The student applies technical knowledge to case facts in discussing the operating risks associated with Bioventures Inc.
The student applies technical knowledge to case facts in discussing the financial accounting issues.
The student applies technical knowledge to case facts in discussing the problems with the prior year review engagement.
The student applies technical knowledge to case facts in discussing the assurance issues. Review of Accounting Policies - Summative Indicator in Performance Measurement and Reporting #5
Revenue Recognition – Licensing
BV recognized $400,000 in licensing revenue in fiscal 2009. In accordance with CICA HB Section 3400
Revenue Recognition, immediate recognition of an up-front payment and other payments is generally inappropriate because BV has continuing involvement with the technology through its provision of research and development services.
This precludes the ability to objectively measure the fair value of any of the elements individually. To facilitate clinical development, BV must provide consulting services related to the transfer of knowledge for
BIO-400 to Zoticon Pharmaceuticals Inc. (ZPI) over a two-year period (500 hours).
The up-front fee and milestone payment should be deferred under this arrangement and revenue recognized based on the measure of progress toward completion of the technical support services under this contract.
This should be done based on the actual hours provided relative to the total number of hours required to be provided, applied to the total of these initial fee and non-contingent contractual payments related to the support services. At any time, the amount of cumulative revenue recognized should not exceed the cumulative amount of non-refundable payments received under the arrangement.
Therefore, revenue of $105,000 (25 hours provided as at year end / 500 total hours x ($100,000 +
$2,000,000)) can be recognized in fiscal 2009. Revenue will need to be reduced by $295,000 ($400,000 $105,000) and deferred revenue in that amount will need to be recognized.
Specific Audit Procedures
Revenue recognition
To support the occurrence, accuracy and completeness of revenue, we will need to obtain a copy of the licensing agreement to verify the terms. We will need to trace the payments received to the bank statements to confirm that they have been received. We will need to review the time reports to verify the number of consulting hours provided as at September 30, 2010.
Research and Development
The technical feasibility of BIO-100, BIO-200 and BIO-300 has not been proven because all phases of the clinical trials have not been completed. Even if the results of preclinical studies or clinical trials are initially positive, different results may be obtained in the later stages of drug development. Therefore, the development costs related to these three drugs have been correctly expensed in accordance with CICA
Handbook – Accounting, Section 3064, Goodwill and Intangible Assets.
[An alternate acceptable response is to expense all costs. Also under ASPE, there is an accounting policy choice to expences costs if BioVenture elects to do so. In this case, students should have concluded that there was a going concern issue in their analysis.]
For BIO-400, the following criteria have been met to capitalize the development costs incurred in fiscal 2010 per Section 3064:
• Technical feasibility has been proven as evidenced by regulatory approval for commercial sale.
• The intention to complete the drug, the ability to sell the drug as well as the existence of a market are evidenced by the licensing agreement with ZPI.
• Adequate financial resources exist given the bank financing expected in 2011 (assuming no going concern issue). • BV has tracked the development costs attributable to BIO-400.
Therefore, development costs of $995,000 incurred in fiscal 2009 should be capitalized and amortized over its market life. More
