A year ago, the AICPA's AcSEC published a draft of an SOP designed to provide authoritative guidance in an area where there had been none for most entities: start-up costs. That ED became SOP 98-5, Reporting on the Costs of Start-Up Activities , but AcSEC made some important changes along the way, as noted by AICPA Technical Manager Daniel J. Noll.
The SOP now covers the accounting for organization costs—the costs for activities related to organizing a new entity—and decrees they should be expensed as incurred, just like other start-up costs. The ED had specifically excluded them, "but in the end, AcSEC could not justify their exclusion," said Noll. AcSEC would have needed to clearly distinguish start-up from organization costs. By excluding organization costs, according to Noll, AcSEC had hoped to avoid generating extra bookkeeping work by creating temporary differences between tax returns for organization costs and book entries. Nevertheless, AcSEC realized that its definition of organization costs would have differed from the IRS's anyway, so a temporary difference was unavoidable even if these costs had been excluded.
The statement requires entities to expense previous capitalized costs in the year of adopting the SOP, as did the ED. However, the SOP now grants exemptions to certain investment companies, which will apply the SOP prospectively. "AcSEC noted that investors in certain funds would be unfairly harmed if previously capitalized costs were required to be expensed immediately, leading to an immediate decrease in net asset value per share," said Noll.
AcSEC also postponed the entire statement for one year, making it effective for financial statements for fiscal years beginning after December 15, 1998, rather than 1997. Noll said AcSEC wanted to give companies more time to consider implementation issues.
To order a copy of SOP 98-5, call the AICPA at 800-862-4272.