FASB to Eliminate Special Accounting Rules for Development Stage Entities

by Morgan Lewis
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The FASB decided in February to direct the FASB staff to draft a final Accounting Standards Update that will eliminate the special accounting treatment for development stage entities. The final update is scheduled to be issued in the second quarter of 2014.

The proposed FASB Accounting Standards Update was issued in November 2013 in response to a Private Company Council (PCC) recommendation that development stage entities not be required to provide the inception-to-date income statement and certain other required GAAP disclosures for development stage entities. The elimination of the special accounting treatment means that there will be no accounting or reporting differences between development stage entities and other operating entities. In addition to affecting development stage entities, the proposed update, when adopted, will simplify the consolidation analysis by an entity that owns an interest in the development stage entity by eliminating the requirement to always consider whether the development stage entity is a variable interest entity.

Under present GAAP, a development stage entity is a company or organization that devotes substantially all of its efforts to establishing a new business. In a development stage entity, planned principal operations have not started or, if they have started, have produced no significant revenue. Currently, in addition to presenting all of the basic financial statements required of operating companies, development stage entities also must present inception-to-date information about income statement line items, cash flows, and equity transactions.

The PCC is an organization created in 2012 by the Financial Accounting Foundation’s board of trustees to examine whether private companies should have different accounting standards. The fact that the PCC’s recommendation related to both private and public companies and that its recommendation will likely result in a final Accounting Standards Update shows the influence that the PCC has on FASB rulemaking.

For additional information on PCC developments, read our January 17 post and March 14 post.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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