Impairment after trial failures

Most drug candidates fail, and when they fail after being bought for hundreds of millions, the write-off is large and public. Understanding the accounting helps explain the headline numbers, which are often partly offset by gains elsewhere. This guide covers the indicators, how in-process R&D is tested, the knock-on effects on contingent consideration, deferred tax, inventory and contracts, partial failures, abandonment and reversals.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. 3 minute read.

Short answer

A clinical trial failure is one of the clearest impairment indicators under IAS 36. Capitalised in-process R&D and licence assets for the drug are tested at once, and their recoverable amount is often close to nil, unless the molecule has value in another indication or could be sold or out-licensed. The write-off is usually not the whole story: contingent consideration owed to the drug's sellers falls in value, creating a gain if it was recognised at fair value in a business combination; deferred tax liabilities on the asset are released; and manufacturing and supply commitments may become onerous. In this guide's example, a US$ 250 million asset is written down by 230 million, but the net loss after the contingent consideration gain and deferred tax is 92.5 million.

At a glance

Indicator
Failed trial, hold, rejection
Asset tested
In-process R&D, licences
Recoverable amount
Often near nil
Contingent consideration
Gain if at fair value
Deferred tax
Liability released
Other effects
Inventory, onerous contracts
Impairment after trial failuresIndicator: Failed trial, hold, rejection; Asset tested: In-process R&D, licences; Recoverable amount: Often near nil; Contingent consideration: Gain if at fair value; Deferred tax: Liability released; Other effects: Inventory, onerous contracts.KEY FACTS AT A GLANCEImpairment after trial failuresIndicatorFailed trial, hold,rejectionAsset testedIn-process R&D, licencesRecoverable amountOften near nilContingent considerationGain if at fair valueDeferred taxLiability releasedOther effectsInventory, onerouscontractsTax BakersImpairment after trial failuresIndicator: Failed trial, hold, rejection; Asset tested: In-process R&D, licences; Recoverable amount: Often near nil; Contingent consideration: Gain if at fair value; Deferred tax: Liability released; Other effects: Inventory, onerous contracts.KEY FACTS AT A GLANCEImpairment after trial failuresIndicatorFailed trial, hold, rejectionAsset testedIn-process R&D, licencesRecoverable amountOften near nilContingent considerationGain if at fair valueDeferred taxLiability releasedOther effectsInventory, onerous contractsTax Bakers
Key facts at a glance, as set out in this guide.

What triggers an impairment test?

In-process R&D is tested at least once a year because it is not yet available for use, but certain events require an immediate test: a trial missing its primary endpoint, a clinical hold for safety reasons, a regulator rejecting the drug or asking for substantial new studies, a competitor's superior product reaching the market first, or the company deciding to stop or deprioritise the programme. Each reduces the expected cash flows or the probability of receiving them. See IAS 36 impairment.

How is in-process R&D tested?

Usually on its own, because a development-stage drug generates no cash inflows and its value can be measured separately, using fair value less costs of disposal based on risk-adjusted cash flows: projected sales and costs if approved, multiplied by the probability of success at each remaining stage, and discounted. After a failure, the probability for the original indication falls to nil or near it. Any remaining value comes from other indications still in development, the possibility of selling or out-licensing the molecule, or its use in combination therapies.

Trial failure: the knock-on effects of a write-off

A company carries in-process R&D of US$ 250 million from acquiring a biotech, with a deferred tax liability at 25% on it and contingent consideration of 80 million owed to the sellers if the drug is approved, measured at fair value. The Phase III trial fails. A second indication in early development is valued at 20 million.

In-process R&D before and after the trial failure (US$ million)In-process R&D before and after the trial failure (US$ million)250In-processR&D before-230Impairment20Carryingamount after
The asset keeps only the value of the remaining indication.
US$ millionEffect on profit
Impairment of in-process R&D: 250 to 20(230.0)
Contingent consideration remeasured to nil+80.0
Deferred tax liability released: 25% of 230+57.5
Net loss(92.5)

The headline impairment of 230 million is more than twice the net effect on profit. Contingent consideration recognised in a business combination is a financial liability measured at fair value through profit or loss, so the drop in its value is a gain. In an asset acquisition, the effect depends on the company's policy for contingent payments: if none was recognised, there is no gain. See acquired in-process R&D.

What else is affected?

  • Inventory: pre-launch stock is written down to net realisable value; see pre-launch inventory.
  • Contracts: minimum purchase commitments with contract manufacturers and trial close-out costs may be onerous, requiring provisions under IAS 37.
  • Collaboration and licence balances: deferred revenue from a partner may be recognised if obligations end, and milestone receivables expected from partners are reassessed.
  • Goodwill: if the drug was a large part of an acquired business, the cash-generating unit carrying goodwill is retested.

What if the programme is abandoned?

If the company decides to stop all development and does not expect to sell or license the molecule, the asset is derecognised, because no future economic benefits are expected from its use or disposal. The loss is the remaining carrying amount.

Can the impairment be reversed?

Yes, if later evidence increases the recoverable amount, for example a new analysis identifies a patient group that responded, or a partner licenses the molecule. The reversal is limited to the carrying amount the asset would have had without the impairment, and goodwill impairments are never reversed. Under US GAAP, impairments of intangible assets cannot be reversed. See impairment reversals and pharma accounting.

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Questions people ask

Is a clinical trial failure an impairment indicator?

Yes. A failed trial, clinical hold or regulatory rejection requires an immediate IAS 36 test of related in-process R&D and licence assets.

Why is the net loss on a trial failure often smaller than the impairment?

Because contingent consideration owed to sellers falls in value, creating a gain if measured at fair value, and deferred tax liabilities on the asset are released.

What other balances does a trial failure affect?

Pre-launch inventory, onerous manufacturing and close-out commitments, collaboration balances and possibly goodwill.

Can an impairment of in-process R&D be reversed?

Under IFRS yes, if the recoverable amount later increases, up to the carrying amount without the impairment; US GAAP does not allow reversal.

Sources

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

  1. IFRS Foundation: IAS 36 Impairment of Assets
  2. IFRS Foundation: IFRS 3 Business Combinations
  3. IFRS Foundation: IAS 37 Provisions, Contingent Liabilities and Contingent Assets

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.

PharmaAcquired in-process R&DPharmaPharma accounting: the key IFRS issuesIAS 36IAS 36 impairment of assets explained

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