Ind-AS Analysis. Pharma sector

On transition to Ind-AS, several accounting and disclosure requirements are likely to impact companies in the pharmaceutical and life sciences sector.

Contract manufacturing Pharmaceutical companies often enter into exclusive ‘contract manufacturing’ arrangements, whereby the contract manufacturer produces specified products for the pharmaceutical company with use of specific machinery/assets. Under Ind-AS, such contracts will have to be evaluated on whether they have any component of lease embedded.

Government grants Pharmaceutical companies usually receive government grants/benefits for setting up manufacturing units in backward areas. Under the existing Indian GAAP, grants received in nature of promoters’ contribution could be carried to the balance sheet and grants received for fixed assets could be reduced from the carrying value of the fixed asset. In Ind-AS, grants are to be recognised in the profit and loss account over the period in which the costs that the grant was intended to compensate are recognised.

Revenue arrangements In-licensing or out-licensing agreements are common in the pharmaceutical industry. These agreements generally have multiple elements such as sale or right to use of intellectual property licences, development activities, manufacturing services. Payment terms often include upfront payment at the time of signing of contract, milestone payments during different stages of development and royalty payments at the time of sale of medicines. The five-step model under Ind-AS requires identifying separate performance obligations and allocation of the total transaction value amongst the different performance obligations. Specific guidance has been given in the standard on accounting for licences of intellectual property, depending on whether the licence is distinct and can be separated from other performance obligations.

Operating segments Several pharmaceutical companies currently disclose a single ‘pharmaceutical’ segment. Under Ind-AS, additional segments may have to be identified and disclosed. It requires disclosure of segment information aligned to the information the Chief Operating Decision Maker reviews to take decisions on resources to be allocated to certain segments and to assess performance.

Acquisition The pharma sector has undergone consolidation through acquisitions. Under Ind-AS, companies will have to assess the fair value of assets and liabilities taken over, and at the same time estimate any contingent or deferred consideration to be paid for acquiring a company.

The writer is Director, Accounting Advisory Services at KPMG in India

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