FASB Proposes Simplification in Financial Reporting for Development Stage Organizations

A new proposed accounting standards update was issued by the Financial Accounting Standards Board (FASB). The proposal aims to improve the financial reporting of public and private development stage organizations. The proposal is a result of response to recommendations provided by the Private Company Council (PCC). After the recommendations of the Private Company Council, the FASB included in its technical agenda the project to address the financial complexities faced by the entities in the development stage.

A development stage entity is defined as an entity that substantially devotes all of its efforts to establish a new business and for which either planned primary operations have not yet commenced or primary operations have commenced but have not generated material amount of revenue.

Currently the US Generally Accepted Accounting Principles (GAAPs) require the development stage organizations to present the same basic financial statements and apply the same recognition and measurement rules for revenues, startup and other similar costs incurred as required of fully established and operating entities. Furthermore, the development stage entities are required by the GAAPs to present inception-to-date information about the cash flows, equity transactions and income statement line items.

The proposed update will remove the distinction of being development stage organization and along with the disclosures requirements will also be removed. This expected to reduce the concerns of the stakeholders about the cost and relevance of additional presentation requirements specific to development stage companies.

A large number of development stage organizations never intend to manufacture their products. Instead of manufacturing they intend to sell the research and development to some other business and stay development stage entity for several years or even in perpetuity. Common examples of such organizations include organizations belonging to biotechnology, pharmaceutical and technology industries.

Russ Golden, the chairman of the FASB stated that "The proposal is the result of a PCC recommendation, but it could improve financial reporting for both public and private companies. We encourage all of our stakeholders to review and provide feedback on our proposal.”