In-Process R&D in Business Acquisitions

In a Sep 1998 speech at the NYU Center for Law and Business, then-SEC chairman Arthur Levitt brought attention to practices of earnings management that he considered to be abuses of accounting judgment. One of the abuses Levitt spoke about was the substantial amount of in-process research and development (IPR&D) charges reported by acquiring companies in business acquisitions. FASB and the International Accounting Standards Board (IASB) are currently developing a joint project with a common exposure draft on accounting for business combinations. An IPR&D charge can be a powerful management tool for generating future earnings improvement. On Jun 30, 2005, FASB issued exposure draft 1204-001 to modify the accounting standards for business combinations. This would significantly alter the accounting of IPR&D. The initial focus of this study was to determine how two events affected the valuation of IPR&D.