Julene Pief, a distinguished scientist of international repute, had developed many successful drugs for a well-established pharmaceutical company. Having an entrepreneurial spirit, Julene persuaded the board of directors that she should resign her position as vice president of research and launch a subsidiary company to produce and market some powerful new drugs for treating arthritis. However, she did not predict overnight success. Instead, she expected to gather a first-rate research team that might take 3–5 years to generate any marketable products. Furthermore, she admitted that the risks were so high that conceivably no commercial success might result.
Nevertheless, she had little trouble obtaining an initial investment of $8 million. The Pief
Pharmaceuticals Company was 70% owned by the parent and 30% by Julene. Julene assembled a team of researchers and began operations. By the end of the first year of the life of the new subsidiary, it had expended $3 million on research activities, mostly for researchers’ salaries but also for related research costs.
The subsidiary had developed no marketable products, but Julene and other top executives were extremely pleased with the overall progress and were very optimistic about developing such products within the next 3 or 4 years.
How would you account for the $3 million? Would you write it off as an expense in year 1?
Could it be capitalized as an intangible asset? If so, would you carry it indefinitely? Or would you write it off systematically over 3 years or some longer span? Why?