R&D; Write-Off in Mergers Stands

U.S. accounting rule makers backed away Wednesday from a proposal to end companies’ ability to instantly write off costs of unfinished research and development projects acquired in mergers.

Edmund Jenkins, chairman of the Financial Accounting Standards Board, said talks with companies and the board’s own research proved the issue is “more complex than we had hoped.” He said the board will probably decide next quarter when it should consider research and development accounting as a whole.

Technology, biotechnology and pharmaceutical companies had argued against changing the rule. Mergers in those industries, which totaled $473.4 billion in value last year, usually involve the purchase of research and development projects in progress.

The board had wanted companies to treat acquired R&D; as an asset, deducting the costs against earnings over time for as long as a product is being developed. That would have meant charges for several quarters, with a reduction in earnings each time. Companies would also have had to differentiate between their own and acquired R&D;, a chore many complained would add to costs.

“There could have been this situation where your project is being capitalized while the project of the scientist next to you is considered an expense,” said Arnold Hannish, chief accountant at Eli Lilly & Co., maker of the anti-depressant Prozac.

The U.S. is one of the few countries that lets companies estimate in-process research and development costs and deduct them from earnings at the time of mergers.

The FASB began considering changing the rule in February, after the Securities and Exchange Commission began pushing to improve the quality of companies’ financial reports and accounting practices.

The SEC in 1998 began scrutinizing companies for inflating their one-time write-offs for R&D.;

In one case, that scrutiny prompted MCI WorldCom Inc. to cut about $3 billion from an R&D; write-off when it bought MCI Communications Corp.