PharmaTech Ltd is an Australian biopharmaceuticals company specializing in the development of new antibiotics for drug-resistant superbugs.

PharmaTech Ltd acquired a 25-year pharmaceutical patent on 1 July 2015 for $200,000 and correctly capitalised this cost. All research expenses incurred prior to clinical trials from 1 July 2015 to 30 June 2018 have been correctly expensed as research costs by the company.

The company commenced the clinical trials on 1 July 2018.Project costs and milestones were as follows: - 1 July 2018 to 30 June 2019: Phase 1 - 3 Clinical trials

$2m in costs were incurred. Further work is required as the drug failed the Phase 3 clinical test, meaning unacceptably high risks remain. This issue must be resolved in order to comply with legal requirements necessary for the drug's regulatory approval.- 1 July 2019 to 30 June 2020: Phase 3 Clinical trials

$1m in costs were incurred to resolve the issue and successfully re-complete Phase 3 of the clinical trials on 30 June 2020. The antibiotic drug obtained regulatory approval in Australia on 30 June 2020.- 1 July 2020 to 30 June 2021:

Production costs of $3m was incurred for the sale of the drug in Australia. Sales commenced 1 July 2020

New equipment costing $1m was purchased on 1 July 2020 for the large scale manufacture of the drug (life 5 years, nil residual value) for the sales in Australia.

The company is now progressing through the additional development procedures and clinical trials necessary to gain approval in South Africa. Management believes that achieving regulatory approval in South Africa is a formality. Mutual recognition treaties and past experience show that South Africa's authorities rarely refuse approval for a new drug that has been approved in Australia.

The South African clinical trials cost $1.2m and were not completed as at 30 June 2021.

AYB200 Assessment 1: Business Report/Semester 1 2020

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PharmaTech Ltd has asked you to present your accounting advice in the following format:(1) Explain the criteria in AASB 138 for classifying research and development costs and classify the project costs accordingly for each of the years ended 30 June 2019, 30 June 2020 and 30 June 2021. Explain how the criteria relate to PharmaTech Ltd.

(2) Provide the journal entries for PharmaTech Ltd's project costs for the years ended 30 June 2019, 30 June 2020 and 30 June 2021.Assume all payments were made using cash and the patent cannot be sold.

Narrations are not required.

(3) Explain two ways how the requirements in IAS 138/AASB 138 may influence management R&D decisions, assuming management compensation is based on profits. For each issue, briefly discuss the potential short- and long-term implications for the business.

(4) Some pharmaceutical firms have called for a new accounting standard specifically for the pharmaceutical industry.

(a) Discuss the nature of new drug development that may necessitate specific accounting guidance, explaining where clarity is most needed.

(b) Explain the trade-off between stringent recognition criteria for R&D aimed at enhancing decision usefulness versus the possible social impacts of the current IAS 138/AASB 138 R&D rules.

(c) Recommend whether or not the IASB and AASB should issue a new accounting standard specifically for the pharmaceutical industry.

Answer rating: 100% (QA)

1 Classifying research and development costs under AASB 138 Research phase According to AASB 138 Intangible Assets expenditure on research activities should be recognized as an expense when it is incu... View the full answer