When one company acquires another company, any acquired research projects are accounted for as:

Question

BlackTom AI · Accepted Answer

To tackle this question, we first restate the scenario and enumerate the possible statements.
Question: When one company acquires another company, any acquired research projects are accounted for as:
Options:
1) indefinite-life intangible assets if the projects have reached the point of technological feasibility.
2) an expense in the current period if the projects have not yet reached the point of technological feasibility.
3) finite-life intangible assets if the projects have reached the point of technological feasibility.
4) finite-life intangible assets if the projects have not yet reached the point of technological feasibility.

Now we evaluate each option one by one:
Option 1: indefinite-life intangibles if feasibility has been reached. The accounting treatment for acquired in-process R&D (IPR&D) under a business combination is nuanced: before feasibility is established, IPR&D is typically recognized as an indefinite-life intangible asset. The moment feasibility is established, the asset typically transitions toward finite life because it is expected to be amortized as the underlying project progresses toward commercialization. Therefore, saying it remains indefinitely staffed as indefinite-life merely because feasibility has been reached is inaccurate; the life is more realistically finite since amortization will begin once the project advances to commercialization or milestones are achieved. This makes Option 1 misleading.
Option 2: expensing in the current period if not yet feasible. In a business combination, non-feasible in-process R&D does not generally get expensed immediately; instead, it is recognized as an intangible asset (often indefinite-life) and subsequently amortized or reviewed for impairment as milestones are achieved or abandoned. Expensing in the current period would ignore the asset recognition requirements and is not consistent with acquisition accounting until impairment or abandonment occurs. Thus this statement is not correct.
Option 3: finite-life intangibles if feasibility has been reached. This aligns with the standard approach: once technological feasibility is established, the acquired in-process R&D is typically deemed to have a finite life and is amortized over its expected useful life. This reflects the transition from an indefinite to finite life as progress toward commercialization occurs. This option matches the conventional treatment.
Option 4: finite-life intangibles if feasibility has not yet been reached. If feasibility has not been reached, the asset is generally not yet amortized as a finite-life asset; it is usually considered indefinite-life or not yet ready for amortization, with potential impairment assessment if conditions change. Stating it is finite-life before feasibility is established contradicts the typical accounting guidance, making this option incorrect.

In summary, Option 3 correctly reflects the standard accounting treatment for acquired in-process R&D in a business combination: finite-life intangible assets once technological feasibility has been reached. The other options either misstate the life of the asset before feasibility, rely on incorrect expense treatment in a acquisition context, or mischaracterize the transition from indefinite to finite life.

When one company acquires another company, any acquired research projects are accounted for as:

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