companies where transactions are frequently targeted solely at acquiring intellectual property — which sometimes includes the intellectual capacity of an organized workforce, such as scientists and manufacturing rights.

This change in accounting will not have any direct cash flow implications. However, financial statement preparers may want to also consider the implications of its non-GAAP measures, presentation and accounting for a number of areas including:

  • Goodwill
  • In-process research and development (IPR&D)
  • Contingent consideration
  • Transaction/deal costs

The FASB’s new definition was developed in response to feedback that the broad previous definition could result in too many transactions being accounted for as business combinations. Going forward, our expectation is that more transactions will be accounted for as asset acquisitions.

Because there are no measurement period adjustments for asset acquisitions, recognition of the transactions must be finalized sooner. Without an equivalent period to finalize amounts, it can often be challenging to complete the accounting for certain asset acquisitions as companies will still need to perform a valuation for the asset acquisition, especially if a deal closes near a period end. This may accelerate the post-deal reporting timeline.

Structuring the transaction

The new framework is expected to result in more transactions being accounted for as asset acquisitions. Deal professionals working on acquisitions and divestitures should consider the following questions:

  • For the set of transferred assets and activities that we are acquiring/divesting, are all or approximately 90% of the fair value of the gross assets concentrated in either a single asset or group of similar assets?
    This matters because…
    If the gross assets’ value is concentrated in a single asset or similar assets, the set may not be considered a business.
  • Is the target an early stage company that has not generated revenues?
    This matters because…
    To qualify as a business without outputs, a set will now need to include an organized workforce and an input that the workforce could develop or convert into outputs.
  • Does the transaction include employees (e.g., scientists, manufacturers), or access to service organizations (e.g., clinical research organizations, contract manufacturers) that will allow continuation of revenue before and after the transaction?
    This matters because…
    To be considered a business, an acquisition would have to include an input and a substantive process (i.e., people) that together significantly contribute to the ability to generate revenues. For example, an acquisition that includes employees, desks, and chairs may not be a business if it only has one valuable drug or drug candidate.

For more details

More details on the accounting, deal and related tax reform issues are in The FASB’s new definition of a business: Pharmaceutical and life sciences industry impacts. For technical accounting insights, also see PwC’s In depth discussion of this topic on CFOdirect.


Colin Wittmer

Deals Leader, PwC US Email

Curt Moldenhauer

Deals Solutions Leader, PwC US Tel: +1 (408) 817 5726 Email: