By Shawn Elliott, CFO | High Rock Accounting

A while back I was onboarding a MedTech device company that was still in trial phase, working their way through FDA studies before they could move into full production and inventory. One of the first questions I needed to work through with a specialist colleague was a simple one: how do you actually spread these trial costs?

Her answer was the right one. It depends. If the FDA study structure is relatively straightforward, you can prorate costs on a per-patient, per-day basis from study start to end. If the studies are more convoluted, with specific FDA milestones driving the work, then you need to tie expense recognition to those milestones instead. Six of one, half a dozen of the other from a GAAP standpoint. What matters is that you pick the right methodology for the study structure, document it, and apply it consistently.

I had seen the milestone approach before with an IPO-ready company I worked with in a previous life. They were running animal testing and a range of clinical studies simultaneously, and they had a big allocation spreadsheet tied to different milestones. It worked because the methodology matched the way the work was actually being performed.

That conversation is what this article is about. Clinical trial expense allocation is not conceptually complicated. ASC 730 gives you the framework. What trips companies up is the execution: choosing the right methodology, getting the data to support it, and having the documentation ready before the auditor starts asking.

The Governing Standard: ASC 730

The accounting framework is clear in principle. Under ASC 730, all research and development costs must be expensed as incurred. No capitalization. No deferral. When a Phase I safety study costs $1.5 million, that $1.5 million hits the income statement in the period the work is performed, not when you write the check. *1

For pre-revenue biotech and MedTech companies, that produces large operating losses on the income statement. That is expected and understood. Sophisticated investors and acquirers in this space evaluate companies on cash runway, program milestones, and pipeline value, not near-term profitability. The losses reflect the nature of the business. The issue is not whether to expense trial costs. The issue is whether you are expensing them accurately, in the right period, in the right bucket.

There is one meaningful carve-out worth knowing: acquired in-process R&D purchased through a business combination is generally capitalized at fair value. *2 That is the exception, not the rule. Internal clinical development costs are expensed. Full stop.

Phase-by-Phase: What You Are Actually Classifying

The accounting treatment is consistent across all three phases. What changes is the cost profile, the complexity of the accrual, and the level of scrutiny from your auditor.

Phase I: Safety and Dosage Studies

Phase I trials in the U.S. typically run between $1.4 million and $6.6 million depending on the therapeutic area and patient population. *3 The cost structure here is relatively contained. Patient counts are small, sites are few, and CRO contracts tend to be simpler than what you will see in later phases.

The classification questions at Phase I center on:

CRO fees: Expense as incurred, based on actual services performed, not the milestone billing schedule in the contract.

Investigator site grants: Accrued based on patient enrollment and visit completion. If your sites are activating in December but invoices do not arrive until February, December is when you recognize the expense.

Clinical drug supply and manufacturing: The compound manufactured for trial use is typically expensed because it has no alternative future use if the trial fails. If the compound has clear alternative uses, you may have a capitalization argument, but you need to document that judgment carefully.

Regulatory fees (IND application, FDA interactions): R&D, expensed as incurred.

Phase II: Efficacy Studies

Phase II is where the accrual complexity jumps. Average costs run between $7 million and $20 million. *4 You now have multiple sites, more patients, longer timelines, and CRO contracts that span multiple fiscal years.

The methodology question my colleague and I discussed becomes critical here. You have two main options, and the right one depends on your study structure:

Straight-line proration: Total contract costs spread evenly across expected trial duration, or broken down per patient per day. Simpler to administer, but less accurate when activity clusters in specific periods.

Milestone-based recognition: Expense tied to specific FDA or protocol milestones. More precise when the study structure drives costs to specific events rather than distributing them evenly. *5

A third approach, activity-based accrual, tracks specific cost drivers such as patient enrollment numbers, completed study visits, and activated sites. This is the most precise but requires real-time data from your clinical operations team, which means accounting and clinical ops need to be talking to each other regularly.

Whichever methodology you choose, consistency is not optional. Switching approaches between periods creates artificial expense volatility. Auditors notice it. Investors notice it during due diligence. If you need to change methodology, document the reason thoroughly before you make the switch.

The most common error I see at Phase II is booking CRO milestone payments when the invoice arrives rather than when the services were performed. If a $120,000 milestone is tied to study completion and the work was performed evenly over twelve months, you needed to record $10,000 per month, not $120,000 when the check clears.

Phase III: Pivotal Studies

Phase III is where the numbers get serious. Costs run from $11.5 million to over $100 million. *6 A typical Phase III trial involves a primary CRO, dozens to hundreds of investigator sites, central and specialty laboratories, drug manufacturers, and multiple consultants operating across multiple locations. *7

At this scale, clinical trial accruals are almost certainly identified as a Critical Audit Matter on your financial statements. That is not a penalty. It is a disclosure that your auditor is going to spend significant time here. You want your documentation in order before they start asking.

At Phase III, program-level cost tracking becomes essential. A single R&D line item on your income statement tells investors and acquirers very little during due diligence. What they want is the financial profile of each program: capital deployed, milestones achieved, and what additional investment is required to reach the next value inflection point. If you have to reconstruct that from scratch when a deal is on the table, you have already lost ground.

