Pharmaceutical manufacturers and distributors, working under price control, product regulation and long development cycles.
Research and development is the first question. Research is expensed; development is capitalised only when the recognition criteria in the applicable standard are met, and the judgement about when that point is reached has to be documented and applied consistently.
The second is the regulated market. Products are licensed and manufacturing premises inspected under the drugs legislation, and the prices of scheduled formulations are controlled, with the consequences of a ceiling price flowing straight into revenue, provisions and disclosure. Expiry, recall and the return of unsold stock make inventory provisioning a continuing exercise rather than a year-end one.
Accounting and reporting
- Research expensed and development capitalised only where the recognition criteria are met
- Inventory valuation across raw materials, intermediates and finished goods, with provisioning for expiry and near-expiry stock
- Revenue recognition net of returns, breakages, trade schemes and chargebacks
- Provisions for price revisions, recalls and product liability
- Intangible assets, licences and product acquisitions, and their amortisation and impairment
Regulatory
- Licensing of products and premises, and record-keeping, under the drugs legislation and its rules
- Price control of scheduled formulations, and the returns that go with it
- GST, including the treatment of samples, expired stock returns and trade schemes
- Cost records and cost audit, which apply to companies in specified industries including pharmaceuticals, subject to the prescribed conditions
Internal controls
- Batch records reconciled between production and the financial records
- Controls over expiry dating, returns and destruction of stock
- Approval of trade schemes, credit notes and chargebacks
- Segregation of duties over despatch, billing and credit
Questions that arise
- Is the point at which development costs begin to be capitalised documented and consistently applied?
- Are provisions for expiry, returns and trade schemes based on actual experience?
- Is the pricing of scheduled products consistent with the applicable ceiling, and is any liability recognised?
- Do cost record and cost audit requirements apply to the company's products?