Financial Accounting Standards Board (FASB) officials said new guidance issued by board members on Tuesday will reduce the overall cost and complexity associated with financial reporting for development stage entities, without lessening the availability of relevant information.
The standard-setting board defines development stage entity as one that devotes substantially all of its efforts to establishing a new business and for which (a) planned principal operations have not commenced, or (b) planned principal operations have commenced but have produced no significant revenue.
Many startups or longstanding organizations that have not yet begun their principal operations or do not have significant revenue would be identified as development stage entities, the FASB noted.
Under current US Generally Accepted Accounting Principles (GAAP), development stage entities are required to present the same basic financial statements and apply the same recognition and measurement rules as established companies. In addition, US accounting rules require a development stage entity to present inception-to-date information about income statement line items, cash flows, and equity transactions.
However, stakeholders had expressed concerns to the FASB about the cost and limited relevance of the additional presentation and disclosure requirements.
In Accounting Standards Update No. 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, the FASB cut costs by removing the incremental reporting requirements, such as inception-to-date information, from GAAP for development stage entities, including the removal of Topic 915 from the FASB Accounting Standards Codification.
The updated guidance also adds an example disclosure in Risks and Uncertainties (Topic 275) to illustrate one way an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities.
In addition, it takes out an exception provided to development stage entities in Consolidations (Topic 810) for determining whether an entity is a variable interest entity, which could change the consolidation analysis, consolidation decision, and disclosure requirements for a company that has an interest in a company in the development stage.
FASB Chairman Russell Golden said the action taken by board members on Tuesday simplifies the accounting guidance and provides more opportunities for cost savings for preparers.
“The update should also help foster more consistent consolidation analyses and decisions among public and private development stage entities, thereby improving the relevance of information provided to users of financial statements,” he said in a written statement.
The presentation and disclosure requirements in Topic 915 will no longer be required for organizations in the first annual period beginning after December 15, 2014. The revised consolidation standards are effective for organizations defined as public business entities one year later, in annual periods beginning after December 15, 2015, and for other organizations two years later, in annual periods beginning after December 15, 2016. Early adoption is permitted for each.