Development Stage Entities Removed from U.S. GAAP

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The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-10 Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which eliminates development stage entities from U.S. generally accepted accounting principles (U.S. GAAP).

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Development Stage Entities Removed from U.S. GAAP

  1. 1. our roots rundeepTM Mayer Hoffman McCann P.C. – An Independent CPA Firm A publication of the Professional Standards Group MHMMessenger © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. TM The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-10 Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, which eliminates development stage entities from U.S. generally accepted accounting principles (U.S. GAAP). Removal of Development Stage Entities The ASU removes the concept of development stage entities from U.S. GAAP and, therefore, entities that previously reported as development stage entities are expected to have reductions in costs for the preparation of financial statements. These savings are achieved by not being required to evaluate if an entity meets the definition of a development stage entity and by the removal of presentation and disclosure requirements, including: 1. to present inception-to-date information in the statements of income (operations), cash flows, and shareholders’ equity, 2. to label the financial statements as those of a development stage entity, June 2014 Development Stage Entities Removed from U.S. GAAP 3. to disclose a description of the development stage activities in which the entity is engaged and 4. to disclose in the first year in which the entity is no longer a development stage entity that it was previously a development stage entity. Disclosure of Risks and Uncertainties The ASU includes an update to Topic 275 Risks and Uncertainties that requires, when an entity has not begun principal operations, to include in its description of operations the activities that it is currently engaged in. Such an entity is also required to disclose risks and uncertainties related to those activities that it has engaged in and an understanding of what those activities are directed towards. Variable Interest Entities In existing U.S. GAAP, when a development stage entity is evaluated to determine if it has sufficient equity under ASC 810-10-15-14(a) a reporting entity made the evaluation based on whether the development stage entity could: 1) demonstrate that the equity invested in the development stage entity was sufficient to permit it to finance its current activities, and 2) whether the development stage entity’s governing and contractual arrangements allowed additional equity investments. This guidance is removed by ASU 2014-10, therefore reporting entities with investments in entities that formerly qualified as development stage entities will be required to follow the broader guidance related to ASC 810-10-15-14(a), which requires an assessment of whether the total equity at risk for the entity is
  2. 2. © 2 0 1 4 M ay e r H o f f m a n M c C a n n P. C . 877-887-1090 • www.mhmcpa.com • All rights reserved. MHMMessenger 2 The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM auditor to further discuss the impact on your audit or audit report. sufficient to permit it to finance its activities without additional subordinated financial support. As a result, many entities that formerly qualified as development stage entities may not be considered VIEs. If a former development stage entity is determined to be a VIE there will be an increase in required disclosure or consolidation by investors in those entities. Transition When adopted, the removal of requirements for development stage entities under Topic 915 Development Stage Entities is required to be applied retrospectively, while the additional disclosure requirements under Topic 275 Risks and Uncertainties are required prospectively. These two components of ASU2014-10areeffectiveforannualperiodsbeginning after December 15, 2014, and interim periods therein, for public business entities. For all other entities the effective date is annual periods beginning after December 15, 2014 and interim reporting periods beginning after December 15, 2015. The elimination of the development stage entity exception for determination of the sufficiency or equity at risk under Topic 810 Consolidation is applied retrospectively. Public business entities are required to adopt the guidance for annual reporting periods beginning after December 15, 2015, and interim periods therein, while the effective date for other entities is periods beginning after December 15, 2016 and interim periods beginning after December 15, 2017. Early adoption is permitted for each amendment by public business entities for any period for which financial statements have not yet been issued and for financial statements that have not yet been made available for issuance for all other entities. For More Information If you have any specific questions, comments or concerns, please share them with Ernie Baugh or James Comito of MHM’s Professional Standards Group or your MHM service professional. You can reach Ernie at ebaugh@mhm-pc.com or 423.870.0511 and James at jcomito@cbiz.com or 858.795.2029.

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