# ASC 810-30-55: Consolidation — Research and Development Arrangements — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 810-30-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/810/30/#55-implementation-guidance-and-illustrations)

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#### Illustrations

##### [810-30-55-1](https://asc.understandingaccounting.org/asc/810/30/#810-30-55-1)

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This Example illustrates the guidance in this Subtopic. A [sponsor](https://asc.understandingaccounting.org/glossary/s/#sponsor "An entity that capitalizes a research and development arrangement.") (the Sponsor) capitalizes a newly created, wholly owned [subsidiary](https://asc.understandingaccounting.org/glossary/s/#subsidiary "An entity, including an unincorporated entity such as a partnership or trust, in which another entity, known as its parent, holds a controlling financial interest. (Also, a variable interest entity that is consolidated by a primary beneficiary.)"), Newco, with $110 million and rights to certain technology developed by the Sponsor (assumed to have no book value) in exchange for Newco Class A common stock and Newco Class B common stock with a nominal [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date."). Concurrent with its formation, the Sponsor and Newco enter into various agreements including a development contract and purchase option (each described in this Example). Shortly thereafter, the Sponsor distributes all of the Newco Class A common stock to the Sponsor's stockholders. The fair value of the Newco Class A common stock at distribution is $80 million.

##### [810-30-55-2](https://asc.understandingaccounting.org/asc/810/30/#810-30-55-2)

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After the distribution, the Sponsor owns all of the authorized shares of the Newco Class B common stock. The Newco Class B common stock conveys essentially no financial interest to the Sponsor and, other than certain blocking rights, provides the Sponsor essentially no voting rights. Under the development contract, Newco will be required to spend all of the cash contributed to it by the Sponsor (the available funds) in the research and development of technologies mutually agreed upon with the Sponsor. Newco will have no employees other than its chief executive officer and no facilities other than a nominal amount of office space. (For purposes of this Example, investment income on the available funds, the chief executive officer's salary, and office space rent are ignored.) In addition, Newco will contract with the Sponsor to perform all of Newco's research and development activities under the development contract at the Sponsor's cost plus 10 percent. Newco expects that, in paying for such activities, the available funds will be substantially exhausted within the first two years of its existence. For purposes of this Example, it is assumed that the Sponsor incurs $50 million in research and development costs for each year under the development contract. As a result, Newco pays $55 million to the Sponsor for each year of the development contract.

##### [810-30-55-3](https://asc.understandingaccounting.org/asc/810/30/#810-30-55-3)

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Under the purchase option, the Sponsor will have the right to purchase all of the Newco Class A common stock at an exercise price that is intended to approximate the fair value of the shares. The purchase option is exercisable at any time until the second anniversary of the distribution of the Newco Class A common stock. For purposes of this Example, 2 scenarios are assumed under the purchase option—1 in which the option is not exercised and 1 in which the option is exercised for $200 million just before the second anniversary of the distribution of the Newco Class A common stock.

##### [810-30-55-4](https://asc.understandingaccounting.org/asc/810/30/#810-30-55-4)

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Under Newco's certificate of incorporation, Newco is prohibited from taking or permitting any action inconsistent with, or that will in any way alter, the Sponsor's rights under the purchase option without the preapproval of the Sponsor. In addition, until the expiration of the purchase option, Newco may not merge, liquidate, or sell any substantial portion of its assets or amend its certificate of incorporation to alter the purchase option, Newco's authorized capitalization, or the provisions of the certificate of incorporation governing Newco's board of directors without the preapproval of the Sponsor. The journal entries to account for the research and development arrangement are presented in the following table.

-   ![ ](https://asc.understandingaccounting.org/asc-img/GUID-EC7C6DAE-E065-4441-B8E7-99325F7461B2-low.gif)
    
    Impact at Consolidated Sponsor Level Distribution of Newco's Class A Common Stock Restricted Cash " $110,000,000 " Cash " $110,000,000 " Common Dividend " 80,000,000 " Newco Class A Common Stock (a) " 80,000,000 " Year 1 Research and Development Research and Development Costs Incurred by the Sponsor Research and Development Expense " $50,000,000 " Cash " $50,000,000 " Reimbursement under Development Contract Cash " $55,000,000 " Restricted Cash " $55,000,000 " Year 2 Research and Development Research and Development Costs Incurred by the Sponsor Research and Development Expense " $50,000,000 " Cash " $50,000,000 " Reimbursement under Development Contract Cash " $55,000,000 " Restricted Cash " $55,000,000 " Purchase Option (Two Scenarios) Scenario 1—Option Not Exercised Newco Class A Common Stock " $80,000,000 " Additional Paid-in Capital " $80,000,000 " Scenario 2—Option Exercised In-Process or Completed Research and Development " $120,000,000 " Newco Class A Common Stock " 80,000,000 " Cash " $200,000,000 " Impact of All the Entries Scenario 1—Option Not Exercised Common Dividends " $80,000,000 " Research and Development Expense " 100,000,000 " Additional Paid-in Capital " $80,000,000 " Cash " 100,000,000 " Scenario 2—Option Exercised Common Dividends " $80,000,000 " Research and Development Expense " 100,000,000 " In-Process or Completed Research and Development " 120,000,000 " Cash " $300,000,000 " (a) Accounted for like noncontrolling interest.