The paradox of capitalised R&D expenses

Having announced in their accounting policies that research and development expenses are expensed as incurred, pharmaceutical companies [1] then show capitalised research and development costs in their balance sheet. But they hide them away and make them difficult to find.

Glaxo Smithkline for instance hide them under the heading “Licensed patents amortised brands etc” which includes amounts “still in development”, without specifying a figure. Astra Zenica hide them in “Product, marketing and distribution rights” which is not quite the same. We know this because there is an important impairment charge which they say is “recorded against products in development”. Sanofi are more open because they have a clear heading “Acquired R&D”.

This gives us the clue.  When companies purchase research and development they capitalise them. Roche Groupe even has a heading called “Intangible assets not available for use”. I am not sure how they can have a value and be recorded without impairment. But they do give us some information:

‘these assets mostly represent in-process research and development assets acquired’, and then they explain the different types of acquisition.

American companies under FASB standards have the same procedure. Abbvie for instance has ‘indefinite-lived research and development’ assets. Abbott too has ‘intangible assets which relate to IPR&D [2] acquired in a business combinations’. Note that the IP here does not refer to the more famous Internet Protocol, as in IP address, or the well known Intellectual Property.

So even when the standards have the same rules, the wording in the financial statements is totally different. European pharmaceutical companies tend to hide their ‘purchased R&D’ in vague terms. The US companies use acronyms and odd peculiar accounting terms such as ‘indefinite-lived’ assuming that the normal user is educated enough in accounting terms to understand them easily.

[1] Europe – Glaxo Smithkline, Astra Zenica, Sanofi, Roche Groupe. USA- Johnson & Johnson, Abbott, Abbvie, Bristol Myers Squib. (2021 Financial statements)

[2] Abbott do not reveal what IPR&D stands for: In-Process Research & Development, they assume that the ordinary user of financial statements know what it means. Bristol Myers Squib use a similar acronym, but not quite the same: IPRD.