Solvgen Case Study

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Memorandum To: Audit Engagement Team Manager From: Zach Halstead, Junior Auditor Subject: Due Diligence on SolvGen Inc. Date: October 4, 2011 After reviewing both the research and development (R&D) agreement and the license and distribution agreement between SolvGen Inc. and Careway Pharma Inc., I have come to the following conclusions: Deliverables Discussion * In accordance with codification 605-25-25, a deliverable must have objective value on a stand-alone basis. * The deliverable in this agreement is the selling of exclusive instrument systems which fall under the license and distribution agreement. * The R&D agreement does not constitute a deliverable since Careway is barred to any of the findings of SolvGen’s R&D department, even in the event of a SolvGen bankruptcy. * Without such access to R&D research, the agreement essentially has no value to Careway on a stand-alone basis. Milestone Payment Revenue Recognition * In accordance with codification 605-28-20, a milestone is achieved if the event would result in additional payments being due to the vendor. * Therefore, the milestone payments cannot be recognized as revenue until the date of the first launch, when revenue is earned and more payment comes due to SolvGen from Careway. * Since R&D does not represent a deliverable, the milestone payments are essentially an up-front payment for the license and distribution deliverable. * Milestone payment revenue should then be spread out on a pro rata basis as products are distributed under the license and distribution agreement. Differences under IFRS? * Since the agreement has just one deliverable, and the agreements went into effect at the same, no material difference exists when comparing GAAP and IFRS. * However, under IFRS, one could record revenue up-front, mainly from the milestone

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