The Financial Accounting Standards Board has issued a proposed accounting standards update to improve financial reporting about public and private development stage entities.
The proposal came in response to recommendations of the Private Company Council at its July 16, 2013 meeting. FASB added a project to its technical agenda to address financial reporting complexity for all organizations in the development stage.
A development stage entity is one that devotes substantially all of its efforts to establishing a new business and for which either planned principal operations have not commenced, or planned principal operations have commenced but have produced no significant revenue.
Under current U.S. GAAP, development stage entities are required to present the same basic financial statements and apply the same recognition and measurement rules for revenues, startup costs, and other similar costs incurred as required of established operating organizations. In addition, the current accounting standards require development stage entities to present inception-to-date information about income statement line items, cash flows and equity transactions.
The proposed update would eliminate the distinction of being a development stage entity—as well as its related disclosure requirements—within U.S. GAAP. This would address stakeholder concerns about the cost and relevance of the additional presentation requirements specific to development stage entities. 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, FASB noted.
“The proposal is the result of a PCC recommendation, but it could improve financial reporting for both public and private companies,” said FASB chairman Russ Golden in a statement. “We encourage all of our stakeholders to review and provide feedback on our proposal.”
FASB is asking stakeholders provide their comments on the proposed update by Dec. 23, 2013.