5 Major Challenges in Life Sciences Accounting & Reporting
The life sciences industry encompasses various entities that discover, develop, and manufacture health care products. Such entities include pharmaceutical, biotechnology, and medical device manufacturers.
As one of the most complex, fast-paced, and highly regulated industries in the world, the life sciences sector brings forth unique challenges for financial professionals. Below we’ll explore some complications related to life sciences accounting and reporting, as well as the benefits of choosing an outsourced accounting partner to meet the industry’s rigorous demands.
Common Challenges in Life Sciences Accounting and Reporting
With near-constant regulatory changes and policy reform, the life sciences industry faces numerous difficulties daily. In addition to balancing financial accounting with internal control requirements, many life science companies are also facing uncertainty as a result of the COVID-19 pandemic. Let’s take a deeper look at some of the major challenges that impact life sciences accounting and financial reporting.
1. Revenue Recognition
Revenue accounting is relatively simple when there’s a traditional exchange of currency for a product. Unfortunately for those in a life sciences company, though, transactional exchanges aren’t always so straightforward. It can be challenging to determine what qualifies as recognizable revenue and what doesn’t, and collaboration among companies often presents additional complications.
Many life science companies join forces with other companies in the industry to share the risks and costs associated with research, development, manufacturing, and commercialization of medical products and biotech. However, because of the collaborative nature of this industry, many entities struggle to recognize revenue in accordance with the Financial Accounting Standards Board (FASB) new revenue standard, Revenues from Contracts with Customers (ASC 606).
Determining whether a collaborative arrangement is within the scope of ASC 606 can certainly make your head spin. Factors such as out-licensing intellectual property, complicated contract terms, and unclear transaction prices are just a few obstacles that life science professionals face when determining how to recognize revenue in a business partnership.
For these reasons, many life science companies either don’t account for their revenue accurately or spend a considerable amount of time learning how to do so. Collecting the amount of information needed to meet ASC 606 requirements is exhausting. For companies like yours in the life sciences sector, the new revenue recognition process entails a great deal of effort, hours, and money. Having an outsourced accountant who’s well-versed in the new revenue standards will help allocate your energy and resources to the things that matter.
2. Interpretation and Presentation of Cash Flow Statements
Do you have a hard time with your company’s cash flow statements? You’re not alone. Many life science companies experience issues with the interpretation and preparation of their cash flow statements. In fact, cash flow statement errors are one of the main reasons that the Securities and Exchange Commission (SEC) reaches out and requires restatements from life science entities.
Some common hurdles that you may experience while preparing cash flow statements include:
- Government grants
- Stock compensation
- Foreign currency cash flows
- Cash proceeds from insurance claims
- Classification of certain cash receipts/payments
As a cash flow statement is an incredibly important tool to measure your company’s performance as it explicitly shows receivables and expenditures over time. If not presented accurately, your cash flow statements can lead to irresponsible business decisions and misinformed investors.
3. Business Consolidation and Asset Acquisition
With growing demands in the healthcare field, the life sciences sector continues to experience significant merger and acquisition (M&A) activity. Manufacturers in the industry are increasingly seeking out opportunities to access new markets, reduce risk, and replace revenue lost by consolidating and acquiring other companies.
Business consolidation and acquisition create several challenges for life sciences accounting and reporting, such as:
- accounting for acquired in-progress research and development (IPR&D)
- allocation of value for acquired intangible assets
- amortization of acquired intellectual property
Without careful accounting, consolidations and acquisitions can become more harmful to your company, rather than helpful.
4. Lease Accounting
The research, development, manufacturing, and marketization of medical products require a lot of space and tools (which, in turn, require a lot of capital). Many companies in the industry have to lease a variety of assets, such as laboratory equipment and manufacturing facilities, to create their products. This, of course, presents unique challenges for life science accounting and financial reporting.
In 2016, the FASB issued a new lease accounting standard (ASC 842) to guide companies through the process of accounting and reporting for leases. However, for those in the life sciences industry, classifying leases isn’t always easy. As a result, extensive analysis is typically necessary to identify embedded leases (hidden in contracts), determine how to apply the standards to certain lease types, and update balance sheets accordingly. This means time, and time means money.
5. Inefficient Processes for Reporting
Financial reporting and accounting are time-consuming enough without you being bogged down by outdated systems. Unfortunately, many life sciences entities still utilize slow, manual processes and multiple systems that don’t interchange information. These inefficient operations make it difficult to quickly produce updated financial reports and interpret data—not to mention that they can put your security at risk!
By replacing your inefficient processes with a centralized, outsourced system like Powered by Centri, you will secure your information and have more time to prioritize diversifying your products, expanding into new markets, and delivering consistent margins.
Benefits of Outsourcing Life Sciences Accounting & Financial Reporting
While in-house accounting may seem like the most logical choice for your business, there are numerous benefits to outsourcing accounting for life sciences. Here are four major reasons that pharmaceutical, biotech, and medical device companies choose outsourced accounting.
1. Focus Your Time & Efforts On What Matters
The life sciences industry is constantly fluctuating, requiring companies to keep up with the changes. But working through constant policy and regulation updates is laborious and exhausting, costing you both time and money.
When you choose to partner with an outsourced accounting firm, you can focus your attention on what matters most—making the informed decisions that will drive improved outcomes.
2. Be Confident in Your Data Security
In-house accounting solutions and inefficient financial tools can make your financial data vulnerable. Having a trusted accounting consultant complete your life sciences accounting and reporting is one of the best ways to secure data, reduce fraud, and avoid financial mismanagement.
Because our experts use real-time accounting technology to examine your statements every day, we’re more likely to identify errors and inconsistencies and keep your data safe—helping you avoid disastrous consequences for your business.
3. Work With Experts Familiar With Your Industry
It can be difficult to find accountants who are familiar with the unique challenges that impact life science companies. Our experts are familiar with the complexities of accounting for the life sciences industry and stay informed on regulatory changes. We’ll provide online accounting support so that you can focus on developing your business.
4. Access to Advanced, Centralized Financial Technology
Many accounting professionals in the life sciences industry use outdated financial tech because they’re used to it, and it appears to be working. What they don’t realize is that they’re making life much harder on themselves.
Outsourced accounting firms have access to the newest financial software and resources to help automate your company’s data collection processes—saving you both time and money. Our team will even teach you how to use the technology and correct any issues so that you don’t waste any time having to figure it out yourself.