The R&D vs. G&A Split: Where Misclassification Happens

All clinical trial costs go into R&D. That part is clear. Where companies run into trouble is the R&D versus G&A classification for costs that touch the trial but are not purely scientific activity.

The common problem areas:

Regulatory affairs staff: Work on IND filings, clinical protocol submissions, or FDA interactions related to the active trial belongs in R&D. Building out compliance infrastructure for the company broadly edges toward G&A. You need time-tracking or activity logs to support the allocation.

Executive and founder time: Executives actively involved in trial design, FDA negotiations, or clinical decision-making have legitimate R&D time. Document it. Unallocated executive time landing in R&D without substantiation is a conversation your auditor will initiate.

Phase IV activities and post-approval studies: Investigator-initiated research, medical education grants, and pharmacovigilance functions all require judgment on classification. *8 The governing question is the scientific intent of the activity. Document it.

Facility and equipment costs: Lab equipment with a specific, non-repeatable use in a trial is R&D. Reusable equipment with alternative future use is an asset that should be capitalized and depreciated. The useful-life test is what matters.

The Accrual Discipline Auditors Look For

Accrual-based accounting requires recognizing expenses when services are performed, not when cash changes hands. For clinical trials, there is almost always a significant lag between when work is completed and when you see an invoice. March patient visits at an investigator site are March expenses, even if the site invoices in May and you pay in June.

Before your audit, you want to be able to show:

A documented accrual methodology applied consistently across periods, with a clear record of why you chose it for this study structure.

Supporting data from clinical operations: enrollment reports, visit logs, site activation records, tied to your monthly accrual estimates.

A reconciliation of accruals to actual invoices so auditors can trace the roll-forward.

A program-level cost tracker by phase, showing cumulative spend mapped to milestones.

The companies that get tripped up are the ones where accounting and clinical operations are not talking to each other. The accountants do not know what patient visits happened last month. The clinical team does not know why accounting needs that data. That gap is what makes accruals indefensible.

The Chart of Accounts Setup That Actually Works

When we onboard a clinical-stage biotech or MedTech company, one of the first things we look at is whether the chart of accounts gives us any visibility into program-level spend. A single R&D line tells you nothing useful. You need sub-accounts at minimum.

The structure I recommend for clinical-stage companies:

R&D: CRO Fees (tagged by program or protocol)

R&D: Investigator Site Grants

R&D: Clinical Drug Supply and Manufacturing

R&D: Lab and Analytical Services

R&D: Regulatory and Compliance

R&D: Data Management

R&D: Personnel (direct research staff)

R&D: Other Clinical Trial Costs

Each of those maps to a phase tag so you can pull program-level spend without rebuilding anything when due diligence hits. In Sage Intacct you can do this cleanly with dimensions. The goal is that when someone asks what Phase II has cost to date, you run a report. You do not reconstruct it from memory or go hunting through individual invoices.

Get This Right Before the Auditor Does

The clinical trial accounting questions are not complicated once you understand the framework. ASC 730 tells you to expense as incurred. The methodology question, straight-line versus milestone versus activity-based, depends on your study structure. The documentation question is just discipline: pick the approach, apply it consistently, and have the data from clinical operations to back it up.

If your trial accruals are not tied to actual clinical activity data right now, that is the first thing to fix. If your methodology has not been documented, that is this week’s work. If R&D and G&A are not clearly delineated with supporting evidence, start building that documentation trail now rather than when fieldwork starts.

Squeaky clean books on your clinical trial expenses are not just an audit convenience. They are what makes your investor narrative credible, your due diligence package defensible, and your next raise a cleaner conversation.

We work with pre-commercial biotech and healthcare companies on exactly this kind of infrastructure. Come ask questions.

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Sources

*1 ASC 730, Research and Development — FASB Accounting Standards Codification. https://asc.fasb.org/730

*2 G-Squared Partners: R&D Cost Accounting for Biotech Companies (March 2026). https://www.gsquaredcfo.com/blog/r-and-d-cost-accounting-for-biotech-companies

*3 Sofpromed: What Is the Actual Cost of a Clinical Trial? (December 2024). https://www.sofpromed.com/what-is-the-cost-of-a-clinical-trial

*4 Abacum: Trial Phase Costing — How much should Phase II cost? (July 2025). https://www.abacum.ai/blog/trial-phase-costing-benchmarks

*5 HW&Co: Navigating Clinical Trial Accruals: A Guide for Med Tech Finance Leaders (May 2025). https://www.hwcpa.com/clinical-trial-accruals-guide-for-finance/

*6 Abacum: Clinical Trial Costing: Phase-By-Phase Budget Guide. https://www.abacum.ai/blog/clinical-trial-costing

*7 G-Squared Partners: Clinical Trial Accounting 101 (October 2025). https://www.gsquaredcfo.com/blog/clinical-trial-accounting

*8 Embark: Accounting for Innovation — R&D Costs Explained (March 2026). https://blog.embarkwithus.com/research-and-development-accounting