Concept of Evergreening: Tweaking around the Laws of Patent

Have you ever wondered that why these cancer drugs are so expensive? A breast Cancer drug named Kadcyla has been recently developed which may cost $90,000 per patient per year. We usually assume that the anti-bodies or other elements which have been used to manufacture these drugs are really expensive; in short we assume that manufacturing cost of these drugs is really high.However, in reality this does not happen at all and it is a small part of trick being played by the management of these companies.
Tweaking around the Laws of PatentThese drugs are discovered after lots of research and development done in their labs and hence a huge amount of costs or overheads are involved in this section. In order to compensate forthese overheads, the prices of such drugs are inflated.

Now, Pharmaceutical companies can usually charge such amount over the span of 20 years because this is the usual tenure of their patent and then after this period is over, any other company can copy the compound and deliver the same at much cheaper price. In other words, any pharmaceutical company can monopolize the market for the span of 20 years but that’s not it, they try their best to extend this period of monopoly by using some other trick too.

The famous concept of Evergreening is used when a company wants to increase the protection of the patent or the monopoly tenure into the market. The elements used to create that compound (drug) are tweaked a little and thus the new compound, which is just different in terms of nomenclature (but carrying the same properties of the previous compound), is submitted again in the form of a patent. This is the best way to manage their markets when a company has invested a lot in the Research and Development of that drug.

This kind of practice are mostly performed in case of life-saving drugs, reason being that their sale is already infrequent and the high cost of these drugs adds more to it. Hence, monopoly of 20 years is not enough. Please note that in most of the countries like Korea, Canada, Australia and India, this is being opposed but then it is difficult to take a stringent against it because anything this may discourage these companies to innovate. They use such methods to maximize their profits and this is the same reason due to which they innovate.

Managing the medical markets is not conventional as compared to other industries because here you are dealing with the lives of people and thus any selfish step taken by the management would rip off the reputation of the market which can be followed by lots of CSR (Corporate Social Responsibilities) activities. Hence, this concept can be used but it is best if it is not being used on life-saving drugs.

What do you do if you noted overprovision or underprovision for previous years' tax

When reviewing by way of financial statement or even tax schedule, you could possibly note overprovision or underprovision for past years' tax. What will you do as being an auditor?

Initially let us fully grasp, what will lead to the accounting entries for overprovision or underprovision for tax: 

overprovision or underprovision of tax

The over or under provision possibly resulted from:
  • tax correspondences (i.e. notice of assessment) through tax authority displaying a revised tax payable
  • tax agent or client a computation error in prior year tax computation
  • tax agent or client turn out to be conscious of new evidences which might recommend that previous tax computation should be revised
  • clarification of new ruling getting published not too long ago
Why it's important for an auditor to know the nature of overprovision or underprovision?
By knowing the nature of overprovision/ underprovision, we are able to cross check to existing year tax computation to produce certain that the basis of computation has been corrected such that latest year tax computation is in line with proper ruling/ basis. As an illustration, throughout the year, tax authority might disagree with claiming professional fee as deductible expense. Therefore, it can lead to underprovision in respect of past year tax. In latest year tax computation, management need to deem the exact same nature of profession fee to become non-deductible expense. This will likely avoid the underprovision  tax inside the future.

In brief, it's important to know the nature of any over or underprovision of tax, and check out that the basis of existing year tax computation has been updated such that it can be in accordance with most up-to-date tax ruling.

Assurance of inter-company's loans

It can be prevalent for our audit client to give corporate assurance to a bank in favour of similar firms for the loan drawn down by the associated firms. Frequently, your audit client may perhaps assure timely repayment of interest and assure to repay amount due should really the associated firm default in repaying.

A bank may perhaps ask for assurance, if:
  • the borrower will not be in financially sound position; or
  • the loan sum is substantial for the borrower standpoint; or
  • the borrower is looking to ask for any discount on its rate of interest

This assurance represents a prospective / contingent exposure to our audit customer. This must be disclosed inside the economic statement of our audit client. The disclosure should really, at a minimal, involve:
  • the nature of your assurance;
  • the sum assured; and
  • contingent exposure as of balance sheet date (i.e. the quantity assured possibly US$100mil on a facility, though the outstanding loan quantity drawn down by associated firm is $80mil as of balance sheet time frame).
This disclosure aids to inform the financial statement user around the contingent libility the Firm has, and this may be an essential concern for a number of the fianancial statement

Share Buy Back Accounting Entries

Nowadays market place, it's prevalent to get a listed business to buy back their very own shares in the open, for the extent  will not violate the guidelines with the listing authority. There's a variety of explanation why the management of listed firms would like to buy  back their very own shares. It may be resulting from:
    share buy back
  • the share price is considered to become regularly lesser than the intrinsic cost (e.g. net tangible asset per share is higher than the share value);
  • there is certainly big cash scales held by the holding business;
  • share price is at exceptionall low-level, and it can be excellent to buy back again the share in the market place
What's the accounting entries for the share buy back?

You will discover two feasible answers for the query above, will depend on management's intention:
  1. In the event the listed business would like to buy back the share and also cancel the share, Acconting entries are:
  2.             Debit:    Share Capital
                Credit:  Cash
  3. In the event the listed business would like to buy back the share for upcoming re-issuance reason (e.g.share issue option to personnel):
                       Debit:    Retained Earning- Treasury Shares
                       Credit:  Cash

To describe additional: treausry shares account will be a debit balance. Out of legal viewpoint, it can be a subset of Retained Earning. With regard to financial statement disclosure intention, it will likely be reflected separately from regular Retained Earning.

Understanding Accounting for Debits and Credits

Within a easier way it might be explained as when an quantity is entered around the left side of an account, it can be a debit plus the account is mentioned to become debited. When an account is entered around the suitable side, it can be a credit, plus the account is mentioned to become credited. Right here are standard debit & credit rule:

 Accounting for Debits and Credits
Assets & Expenses
Dr                      Cr
(Increases)            (Decreases)

Liabilities, Capital and Income
Dr                     Cr
(Decreases)         (Increases)

An account contains a debit balance once the sum of its debits is greater then the sum of the its credits: it provides a credit balance when the sum of the credits is the greater. In doubleentry accounting, that is in almost general use, there are actually equal debit and credit entries for every single transaction. In which only two accounts might be affected, the debit & credit amounts are the same. If more than two accounts will be affected, the overall of the debit entries must the same to the total of the credit entries.

Debits and Credits

Double-entry bookkeeping is controlled by the accounting formula. If income
equals expenses, the following standard formula must be true:

Assets = liabilities + equity
At any time, income may not equal expenses. If so the equation is often
further extended, so that the (expanded) equation turns into:
Assets = liabilities + equity + (revenue - expenses)Samples of debits and credits

Purchase of a Computer
Debit Computer account is increased (Fixed asset account)
Credit Creditors account is increased (Liability account)
Paying supplier for the Computer
Debit Creditors account is reduced (Liability account).
Credit Bank account is reduced (Asset account) .

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