Alza Corporation Case

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ALZA CORPORATION: A CASE STUDY CONCERNING R&D ACCOUNTING PRACTICES IN THE PHARMACEUTICAL INDUSTRY

Tim McCoy, Lamar University Margaret Hoskins, Henderson State University

CASE DESCRIPTION The primary subject matter of this case concerns variable interest entities (VIEs), accounting for research and development (R&D) arrangements, and consolidated financial statements. The case has a difficulty level of four for five, appropriate for senior or first-year graduate level. The case is designed to be taught in one class hour and is expected to require three hours of outside preparation by students. CASE SYNOPSIS This case illustrates the innovative off-balance sheet financing techniques used by ALZA Pharmaceuticals Corporation in the 1990s to fund its R&D activities. The case shows that, although ALZA technically adhered to generally accepted accounting principles (GAAP) in effect at the time, its financial statements failed to reflect economic reality by overstating revenues and net income. The case is a prime example of how accounting for VIEs prior to current GAAP failed to capture economic reality. The case details two of ALZA’s R&D funding arrangements, illustrates the accounting practices used to capture them, and evaluates the manner in which their results were reported in the financial statements. Furthermore, the accounting and reporting procedures used will be compared to those required by 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. This comparison will help students understand the relevance and need for the new pronouncements. INTRODUCTION ALZA Pharmaceuticals Corporation was incorporated under the laws of the State of California on June 11, 1968. Its founder, Alejandro Zaffaroni, was a member of the scientific team that invented the birth...