Upcoming Changes in Accounting for Development Stage Entities

The Financial Accounting Standards Board (FASB) has recently issued Accounting Standards Update (ASU) No. 2014-10: Development Stage Entities (Topic 915) with a focus on improving financial reporting for development stage entities by reducing the cost and complexity associated with existing incremental reporting requirements.

The amendments contained in this ASU will impact entities that are currently classified as development stage entities under U.S. Generally Accepted Accounting Principles (GAAP) and may affect the consolidation decisions of entities that have an ownership interest in a development stage entity. A development stage entity is currently defined in the Master Glossary of the Accounting Standards Codification as: “An entity devoting substantially all of its efforts to establishing a new business and for which either of the following conditions exists:

  • Planned principal operations have not commenced.
  • Planned principal operations have commenced, but there has been no significant revenue therefrom.”

The ASU removes the definition of a development stage entity from the Master Glossary, which effectively eliminates the financial reporting distinction that currently exists between development stage entities and other reporting entities. Entities currently classified as development stage entities will no longer be required to present inception-to-date information in the statements of income, cash flows, and shareholders’ equity. In addition, they will no longer have to label their financial statements as those of a development stage entity, disclose a description of the development stage activities in which they are actively engaged, or disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been a development stage entity. These changes are expected to reduce the cost and complexity associated with providing this information, allowing the entity to devote more of its efforts and resources to establishing its business.

The ASU also clarifies that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not yet commenced planned principal operations. This clarification will improve the relevance of information provided to users of the financial statements in cases in which an entity did not previously adhere to requirements for those disclosures.

Finally, the amendments eliminate the exception to the sufficiency of the equity-at-risk criterion in Topic 810, Consolidation, which currently exists for development stage entities. This elimination will require all reporting entities that have an interest in a development stage entity to apply consistent guidance for all transactions that are economically the same or similar. The same guidance will be applied when determining whether an entity is a variable interest entity and whether the variable interest entity should be consolidated, regardless of whether the entity has commenced planned principal operations or has significant revenue from its principal operations. This application will provide for more consistent consolidation analyses and decisions among reporting entities, improving the relevance of information provided to users of financial statements. However, it may change the consolidation decision and the disclosure requirements for entities that have an interest in an entity currently classified as development stage.

The amendments related to the elimination of inception-to-date information and other remaining disclosure requirements of Topic 915 should be applied retrospectively except for the clarification of Topic 275, which shall be applied prospectively. For public business entities, these amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. For other entities, the amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015.

The amendments eliminating the exception to the sufficiency of equity-at-risk criterion for development stage entities in Topic 810 should be applied by public business entities retrospectively for annual reporting periods beginning after December 15, 2015, and interim periods therein. For all other entities, these amendments should be applied retrospectively for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017.

Early adoption of each of the amendments is permitted for public business entities for any annual reporting period or interim period in which the entities’ financial statements have not been issued. Other entities are permitted to early adopt for any period in which the financial statements have not been made available for issuance.

If your organization has questions about this recently issued FASB ASU regarding development stage entities, contact the expert listed below at PYA, (800) 270-9629.


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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