By Jason Bramwell
The Financial Accounting Standards Board (FASB) on November 7 issued an exposure draft of a proposed accounting standards update that is intended to improve financial reporting about public and private development stage entities.
Individuals and organizations have until December 23 to review and provide comments on the exposure draft.
In Developmental Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, the FASB defines a 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."
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, according to the FASB.
The proposed accounting standards update of Topic 915 would eliminate the distinction of being a development stage entity – as well as its related disclosure requirements – within US GAAP.
In addition, the proposed amendments would eliminate the following four requirements of development stage entities:
- Present inception-to-date information on the statements of income, cash flows, and shareholder's equity.
- Label the financial statements as those of a development stage entity.
- Disclose a description of the development stage activities in which the entity is engaged.
- Disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage.
"Discussions with investors and other users of financial statements of development stage entities indicate that they do not find the inception-to-date information or the incremental disclosure requirements to be decision useful", the FASB stated in the exposure draft. "The proposed amendments would provide cost savings for preparers without reducing the relevance of information for users of financial statements."
Many development stage entities with multiple products under development do not intend to ever manufacturer 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.
"The proposal is the result of a PCC recommendation, but it could improve financial reporting for both public and private companies", FASB Chairman Russell Golden said in a written statement. "We encourage all of our stakeholders to review and provide feedback on our proposal."