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FASB Removes Guidance for Development Stage Entities

Issued recently by the Financial Accounting Standards Board (“FASB”), Accounting Standards Update No. 2014-10 (“ASU No 2014-10”), Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, eliminates from U.S. GAAP all required incremental financial reporting for development stage entities. Currently, a development stage entity is defined as an entity that gives all of its efforts to creating a new business in which planned principal operations have not begun, or have started but yet to generate any significant revenue. Per current U.S. GAAP standards, a development stage entity must apply the same general financial statements, and recognition and measurement rules as traditional companies do. However, there were additional reporting requirements including the requirement to present inception-to-date information on income statement line matters, cash flows and equity transactions.

In regards to ASU No. 2014-10, the new guidance:

(a) Adds an example disclosure in Topic 275, Risks and Uncertainties, to show how an entity that has yet to start its planned principal operations could offer details about any risks or uncertainties concerning the company’s present activities; and

(b) Removes an exception offered to development stage entities in Topic 810, Consolidation, for defining if an entity is considered a variable interest entity.

The portion of the ASU related to the inception to date information is effective date retrospectively for public business entities for annual reporting periods beginning after December 15, 2014 and interim periods therein. For all other entities, the inception to date portion is effective for annual reporting periods beginning after December 15, 2014 and interim reporting periods beginning after December 15, 2015. The clarification to Topic 275 should be applied prospectively.

The effective date for the elimination of the exception to the sufficiency-of-equity-at-risk criterion should be applied retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. All other entities should apply the sufficiency of equity at risk portion retrospectively for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017. Early adoption of the guidance is allowed.

For the development stage entity guidance news release or ASU No 2014-10 document, please visit the FASB’s website.

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