FASB voted Wednesday to propose changes designed to improve the relevance and reduce the complexity of development-stage entity financial reporting.
The board expects to issue an exposure draft (ED) by the end of October that would apply to public and private entities.
During a July 16 meeting, the Private Company Council (PCC) recommended that FASB add a project to its technical agenda that would help decrease the complexity of financial reporting for all organizations that are in the development stage.
According to FASB, a development-stage entity devotes substantially all its efforts to establishing a new business and:
- Has not begun planned principal operations; or
- Has begun planned principal operations without producing significant revenue.
“The recommendation of the PCC prompted us to look at ways of addressing this issue for the benefit of both private and public companies,” FASB Chairman Russell Golden said in a news release.
U.S. GAAP requires development-stage entities to present the same basic financial statements and apply the same recognition and measurement requirements as established operating organizations for revenues, start-up costs and other similar costs.
Development-stage entities also are required by U.S. GAAP to present inception-to-date information about income statement line items, cash flows, and equity transactions. The cost and lack of relevance of these additional presentation requirements has led to concerns among stakeholders.
Many development-stage entities have multiple products under development without ever intending to manufacture a product, according to FASB. These entities may sell their research and development to other businesses, which develop them for manufacture.
Development-stage entities fitting this description are most common in the pharmaceutical, biotechnology, and technology industries, according to FASB, and they often remain in the development stage for several years or on a permanent basis.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.