Acquired in-process R&D

Big pharma refills its pipeline by buying: single molecules, licences and whole biotech companies. How those purchases are accounted for decides whether billions sit on the balance sheet or go straight through profit, and whether later trial failures cause impairments. This guide works through a typical biotech acquisition under IFRS and US GAAP, covering the concentration test, contingent milestones, business combinations, subsequent spending and impairment.

By Muhammad Bilal, Chartered Accountant. Reviewed by Awais Jameel, Chartered Accountant. 3 minute read.

Short answer

Acquired in-process R&D, a drug candidate bought before it is approved, is capitalised as an intangible asset under IFRS whether it is bought on its own, through a licence or in a business combination, because the price reflects the probability of success. It is not amortised until the drug is available for use, but it is tested for impairment every year. Buying a company whose value sits almost entirely in one drug candidate is often an asset acquisition, confirmed by IFRS 3's optional concentration test, with no goodwill and no deferred tax. US GAAP differs sharply: in-process R&D bought in an asset acquisition is expensed unless it has an alternative future use. In this guide's example, a US$ 300 million purchase of a biotech is an asset on the balance sheet under IFRS and an expense under US GAAP.

At a glance

IFRS, separate purchase
Capitalised
IFRS, business combination
Capitalised at fair value
Concentration test
Optional, can make it an asset acquisition
US GAAP asset acquisition
Expensed, unless alternative use
Before approval
Not amortised, tested yearly
Later R&D spending
Usually expensed
Acquired in-process R&DIFRS, separate purchase: Capitalised; IFRS, business combination: Capitalised at fair value; Concentration test: Optional, can make it an asset acquisition; US GAAP asset acquisition: Expensed, unless alternative use; Before approval: Not amortised, tested yearly; Later R&D spending: Usually expensed.KEY FACTS AT A GLANCEAcquired in-process R&DIFRS, separate purchaseCapitalisedIFRS, business combinationCapitalised at fair valueConcentration testOptional, can make it anasset acquisitionUS GAAP asset acquisitionExpensed, unlessalternative useBefore approvalNot amortised, testedyearlyLater R&D spendingUsually expensedTax BakersAcquired in-process R&DIFRS, separate purchase: Capitalised; IFRS, business combination: Capitalised at fair value; Concentration test: Optional, can make it an asset acquisition; US GAAP asset acquisition: Expensed, unless alternative use; Before approval: Not amortised, tested yearly; Later R&D spending: Usually expensed.KEY FACTS AT A GLANCEAcquired in-process R&DIFRS, separate purchaseCapitalisedIFRS, business combinationCapitalised at fair valueConcentration testOptional, can make it an asset acquisitionUS GAAP asset acquisitionExpensed, unless alternative useBefore approvalNot amortised, tested yearlyLater R&D spendingUsually expensedTax Bakers
Key facts at a glance, as set out in this guide.

Why is acquired in-process R&D capitalised under IFRS?

IAS 38 requires probable future economic benefits and reliable measurement before an intangible asset is recognised. For a separately acquired asset, the price paid already reflects the market's expectation of future benefits, including the probability of success, so the probability criterion is treated as satisfied. The same applies to in-process R&D acquired in a business combination, which is recognised at fair value. That is why a Phase II candidate bought for millions is an asset, while an identical one developed internally is not. See when pharma capitalises R&D.

Is buying a biotech a business combination?

Only if what is bought is a business: inputs and substantive processes that together contribute to creating outputs. A biotech with one drug candidate and a few employees may not have substantive processes. IFRS 3 also offers an optional concentration test: if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar assets, such as one drug candidate and its patents, the purchase is an asset acquisition. The cost is then allocated to the assets acquired, with no goodwill and, under the initial recognition exemption, no deferred tax. See IFRS 3 explained.

Acquired in-process R&D: one biotech, three treatments

A pharma company buys a biotech whose only significant asset is a Phase II drug candidate. It pays US$ 300 million upfront and will pay the sellers 200 million more if the drug is approved. The concentration test is met.

A drug candidate bought in an asset acquisitionA drug candidate bought in an asset acquisitionTOPICIFRSUS GAAPUpfront priceCapitalisedExpensedGoodwillNoneNoneDeferred tax on day oneNoneDependsAmortisationFrom approvalNot applicableAnnual impairment testYesNot applicable
The same purchase can be an asset or an expense.
US$ millionIFRS, asset acquisitionIFRS, if it were a businessUS GAAP, asset acquisition
Upfront paymentIntangible asset 300Intangible at fair value, goodwill for any excessExpensed 300
Approval milestone of 200Policy: recognised when paid or probable, or at inceptionContingent consideration at fair value, changes in profitRecognised when probable, then expensed or capitalised
Deferred taxNone, initial recognition exemptionDeferred tax liability, increasing goodwillDepends on tax basis
Effect on profit at acquisitionNoneNoneExpense of 300

Under US GAAP, the milestone, if paid before approval, is also expensed; one payable on approval is usually capitalised as the drug then has an alternative future use. The differences make pharma companies' results under the two frameworks hard to compare.

How are milestone payments to sellers handled in an asset acquisition?

IFRS has no specific guidance on variable payments for asset purchases; the IFRS Interpretations Committee discussed the issue but did not resolve it. In practice, companies choose a policy: some recognise a liability for contingent payments only when they become payable or probable, adding them to the asset's cost; others recognise the fair value of the contingent payments at the acquisition date as part of cost, with later changes adjusting the asset or profit. The policy should be disclosed and applied consistently.

What happens after the acquisition?

The asset is not amortised while the drug is in development, but it must be tested for impairment at least annually, and whenever there is an indication such as a trial failure. Further development spending is assessed under IAS 38's criteria for internal development, so it is usually expensed until approval. On approval, amortisation starts, over the period of patent protection and exclusivity. See impairment after trial failures.

What about in-licensed rights?

Upfront and milestone payments to in-license a drug candidate are separately acquired intangible assets under IFRS and are capitalised in the same way. Under US GAAP they are expensed as research and development if the rights have no alternative future use. See licensing deals and milestone payments and pharma accounting.

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Questions people ask

Is acquired in-process R&D capitalised under IFRS?

Yes, whether bought separately, in-licensed or acquired in a business combination, because the price reflects the probability of success.

What is the concentration test?

An optional IFRS 3 test: if substantially all the fair value of gross assets acquired is in one asset or group of similar assets, the purchase is an asset acquisition.

How does US GAAP treat in-process R&D bought in an asset acquisition?

It is expensed unless it has an alternative future use; in a business combination it is capitalised.

Is acquired in-process R&D amortised?

Not until the drug is available for use, usually on approval; until then it is tested for impairment at least annually.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 38 Intangible Assets
  2. IFRS Foundation: IFRS 3 Business Combinations
  3. FASB Accounting Standards Codification: Topic 730, Research and Development

Rules and fees change. If you are reading this long after October 8, 2026, confirm the figures with the source before you rely on them.

PharmaPharma accounting: the key IFRS issuesPharmaImpairment after trial failuresIFRS 3IFRS 3 business combinations explained

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This guide is general information. It is not tax or legal advice for your situation.