Summary Business Accounting

Question:

Pfizer , a large research-based pharmaceutical company, enters into a contract with a start-up

biotechnology company called HealthPro and promises:

1. To grant HealthPro the exclusive rights to use Pfizer’s Technology A for the life of its patent. The

license gives

HealthPro the exclusive right to market, distribute, and manufacture Drug B as developed using

Technology A.

2. To assign four full-time equivalent employees to perform research and development services for

HealthPro in a specially designated Pfizer lab facility. The primary objective of these services is to

receive regulatory approval to market and distribute Drug B using Technology A.

HealthPro is required to use Pfizer’s lab to perform the research and development services necessary to

develop Drug B using Technology A, because the know how and expertise related to Technology A are

proprietary to Pfizer and not available elsewhere.

Required:

Determine which parts of this contract are separate performance obligations. Explain your reasoning for

each obligation.



Answer:



The license granted by Pfizer is not a separate performance obligation. The only way to exploit the

license is via utilizing ongoing R&D services from Pfizer. The license does not provide utility on its own

or together with other goods or services that HealthPro has received previously from Pfizer or that are

available from other entities. Rather, the license requires Pfizer’s R&D services and proprietary expertise

to be valuable. Therefore, Pfizer would combine the license with the R&D services to HealthPro and

account for them as a single performance obligation.