Trueblood Case 9-2: Pharmagen
1. State the issue at hand. (Typically this is merely the question you are asked at the end of the case.)
How to account for the funding of the R&D and royalty payments
2. State the fact pattern. BRIEFLY present the relevant facts. (Bullet points can be very useful here.) (This can be a challenge, given that some Trueblood cases are only a few paragraphs long, it can be hard to further summarize them.)
• Pharmagen entered into a funding agreement with Company XYZ, an unrelated third-party private equity investor (PEI)
• Pharmagen will receive $500 million from PEI for R&D costs associated with drug X
• The funding is to be used solely for the development of X and may not be used for any other purposes …show more content…

Present other possible solutions and the GAAP that supports these positions.
• Pharmagen could argue to recognize the funding by the PEI as deferred revenue because Pharmagen has agreed to pay the PEI a fixed royalty on both drug X and future royalties associated with an existing drug for a defined period. One could argue that the royalty is based on sales of a product that is not even developed yet. o ASC 470-10-25-1 “An entity receives cash from an investor and agrees to pay to the investor for a defined period a specified percentage or amount of the revenue or of a measure of income (for example, gross margin, operating income, or pretax income) of a particular product line, business segment, trademark, patent, or contractual right. It is assumed that immediate income recognition is not appropriate due to the facts and circumstances.”

5. Explain the flaws in these perspectives that make them less desirable than your preferred solution. Citing the appropriate paragraphs in the authoritative literature will definitely help your grade. Not citing the appropriate paragraphs in the authoritative literature will have the opposite effect. Further, consider conditions under which these solutions may become the preferred solution – what facts in the case would need to change for this to become