These companies usually engage in activities such as raising capital, research and development, exploring for revenue streams, as well as many others. A development stage entity has not reached its fullest, mature stage of sustainable business yet and still has many risks involved with its operations.
Developing vs. Operating Entities under ASC 915
It is important to note that despite the inherent differences in developing entities and those that are in operation, GAAP requires that the two be treated very similarly. A developing entity must still prepare GAAP financial statements, and the standard actually sets out to say that they cannot use special measurements of their choosing just because they are in the development stage. The fact that the readers of the financials are aware that they are developing is enough, and they must hold up to that scrutiny of financial markets.
Disclosures under ASC 915
While a developing company must adhere to full GAAP standards, it is important to note that they are required to provide additional disclosures, on top of those that are required from companies which are in full operation, to the readers of the financial statements. This is ultimately to ensure the appropriate information regarding what stage of development the entity is in, so that the investor can understand the applicable risks involved.
The notes must disclose that the entity is in the developing stages, and not a fully operational entity yet, as well as the nature of those parts of the business which are currently under development. The statement of financial position (aka balance sheet) also should break out the cumulative loss since the inception of the company. The income statement should show the current profit or loss, as well as cumulative losses since the inception of entity. The statement of cash flows also needs to list the current and since inception cumulative flows. Additionally, the statement of equity should list each stock issuance made, including the date, number of shares, and whether cash was received or there was other consideration made instead.
Disclosure when Becoming a Fully Operational Entity
Once the company is no longer in the development stages, it should continue to disclose within the equity the information related to the prior period development stage equity. This need only be done in the first year of the company, as well as any years in which comparative financial statements are presented.
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