Kevin Didio, CPA, CISA, Audit Partner

Inventory Accounting Considerations for Manufacturing in the Life Science Industry


Finance and accounting professionals in the life science industry must often exercise significant judgment in applying accounting guidance to inventory. A few common inventory situations faced by life science professionals are explored below.

How Should Development Supplies Items Be Accounted For?

Often, materials are purchased to be used as part of clinical trial tests. Companies performing the clinical trials have no intention of selling the materials used as part of the trials. As a result, the materials do not meet the definition of inventory under ASC 330-10-20. This is because they are not held for sale or consumed in the production of goods to be sold. If these materials have an alternative future use in other development projects, the material item does meet the definition of an asset. The assets should be recorded at cost and accounted for as supplies used in the development process. When supplies are used, the associated cost forms part of research and development expenses.

How Should Purchase Materials Be Accounted For When the Ultimate Use of Those Materials Is Not Known?

If the materials can be utilized in the production of marketed drugs, the materials should be recorded as inventory at the lower of cost or net realizable value. If the materials are assigned to the manufacturing of drugs in development, the materials should be accounted for as research and development supplies in line with the discussion above. However, if the bulk materials are only suitable to be used for a particular research and development project, and do not have any alternative future use, the costs would be recognized as research and development expense as incurred.

How Should Costs Associated With In-Development Drugs Be Accounting For?

Pre-launch inventory can be capitalized if there is a present economic benefit, which is assessed based on the judgment of individual facts and circumstances. Items to consider include the feasibility of the drug in development, the status of any regulatory committee reviews, and an understanding of any potential hurdles to regulatory approval.

If a present economic benefit is determined, the pre-launch inventory can be capitalized at the lower of cost or net realizable value. Management should periodically reassess to determine whether the inventory continues to have a present right to an economic benefit. If at any time regulatory approval is not deemed to be probable, the inventory should be written down to its net realizable value, which is presumably zero. If the value of inventory is written down, the reduced amount is the new cost basis. Please note that if regulatory approval is ultimately obtained, the inventory is not written back up.

Contributing author: Kevin Didio, CPA, CISA, is an audit partner with over 12 years of experience providing accounting, assurance and consulting services to private and publicly-held domestic and foreign companies. He specializes in working with manufacturing, transportation, consumer and retail, technology and life science industries. For more information on this topic, contact Kevin at