AOL's Acquisition of Mirabilis (A): Accounting for Acquired In-Process R&D

This case explores the issue of accounting for in-process research and development (IPRD) for an acquisition under purchase-method accounting. The case provides information on acquisition accounting, and the standards used for defining and treating IPRD. It also discusses practices that led to controversy over IPRD accounting in the mid-1990s. The situation is the acquisition of a small software company (Mirabilis), with a very popular Internet software product for instant messaging, but with no revenues. The acquiring company, America Online, indicated in the acquisition announcement that they intended to write a substantial amount of the purchase price off as IPRD. Shortly after that announcement, the new Chief Accountant of the SEC indicated that the SEC was concerned about the amount of such write-offs. The case asks how the CFO of AOL should respond, and what the impact of the IPRD write-off amount will be on the Company’s future earnings and stock price. Two short follow-up cases provide additional information.