What accounting treatment will be applied for the licensing revenue under IFRS/US GAAP, and how will it affect the company's financial statements?

Accounting treatment

Both IFRS 15 and US GAAP (ASC 606) require a licensing arrangement to be accounted for as a “performance‑obligation” contract. The $645 million total consideration is split into any upfront cash (or non‑cash) payment and any staged, milestone‑ or royalty‑based payments. The upfront portion is recorded first as a contract liability (deferred revenue) on the balance sheet and is recognised as revenue over the period in which Expedition is granted the right to use the drug (i.e. the term of the licence or the period of the related development‑milestone obligations). If the licence is for a defined period, revenue is recognised ratably; if the licence is tied to specific development milestones, revenue is recognised when those milestones are achieved and the related performance‑obligation is satisfied.

Consequently, the immediate effect on Fosun Pharma’s financials will be:

• Cash / receivables ↑ (up‑front payment or a receivable for the licence fee).
  
• Deferred‑revenue (liability) ↑ for the same amount, offsetting the cash inflow.
  
• Net‑income is unchanged at signing; revenue will be booked gradually, expanding future top‑line growth but not boosting current earnings.
  
• EBITDA may be higher in the short term if the licence fee is classified as “other operating income” under IFRS 15/ASC 606, but the core operating profit will still be deferred.

Trading implications

The market will likely price‑in the expected future cash inflow now, creating a short‑term upside as the licence cash improves liquidity and reduces financing risk. However, because the bulk of the $645 million will be recognised as revenue over the next 2‑4 years, the current earnings profile remains unchanged, limiting immediate earnings‑driven upside. Traders should watch for:

• Liquidity‑focused buying on the news (higher cash balance, lower net‑debt) – a catalyst for a modest price bump.
  
• Forward‑looking valuation as analysts upgrade FY‑2025‑2026 earnings forecasts once the deferred‑revenue is amortised into the income statement.
  

If the stock is already priced for the future revenue stream, the reaction may be muted; otherwise, a 2‑5 % bounce on the day of the announcement is plausible, with the longer‑run rally driven by the incremental top‑line contribution as the licence revenue is recognized. Position accordingly – consider a short‑term long entry on the news, with a stop a few percent below the breakout, and keep the position for the next earnings cycles when the deferred revenue begins to lift reported profit.