CPA & Business Advisory Blog

Small Business Classification: Possible Changes Affecting Development Stage Entities

Under current accounting standards, startup companies that are devoting substantially all of their efforts to creating a new business may be considered Development Stage Entities (DSE) if either 1) the principal operations haven’t commenced yet OR 2) principal operations have commenced, but there has been no significant revenues generated.  Once identified as such, DSEs have additional financial statement disclosure and reporting requirements, as discussed in my previous blog on August 27, 2012.  However, this reporting distinction may soon change as the Financial Accounting Standards Board (FASB) has issued a proposal to eliminate the DSE guidance. 

As reported by CCH Accounting Research Manager, “The proposed ASU (Accounting Standards Update) would eliminate the distinction of being a development stage entity, as well as its related disclosure requirements, within U.S. GAAP (Generally Accepted Accounting Principles). This would address stakeholder concerns about the cost and relevance of the additional presentation requirements specific to development stage entities.”

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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.

“The proposal is the result of a PCC (Private Company Council) recommendation, but it could improve financial reporting for both public and private companies,” noted FASB Chairman Russ Golden. “We encourage all of our stakeholders to review and provide feedback on our proposal.”

If these reporting requirements currently affect the complexity of your filing requirements or you are a financial statement user who values the additional disclosures currently required under GAAP, it is important to share your opinion on the proposed regulation changes.  Click here for the complete Exposure Draft on the proposed ASU;  send comments to xbrled@fasb.org

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