SEC, FASB update accounting standards, oversight
At the recent Finance and Accounting for Bioscience conference in Boston, Danielle Matthews, professional accounting fellow from the Securities and Exchange Commission’s (SEC) Office of the Chief Accountant (OCA), and Financial Accounting Standards Board (FASB) Deputy Technical Director Nellie Debbeler, provided updates on regulatory developments and accounting standards for the life sciences sector.
Derivatives scope refinements near completion
Debbeler announced that the long-awaited derivatives scope refinements project is nearing finalization. The project aims to address concerns that the current definition of derivatives is being applied more broadly than intended, particularly affecting R&D funding arrangements.
“We heard that accounting for these arrangements as derivatives doesn’t provide decision-useful information and was causing some entities not to enter into these transactions,” she explained.
The final standard will include a scope exception for contracts with underlyings based on operations or activities specific to one of the parties, with four specific exclusions to ensure appropriate classification.
SEC consultation process
Matthews added to the derivative conversation: “There are things that may be derivatives today, but after this project wraps up, some of those things may no longer be derivatives and questions could arise about how to account for those things that are no longer derivatives. So our consultation process can help with that.”
While SEC oversees FASB, Matthews detailed the SEC’s consultation process available to companies facing complex accounting issues.
“An entity can consult with OCA to obtain the staff’s views on accounting, auditing or auditor independence issues,” Matthews explained. “The consultation process is best accomplished through a written submission on a named basis going through all the factual details.”
Matthews emphasized that companies should thoroughly evaluate authoritative guidance and apply reasonable judgment to their specific facts and circumstances before seeking consultation.
Intangible assets project taking shape
While intangible assets emerged as a top priority in FASB’s 2021 agenda consultation (ranking fourth highest for investors and sixth for preparers), stakeholders have divergent views on what action should be taken. The Board is currently reviewing feedback from their Invitation to Comment and will determine next steps in the coming weeks through their agenda prioritization process.
“The feedback is mixed,” noted Debbeler. “There’s generally not a lot of stakeholder support for a broad project to recognize a significant amount of internally generated intangibles or comprehensively revisit the accounting for all intangibles.” Instead, there appears to be more interest in aligning the accounting treatment between internally generated and acquired intangibles.
Other potential areas for improvement include updating the definition of research and development, enhancing disclosures, and refining impairment analysis methodologies for intangible assets.
SEC comment letter trends
Matthews added that the SEC continues to focus on several areas in its reviews of life sciences companies, including:
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Disaggregation of R&D expenses by product candidate or development program
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Classification decisions between business combinations and asset acquisitions
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Accounting for in-process R&D and identifiable intangibles
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Disclosure of material license terms and patent cliff issues
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