The FASB eliminates incremental reporting requirements for DSEs and also amends the current consolidation guidance
On June 10, 2014, the FASB issued Accounting Standards Update (ASU) No. 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 the concept of a development stage entity (DSE) in its entirety from current accounting guidance. Amendments to the consolidation guidance may result in more DSEs being considered variable interest entities (VIEs).
Elimination of development stage entity reporting
A DSE is an entity devoting substantially all of its efforts to establishing a new business and for which either planned principal operations have not yet commenced or have commenced but there has been no significant revenues generated from that business. Under current guidance, DSEs are required to present inception-to-date financial information in their annual statements.
The new standard eliminates the concept of a DSE from U.S. GAAP. Therefore, the current incremental reporting requirements for a DSE, including inception-to-date information, will no longer apply.
The standard also clarifies that the disclosures in Topic 275, Risks and Uncertainties, apply to entities for which planned principal operations have not yet commenced.
Amendment to current consolidation guidance
Under current consolidation guidance, an entity could be a VIE for several reasons, including insufficient equity investment at risk to fund ongoing activities. The current guidance includes an exception for DSEs, in which a DSE with sufficient equity to finance its current activities (rather than its ongoing activities), is not deemed to be a VIE under this criterion.
The new standard eliminates the relief provided to DSEs when evaluating the sufficiency of equity at risk criterion. As a result, companies that invest in DSEs would need to consider whether a DSE has sufficient equity at risk to fund its current and ongoing activities. This will likely result in more entities being deemed to be VIEs.
If an entity is determined to be a VIE as a result of adopting the new standard, a primary beneficiary would need to be identified. This could result in a different consolidation conclusion than what was reached under the voting interest consolidation model. Additionally, the disclosures required under the VIE consolidation model differ from those required under the voting interest consolidation model. The VIE consolidation model requires disclosures not only by the reporting entity that consolidates the VIE, but also other reporting entities that have variable interests in the VIE.
The new guidance applies to all entities that previously met the definition of a DSE.
While the new standard provides relief to some preparers, others may be required to spend more time and effort on (1) performing the consolidation analysis under the more complex VIE model, (2) accumulating the information needed to meet the more extensive VIE disclosure requirements, (3) performing the required reassessments each reporting period, and (4) developing, documenting, and testing internal controls over the related processes.
The removal of the DSE reporting requirements (Topic 915) and clarification to the risks and uncertainties disclosure requirements (Topic 275) are effective for public business entities for annual reporting periods beginning after December 15, 2014, and interim periods therein. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2014, and interim reporting periods beginning after December 15, 2015. Retrospective application is required, except for the clarification of Topic 275, which should be applied prospectively.
The amendment to the consolidation guidance (Topic 810) is effective for public business entities for annual reporting periods beginning after December 15, 2015, and interim periods therein. For all other entities, the amendment is effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods beginning after December 15, 2017. The changes are to be applied to existing investments as of the date of adoption. Retrospective application is required.
Early adoption of the new standard is permitted.
We plan to issue an In depth publication in the near term focusing on how investors in DSEs may be impacted by the changes to the consolidation guidance.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams who have questions should contact the Business Combinations team in the National Professional Services Group (1-973-236-7801).