Interpreting Acquisition Footnote with In-Process Research and Development

On October 3, 2017, Gilead Sciences, Inc. (Gilead) acquired 100% of the outstanding common stock

of Kite Pharma, Inc. (Kite). According to Gileads December 31, 2017 Securities and Exchange Com-

mission Form 10-K, [t]he acquisition of Kite was accounted for as a business combination using the

acquisition method of accounting. The following excerpt is from Note 5 (i.e., Acquisitions) of Gileads

2017 10-K:

The following table summarizes the preliminary acquisition date fair values of assets acquired and

liabilities assumed, and the consideration transferred (in millions):

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 652

Identifiable intangible assets

Indefinite-lived intangible assetsIPR&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,950

Outlicense acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,606)

Other assets acquired (liabilities assumed), net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Total identifiable net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,168

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,987

Total consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,155

a. What did Gilead need to demonstrate for the Kite acquisition to qualify as a business

combination? (In answering this question, ignore the information in part d of this problem.)

b. Given the individual identifiable net assets acquired, describe why business combination

accounting might seem unusual for the Kite acquisition. (In answering this question, ignore the

information in part d of this problem.)

c. For this question only, assume the Kite acquisition qualified as an asset acquisition that is not a

business combination. How would the accounting for the acquisition of Kites net assets differ?

d. According to Gileads 2017 10-K, in October 2017, after the acquisition date of Kite, the FDA

approv[ed] Yescarta for the treatment of adult patients with relapsed or refractory DLBCL after

two or more lines of systemic therapy. (This technology was technically considered unproven

and presented as part of in-process research and development at the balance acquisition date.)

The footnote states that the fair value of the technology for this proven Yescarta therapy is $6,200

million. If this technology was proven and patented, how will the above-presented information in

the acquisition footnote change in the December 31, 2017 financial statements of Gilead?

THIS IS ALL THE INFORMATION THE BOOK GIVES DONT ASK FOR MORE