Accounting & Auditing Blog

What You Need to Know about Accounting for Development Stage Entities

Life Science and Innovation entities should think about whether their business will be considered a Development Stage Entity (DSE).  DSEs have additional financial statement disclosure and reporting requirements that management, owners, investors, and third-party reviewers of DSEs should understand. 

According to Financial Accounting Standards Board (FASB), startup companies that are devoting substantially all of their efforts to creating a new business may be considered DSEs if either 1) the principal operations haven’t commenced yet OR 2) principal operations have commenced, but there has been no significant revenues generated.  A typical research and development entity that’s in the process of vetting a drug or product and has yet to commercialize would likely fall under this category. 

However, there could be exceptions to the rule depending on the entity’s long term goals, the makeup of the entity’s ownership and its circumstances.  It’s best to discuss this possibility with your accountant in the planning phases of a compilation, review or audit so there are no surprises.

Some of the additional financial statement disclosure and reporting requirements for DSEs include the following:

  • Balance Sheet

    • Cumulative net losses shall be disclosed with an appropriate caption
    • Example caption:  Deficit Accumulated During the Development Stage
  • Income Statement

    • Time period of the statement shall be from the entity’s inception and therefore shall show revenue and expenses for each period covered by the income statement and, in addition, cumulative amounts from the entity’s inception
    • Example:  If the financials are for the year ended December 31, 2012, but the entity started operations on April 1, 2009 then a column including the cumulative revenue and expense activity from April 1, 2009 through December 31, 2012 would need to be included in the statements
  • Statement of Shareholder Equity

    • Time period of the statement shall be from the entity’s inception
    • Example:  If the financials are for the year ended December 31, 2012, but the original investors of the entity contributed $1,000 in exchange for shares of the entity in May of 2009 this transaction would need to be disclosed in the statements
  • Statement of Cash Flows

    • Time period of the statement shall be from the entity’s inception and therefore shall show cash inflows and outflows for each period covered by the income statement and, in addition, cumulative amounts from the entity’s inception
    • Example:  If the financials are for the year ended December 31, 2012, but the entity started operations on April 1, 2009 then a column including the cumulative cash inflows and outflows from April 1, 2009 through December 31, 2012 would need to be included in the statements
  • Notes to Financial Statements

    • Description of the nature of the development stage activities in which the entity is engaged.
    • Example:  ABC Company is a development stage enterprise engaged in research and development activities to identify, develop, and commercialize a drug for therapeutic use.

As demonstrated above, DSEs require additional disclosures and reporting requirements in their financial statements that may create more work for those involved with the financial statement preparation, but the information can be a useful tool for evaluating the entity’s progress and financial condition.  Make sure you’re not surprised by these potential requirements by having open communications with your accounting and auditing firm. 

To learn more about Skoda Minotti's Life Sciences & Innovation Accounting services leave a message below, or contact Marilea Campomizzi at 440-449-6800.

 

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