CBI Scene Blog

Evolving Pharma Accounting Challenges in the International Arena

Posted by Katie S on Jan 31, 2014 4:08:00 PM

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As the pharmaceutical business in the United States pushes ever further into the global arena, there are challenges that must be addressed by accounting teams and financial executives. Identifying these areas of challenging circumstances can position those that make the financial decisions more solidly on the path to reach the company's goals. In order to do so, it is imperative to keep the following in mind:

1) Changing Regulations for Paramedicals

In an increasingly complex global market, complications caused by the introduction of various regulation, and that are often designed to protect that country's residents - both their physical and monetary health - tend to be the norm. Current regulations, as well as those on the horizon, must be addressed in order to offer a balanced financial decision.

2) IFRS Standards and Convergence Updates

The convergence of the IFRS standards throughout the industry continues. The primary focus is two-fold: to ensure as much convergence in the standards as possible, and, do so without a decrease in quality as required by investors. These IFRS standards mean big changes in the way accounting is handled across the board, in both the international arena and in the United States.

3) Rules Vs Principles

Principles based accounting practices, rather than those based on rules, as the United States is historically grounded in, is a primary aim of the IFRS standards. Due to frequent liability issues in the US, and particularly in the pharmaceutical industry, there will likely need to be rules encased within the principles in order for the new standards to meet demands.

4) Asset Valuation

Currently, the US GAAP allows for no leeway when reporting development and research costs. All must be expensed. Under the IFRS standards, though, development costs are included as an asset of the company's rather than needing to be income expensed. The costs for basic research, though, must still be expensed against income.

5) Impairment Revisited

The IFRS allows more flexibility when impairing assets. Under the US GAAP, assets could only be written down once, and not written back up again. Under the IFRS, assets can be written back up when, or if, the circumstances change. Even though IFRS allows assets to be written up to their book value, this practice does not increase net income, allowing for more flexibility in reporting.

6) Making Leases Transparent

In order to increase accountability and transparency, the IFRS sets forth objectives designed to do so. Previously, leases were, for the most part, recognized only off the balance sheet. Even though leases are a crucial way to finance new biopharm assets, the new standards will require that they are reported in a different manner to encourage the right principles.

7) Global Accounting Implications

R&D needs a very clear and focused plan in order to justify spending on a particular regime. Due to the demand of new pharmaceuticals to perform better, and with a higher profit margin, those benefits must be weighed carefully by accounting staff against their expense ratio. Keeping the equation for cost/benefit ratio within the necessary parameters allows for continued success.

8) Revenue Reporting Changes

Under the IFRS, revenue is counted in a one-to-one system in which the company receives from the customer the same amount, giving each distinct group of goods and services its own price scale. Using estimates more often is key in this reporting methodology. By following this outline, such estimates are formulated:

  • identify customer contracts
  • identify performances obligations separately
  • identify the price of the transaction
  • allocate the price of the transaction to the obligation of performance
  • once the performance obligation is complete, the revenue is recognized

Exciting changes to the world of biopharm and accounting mean the iimplementation of new accountability systems that promise to be a challenge. The seamless convergence of two methodologies, though, means a smoother expansion further into the global markets of today.

To learn more about international pharmaceutical accounting challenges, join us at CBI's 10th Annual Life Sciences Accounting & Reporting Congress, taking place March 17-19, 2014 in Philadelphia, PA. Here from thought leaders from J&J, Bristol-Myers Squibb, Bayer, Deloitte, PwC, Eli Lilly, the U.S. Securities & Exchange Commission, and many more!

Accounting and Reporting Congress_______________________________________________________________________________

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Sources: 

http://www.pwc.com/us/en/health-industries/pharma-life-sciences/accountable-care-pharmaceutical-companies.jhtml

http://www.investopedia.com/articles/investing/030713/gaap-and-ifrs-standards-convergence-efforts.asp

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663

http://gbr.pepperdine.edu/2010/08/what-will-the-international-financial-reporting-standards-ifrs-mean-to-businesses-and-investors/

Topics: Finance