Alza Corporation Essay

INSTRUCTORS' NOTES
In a strategy decision to become a fully-integrated pharmaceutical company, ALZA Pharmaceutical Corporation devised two off-balance sheet R&D arrangements. The first was Therapeutic Discovery Corporation (TDC), which operated from mid-1993 through 1997. The second was Crescendo Corporation, which operated from 1997 through 2000.
In both arrangements, ALZA invested cash in the corporations, issued stock in the new corporations to ALZA stockholders, and performed R&D activities for the new corporations. Amounts invested in the new corporations flowed back to ALZA and were recorded as R&D revenue. Since ALZA was recording both the revenue received from TDC and Crescendo and its own expense, the company claimed that the impact on income was not significant.
This case reviews the journal entries made to record the investments in TDC and Crescendo and leads students through an evaluation of ALZA's claim that the arrangements had an insignificant impact on its reported net income.
This case illustrates that ALZA's assertion is not an accurate assessment of the impact of the arrangement. Without the R&D arrangements, ALZA would simply be recording R&D expense as it was incurred, thereby reducing net income by the amount of R&D expense. Using TDC & Crescendo arrangements, ALZA recorded both revenue and expense, thereby eliminating the reduction of net income for its R&D expense.
Students are asked to evaluate ALZA's accounting and reporting procedures in light of ARB No. 51, Consolidated Financial Statements, FASB Interpretation No. 46 (R) Consolidation of Variable Interest Entities-an Interpretation of ARB No. 51, and EITF 99-16, Accounting for Transactions with Elements of Research and Development Arrangements.

1. What effect did the TDC and Crescendo arrangements have on ALZA’s R&D reported on the income