Heal-an-Elbow, Inc. (Heal-an-Elbow) is a medical device company that specializes in developing elbow replacement hardware. In 2013, Heal-an-Elbow acquired 100 percent equity ownership of LZ International (LZ) for a purchase price of $15 million. LZ is a pharmaceutical company that is in the process of developing two drugs: (1) a drug to cure cancer, Drug Z, and (2) a pain medication, PainQ. Heal-an-Elbow acquired the entity to expand into a new sector within the medical field.

Through the acquisition method of accounting, Heal-an-Elbow recognized intangible assets for the in-process research and development (IPR&D) related to the ongoing development of Drug Z and PainQ, among other acquired intangible assets. Drug Z and PainQ had an acquisition date fair value of $4 million and $3 million, respectively.

During 2014, Heal-an-Elbow determined its operations could not support the continued development of Drug Z because significant efforts were being put into the development of PainQ. Since the date of acquisition, Heal-an-Elbow had not invested any additional funding in the development of Drug Z. Heal-an-Elbow determined that there was no change in the carrying amount recorded at the date of acquisition.

Rather than abandon the development project, Heal-an-Elbow entered into an agreement with PharmaPhar Company (PharmaPhar) to transfer its ownership interests in the IPR&D for Drug Z. PharmaPhar, the markets largest pharmaceutical company, will use Drug Zs IPR&D to continue its development, and obtain FDA (Food and Drug Administration) approval to sell the drug on the open market. The transfer of the IPR&D from Heal-an-Elbow to PharmaPhar is known as an out-license transfer, which is essentially a sale agreement.

In return, PharmaPhar will pay Heal-an-Elbow (1) a nonrefundable fixed fee of $2 million at contract execution, (2) the ability to earn contingent future payments of $500,000, when Drug Z is FDA approved, and a 10 percent royalty fee based on the annual sales earned by PharmaPhar for the sale of Drug Z in each of the subsequent five years following FDA approval.

At the date of transfer, Heal-an-Elbow estimates the fair value of the total consideration (nonrefundable fixed fee and contingent future fees) to be $5.5 million, and this figure assumes that FDA approval is granted. PharmaPhar transfers $2 million for the ownership of the IPR&D of Drug Z.

Under IFRS: At the date of transfer to PharmaPhar, how should Heal-an-Elbow record the transaction? What are the alternatives available to Heal-an-Elbow and which one is best? Under US GAAP: At the date of transfer to PharmaPhar, how should Heal-an-Elbow record the transaction? What are the alternatives available to Heal-an-Elbow and which one is best