Chris Jackson was recently promoted to Controller ofResearch and Development (R&D) for BrisCor, a Fortune 500 pharmaceutical company that manufacturesprescription drugs and nutritional supplements. The company’s total R&D cost for 2017 was expected (budgeted)to be $5 billion. During the company’s midyear budget review, Chris realized that current R&D expenditureswere already at $3.5 billion, nearly 40% above the midyear target. At this current rate of expenditure,the R&D division was on track to exceed its total year-end budget by $2 billion!In a meeting with CFO Ronald Meece later that day, Jackson delivered the bad news. Meece was bothshocked and outraged that the R&D spending had gotten out of control. Meece wasn’t any more understandingwhen Jackson revealed that the excess cost was entirely related to research and development of anew drug, Vyacon, which was expected to go to market next year. The new drug would result in large profitsfor BrisCor, if the product could be approved by year-end. Meece had already announced his expectations of third-quarter earnings to Wall Street analysts. Ifthe R&D expenditures weren’t reduced by the end of the third quarter, Meece was certain that the targetshe had announced publicly would be missed and the company’s stock price would tumble. Meeceinstructed Jackson to make up the budget shortfall by the end of the third quarter using “whatever meansnecessary.”Jackson was new to the controller’s position and wanted to make sure that Meece’s orders were followed.Jackson came up with the following ideas for making the third-quarter budgeted targets:a. Stop all research and development efforts on the drug Vyacon until after year-end. This change woulddelay the drug going to market by at least 6 months. It is possible that in the meantime a BrisCor competitorcould make it to market with a similar drug.b. Sell off rights to the drug Martek. The company had not planned on doing this because, under currentmarket conditions, it would get less than fair value. It would, however, result in a one-time gain thatcould offset the budget shortfall. Of course, all future profits from Martek would be lost.c. Capitalize some of the company’s R&D expenditures, reducing R&D expense on the income statement.This transaction would not be in accordance with GAAP, but Jackson thought it was justifiablebecause the Vyacon drug was going to market early next year. Jackson would argue thatcapitalizing R&D costs this year and expensing them next year would better match revenues andexpenses.What would you recommend Jackson do?
Chris Jackson was recently promoted to Controller of
Research and Development (R&D) for BrisCor, a Fortune 500 pharmaceutical company that manufactures
prescription drugs and nutritional supplements. The company’s total R&D cost for 2017 was expected (budgeted)
to be $5 billion. During the company’s midyear budget review, Chris realized that current R&D expenditures
were already at $3.5 billion, nearly 40% above the midyear target. At this current rate of expenditure,
the R&D division was on track to exceed its total year-end budget by $2 billion!
In a meeting with CFO Ronald Meece later that day, Jackson delivered the bad news. Meece was both
shocked and outraged that the R&D spending had gotten out of control. Meece wasn’t any more understanding
when Jackson revealed that the excess cost was entirely related to research and development of a
new drug, Vyacon, which was expected to go to market next year. The new drug would result in large profits
for BrisCor, if the product could be approved by year-end.
Meece had already announced his expectations of third-quarter earnings to Wall Street analysts. If
the R&D expenditures weren’t reduced by the end of the third quarter, Meece was certain that the targets
he had announced publicly would be missed and the company’s stock price would tumble. Meece
instructed Jackson to make up the budget shortfall by the end of the third quarter using “whatever means
necessary.”
Jackson was new to the controller’s position and wanted to make sure that Meece’s orders were followed.
Jackson came up with the following ideas for making the third-quarter budgeted targets:
a. Stop all research and development efforts on the drug Vyacon until after year-end. This change would
delay the drug going to market by at least 6 months. It is possible that in the meantime a BrisCor competitor
could make it to market with a similar drug.
b. Sell off rights to the drug Martek. The company had not planned on doing this because, under current
market conditions, it would get less than fair value. It would, however, result in a one-time gain that
could offset the budget shortfall. Of course, all future profits from Martek would be lost.
c. Capitalize some of the company’s R&D expenditures, reducing R&D expense on the income statement.
This transaction would not be in accordance with GAAP, but Jackson thought it was justifiable
because the Vyacon drug was going to market early next year. Jackson would argue that
capitalizing R&D costs this year and expensing them next year would better match revenues and
expenses.What would you recommend Jackson do?
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