Outdated Accounting Practices Hold Back R&D Success: Why Pharma Leaders Should Act Now
A Hallelujah Moment for R&D Leaders Frustrated by Outdated Accounting Practices!
In small and mid-sized life sciences companies, outdated accounting methods in finance are causing more harm than meets the eye. Legacy systems—marked by complex Excel spreadsheets and lengthy feedback loops—are overwhelming R&D teams. These inefficient practices waste time and drain the value of R&D, leading to delays in innovation. It’s time for non-finance leaders to push for streamlined, transparent accounting tools that drive progress rather than hinder it.
The path from lab to market depends on integrating R&D with modern, strategic financial oversight.
Below, we’ll explore why CFOs and stakeholders must embrace up-to-date, integrated solutions to secure R&D success and company growth.
1. R&D Delays Due to Complicated Operational and Funding Models
Modern R&D projects involve partnerships and complex payment structures, including royalties and milestone payments that must comply with international accounting standards (ASC 815 in the U.S., IAS 38, IFRS 15, and IAS 20 in Europe). These complexities create delays in research and can impact cash flow.
A smart contract management system integrated with the corporate ERP can significantly ease the workload for R&D teams. It provides finance with timely, accurate data, improving decision-making and helping companies stay aligned with R&D goals and accounting compliance.
This shift relieves R&D from sifting through cumbersome Excel sheets, allowing them to focus on innovation.
2. Fragmentation in R&D Accounting Leads to Hidden Costs
R&D accounting often fragments costs, as an example managing direct expenses like lab materials separately from indirect ones such as personnel and consultants. This siloed approach causes two major problems:
• Lack of transparency in R&D spending, with some costs going unnoticed.
• Difficulty in evaluating the true progress of research projects.
Customizable dashboards that categorize expenses by type, project stage, or accounting standard can provide a complete view of R&D investments. This holistic approach improves oversight and planning, empowering stakeholders with clear insights into cost management.
3. Inventory and Prelaunch Risks
To prepare for regulatory approval and launch, life sciences companies often initiate production before approval is secured. This raises a key question: should costs incurred for pre-approved products be recorded as inventory or expensed immediately, in accordance with standards like FASB Concepts Statement 8 (or IAS 38 in Europe)?
With modern ERP systems, real-time simulations and classifications of costs as expenses, assets, or inventory become streamlined. This ensures compliance, enables accurate reporting, and minimizes risk, providing full audit trails for efficient tracking.
4. Managing Nonrefundable Advances and Tax Credits
Many life sciences companies make nonrefundable advances to secure resources for future R&D services, as required under ASC 730-20. These advances must be monitored to ensure proper recognition of services or goods, and expenses adjusted if services are canceled. For materials with alternative uses, the recognition process must comply with ASC 730-10.
An integrated contract management system that connects with purchasing, inventory, and accounting is essential. This setup tracks goods and services in real-time, ensuring accurate and compliant accounting practices.
5. Accurate Classification of Priority Review Vouchers (PRVs)
The FDA awards PRVs to expedite reviews for treatments targeting rare diseases, allowing a reduced six-month review period. Companies acquiring PRVs face accounting challenges: should PRVs be capitalized as assets or expensed as R&D?
For PRV sales, companies must determine if revenue falls under ASC 606 (IFRS 15) or a gain under ASC 610-20 (IFRS 16). Income from PRV sales may impact R&D credit eligibility and potentially triggering clawbacks if tax authorities see the sale as a commercial gain rather than R&D funding.
Modern ERP tools with R&D cost tracking can accurately allocate costs, helping companies comply with these complex requirements.
6. Preparing for Future Standards and Reducing Compliance Risks
The FASB and IASB continuously evolve their standards, impacting derivatives under ASC 815, among others. Life sciences companies must maintain compliant ERPs and validating processes before implementing policy changes.
Modern ERPs ensure that life sciences companies remain compliant, reduce restatement risks, and allow leaders to adapt as new guidelines emerge.
#GOATConsultants™-Level Insights:
In life sciences, R&D success relies on collaboration and forward-thinking. By pushing CFOs to modernise accounting practices and adopt ERP systems, the executive team can maximize R&D investments, reduce risks, and drive the company’s ultimate mission: delivering new treatments to patients with unmet needs.
Learn more about how modern systems can drive innovation and growth in your company’s finance and accounting operations by visiting our Change Management and Innovation page.
For more information on accounting norms, visit:
Financial Accounting Standards Board (FASB) – www.fasb.org
International Financial Reporting Standards (IFRS) – www.ifrs.org
