Sep 12th 2013
By Jason Bramwell
The Financial Accounting Standards Board (FASB) voted on September 11 to approve issuing an exposure draft containing proposals for improving financial reporting about public and private development stage entities.
FASB is expected to issue the exposure draft by the end of October.
A development stage entity is one that devotes substantially all of its efforts to establishing a new business and for which (1) planned principal operations have not commenced, or (2) planned principal operations have commenced but have produced no significant revenue, according to the FASB.
Current US Generally Accepted Accounting Principles (GAAP) requires development stage entities to present the same basic financial statements and apply the same recognition and measurement requirements for revenues, start-up costs, and other similar costs incurred as required of established operating organizations. In addition, it requires development stage entities to present inception-to-date information about income statement line items, cash flows, and equity transactions.
Stakeholders have raised concerns to the FASB about the cost and relevance of these additional presentation requirements. Many development stage entities with multiple products under development do not intend to ever manufacture a single product but, rather, may periodically sell the research and development to another business.
Pharmaceutical, biotechnology, and technology industries are most likely to have long-term development stage entities affected by these requirements, and it is now common for many of these entities to remain in the development stage for several years or even in perpetuity, according to the FASB.
Based on the recommendation of the Private Company Council (PCC) at its meeting on July 16, 2013, the FASB added a project to its technical agenda to address financial reporting complexity for all organizations in the development stage.
"As part of our commitment to increase the relevance of financial reporting while reducing its cost and complexity, the FASB will issue an exposure draft aimed at improving reporting about development stage companies and organizations," FASB Chairman Russell Golden said in a written statement. "The recommendation of the PCC prompted us to look at ways of addressing this issue for the benefit of both private and public companies, and we encourage all of our stakeholders to review and provide feedback on the document when we issue it."
The Financial Accounting Foundation – the FASB's parent organization – created the PCC in May 2012 to work with the FASB to determine whether and when to modify US GAAP for private companies.