FASB Votes to Eliminate Development Stage Entities

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Information about FASB Votes to Eliminate Development Stage Entities
Finance

Published on March 11, 2014

Author: MHMPC

Source: slideshare.net

Description

The Financial Accounting Standards Board (FASB) decided in a recent meeting to remove the guidance under Accounting Standards Codification Topic 915 (ASC 915) Development Stage Entities.

Background

Under existing U.S. Generally Accepted Accounting Principles (U.S. GAAP) a development stage entity is defined as an entity that is both: 1) devoting substantially all of its efforts to establishing a new business and 2) that has not commenced planned principal operations or that has begun principal operations, but has not had significant revenue from those operations.

The financial statements of an entity meeting the definition are required to disclose information about its status as a development stage entity and to present inception-to-date information for the statements of income, cash flows and equity.

our roots rundeepTM Mayer Hoffman McCann P.C. – An Independent CPA Firm A publication of the Professional Standards Group MHMMessenger © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. TM The Financial Accounting Standards Board (FASB) decided in a recent meeting to remove the guidance under Accounting Standards Codification Topic 915 (ASC 915) Development Stage Entities. Background Under existing U.S. Generally Accepted Accounting Principles (U.S. GAAP) a development stage entity is definedasanentitythatisboth:1)devotingsubstantially all of its efforts to establishing a new business and 2) that has not commenced planned principal operations or that has begun principal operations, but has not had significant revenue from those operations. The financial statements of an entity meeting the definition are required to disclose information about its status as a development stage entity and to present inception-to-date information for the statements of income, cash flows and equity. On November 7, 2013 the FASB issued Proposed Accounting Standards Update 2013-320 Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements. The proposed update requested comments on the removal of the definition of a development stage entity from U.S. GAAP. The FASB proposed the removal of March 2014 FASB Votes to Eliminate Development Stage Entities the development stage entity guidance because of concerns that the information provided was not useful for financial statement users and was too costly and complex to apply. This complexity and cost could often be seen in several industries, including the bio- tech industry, where the research period to develop a product may extend many years. For entities in such an industry it was possible to qualify as a development stage entity for five, or more, years and therefore to present five, or more, statements of income, cash flows and changes in equity. Presenting financial statements and disclosure for so many periods could cause significant costs in preparing and maintaining financial statements, obtaining an audit or changing audit firms. In addition, the users of those financial statements could find it difficult to understand the financial information provided because of the complexity of the financial statement presentation. Removal of Development Stage Entities After considering the generally favorable comments received on the proposed accounting standard, the FASB voted on February 26, 2014 to remove the development stage entity guidance. The FASB staff has been directed to prepare a final accounting standard updated (ASU). The removal will eliminate the requirements to prepare financial statements that include the statements of income, cash flows and changes in equity from the date of inception. In addition, disclosure about the status of the entity as a development stage entity will be eliminated.

© 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. MHMMessenger 2 The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report. Other Changes to U.S. GAAP Along with the removal of ASC 915, the vote impacted two additional areas of U.S. GAAP. First, the vote included a modification to ASC 275 Risks and Uncertainties that clarifies that an entity that has not begun operations is required to disclose additional information about risks and uncertainties. Secondly, the FASB voted to eliminate guidance in the variable interest entity (VIE) section of ASC Topic 810 Consolidation related to development stage entities. In existing U.S. GAAP, when a development stage entity is evaluated to determine if it has sufficient equity under ASC 810-10-15-14(a) a reporting entity made the evaluation based on whether the development stage entity could: 1) demonstrate that the equity invested in the development stage entity was sufficient to permit it to finance its current activities, and 2) whether the development stage entity’s governing and contractual arrangements allowed additional equity investments. With the removal of this guidance, reporting entities with investments in entities that formerly qualified as development stage entities will be required to follow the broader guidance related to ASC 810-10-15-14(a), which requires an assessment of whether the total equity at risk for the entity is sufficient to permit it to finance its activities without additional subordinated financial support. As a result there may be an increase in the determination that entities that formerly qualified as development stage entities are VIEs, and, likewise, an increase in disclosure or consolidation by investors in those entities. What to Watch For The FASB directed the staff to prepare a final ASU to be voted on by written ballot. The FASB staff has not indicated an expected timeline for the final ASU. It is expected that the removal of ASC 915 and modification to ASC 275 will be effective for periods beginning after December 15, 2014 and will permit early adoption, while the modificiation to the VIE consolidation model will be effective for periods beginning after December 15, 2015 for public companies or December 15, 2016 for private companies, with early adoption permitted for any financial statements not yet made available for issuance prior to the final ASU’s issuance date. For More Information MHM’s Professional Standards Group will continue to monitor progress on the issuance of the final ASU. If you have any specific questions, comments or concerns, please share them with Ernie Baugh or James Comito of MHM’s Professional Standards Group or your MHM service professional. You can reach Ernie at ebaugh@mhm-pc.com or 423.870.0511 and James at jcomito@cbiz.com or 858.795.2029.

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