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Dexterity
On 1 October 2013 Dexterity acquired Temerity, a small company that specialises in pharmaceutical drug research and development. The purchase consideration was by way of a share exchange and valued at $35 million. The fair value of Temerity’s net assets was $15 million (excluding any items referred to below).
1. Temerity owns a patent for an established successful drug that has a remaining life of 8 years. A firm of specialist advisors, Leadbrand, has estimated the current value of this patent to be $10 million; however the company is awaiting the outcome of clinical trials where the drug has been tested to treat a different illness. If the trials are successful, the value of the drug is then estimated to be $15 million.
2. Also included in the company’s statement of financial position is $2 million for medical research that has been conducted on behalf of a client.
3.Dexterity has developed and patented a new drug which has been approved for clinical use. The costs of developing the drug were $12 million. Based on early assessments of its sales success, Leadbrand have estimated its market value at $20 million.What is the goodwill on acquisition?
Answer: $8 million considering that we need to add the $10m for the patent (item 1) and $2m (item 2) to the fair value of the assets acquired.
I didn’t understand why the $2m should be considered. Could you please clarify?
Thanks
“I didn’t understand why the $2m should be considered.”
This $2 million is not research costs for Temerity … in that case they would have been expensed as incurred
In this situation, Temerity is conducting work on behalf of a client so the $2 million is a receivable. It could alternatively be classed as work-in-progress but whatever category it eventually is allocated to, it IS an asset that should be included within the Temerity net assets at date of acquisition
Better?
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