FASB EITF 99-16 Provides Necessary Guidance to Avoid Overstatements of Net Income

Abstract

Before merging with Johnson & Johnson in 2001, ALZA Pharmaceuticals Corporation was on the cutting edge of both drug delivery systems and creative financial arrangements. This paper explains the creation of two spin-off corporations by ALZA for the purpose of funding research and development (R&D) activities to be carried out primarily by and for the benefit of ALZA. The agreements between ALZA and its two spin-offs are outlined, the financial statement impact for ALZA is examined, and the disclosures made regarding the arrangements are critiqued. Results show that existing GAAP was circumvented to enhance revenue and net income over a period of eight years. Finally, the paper discusses the potential efficacy of a principles-based accounting standard in preventing the overstatement and circumvention of GAAP and argues for the continuing need for detailed guidance in the standard-setting process.

Keywords: US GAAP, principles based accounting standard, standard setting

JEL Classification: M40, M41, G11