This excerpt taken from the GILD 10-K filed Mar 14, 2005.
Accounting for Research and Development Costs. These costs are a significant component of R&D expenses. Most of our clinical and preclinical studies are performed by third party CROs. We accrue costs for clinical studies performed by CROs on a straight-line basis over the service periods specified in the contracts and adjust our estimates, if required, based upon our on-going review of the level of effort and costs actually incurred by the CRO. Initially we estimate that the work performed under the contracts occurs ratably over the service periods to the expected milestone, event or total contract completion date. The expected completion dates are estimated based upon the terms of the contracts and past experience with similar contracts. We monitor levels of performance under each contract including the extent of patient enrollment and other activities through communications with our CROs, and we adjust our estimates, if required, on a quarterly basis so that our expenses reflect the actual effort expended by each CRO.
All of our material CRO contracts are terminable by us upon written notice and Gilead is generally only liable for actual effort expended by the CRO at any point in time during the contract, regardless of payment status. Amounts paid in advance of services being performed will be refunded if a contract is terminated. Some contracts include additional termination payments that become due and payable only if Gilead terminates the contract. Such additional termination payments are only recorded if a contract is terminated.
During 2004, in order to better reflect the nature of European Phase 4 clinical trials, Gilead began recording these costs as R&D expenses. Such amounts were previously classified as selling, general and administrative expenses in our consolidated statements of operations. In order to be consistent with the current period presentation, $16.9 million and $7.1 million of expenses were reclassified from selling, general and administrative to research and development expenses, for the years ended December 31, 2003 and 2002, respectively.