The Financial Accounting Standards Board (FASB) is drafting an Accounting Standards Update (ASU) which would eliminate the concept of a development stage entity along with the special disclosures required for such entities under accounting principles generally accepted in the United States of America (U.S. GAAP). The final ASU is expected to be voted on by written ballot later this year.
Entities Affected by the Update
The FASB defines a development stage entity (DSE) as an entity devoting substantially all of its efforts to establishing a new business and for which: (a) planned principal operations have not commenced; or (b) planned principal operations have commenced, but do not generate significant revenue.
The proposal will significantly impact all entities meeting the FASB definition as well as companies that have investments in DSEs.
Current Disclosure Requirements and Proposed Changes
Currently, DSEs are required to disclose in their financial statements the status of the development stage entity along with the description of the development stage activities and cumulative quantitative inception-to-date information on the statements of income, cash flows, and shareholders' equity.
The FASB update aims to eliminate the cost and complexity associated with providing the required inception-to-date information, which many believe does not yield significant benefits to financial statements users.
Variable Interest Entity (VIE) Considerations
Along with the removal of a development stage entity concept, the Board has voted to eliminate the guidance on variable interest entities that referred to DSEs. Currently, a DSE that meets certain conditions and has enough funds to operate until meeting its key milestone does not have to be consolidated. With the removal of a relief for DSEs, the preparers of financial statements will have to apply general VIE guidance to DSEs. Among other factors, the guidance requires the preparer to assess whether the entity has sufficient funds in order to operate without additional support. As a result of the amendment, some former DSEs which had enough funds to operate, but only until meeting certain milestones, would no longer be exempt from VIE considerations.
As a consequence of the amendment, a more thorough VIE analysis is required by investors and preparers, as many former DSEs would now have to be consolidated under the updated VIE guidance.
Comparability with International Financial Reporting Standards (IFRS)
The amendment will reduce existing differences between U.S. GAAP and IFRS, as IFRS does not recognize the concept of a development stage entity or require separate disclosures related to DSEs.
Status and the Effective Date
Changes related to inception-to-date information and the related disclosure requirements are expected to be effective for interim and annual reporting periods beginning after December 15, 2014 for public entities. Early adoption is also expected to be allowed as of the first annual or interim period after the issuance of the final Accounting Standards Update.
Changes related to the elimination of guidance concerning the assessment of a VIE that is also a DSE are expected to be effective for interim and annual reporting periods beginning after December 15, 2015 for public entities. Early application is also expected to be permitted for any annual or interim period for which the entity's financial statements have not yet been issued.
The latest updates on the status of the amendment and the draft of the Proposed Accounting Standards Update are available on the FASB's website at www.fasb.org.
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