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Start Up Cost – GAAP

Start up Cost – GAAP

Defines Start up Activities – Capitalize or Expenses

The American Institute of CPAs accounting standards executive committee (AcSEC), issued an exposure draft of a Statement of Position, Reporting on the Costs of Start-Up Activities.

The ED defines start-up activities broadly as “one-time activities related to opening a new facility, introducing a new product or service, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation.” AcSEC noted that entities currently use different terms, such as preopening and preoperating, to describe start-up activities and costs. The ED uses start-up to describe all those costs and activities.

Main Provisions

The ED requires that start-up costs be expensed as incurred. Although specific guidance already exists for construction contractors, federal government contractors, airlines and casinos, it all would be superseded by the proposed SOP.

AcSEC had considered whether start-up costs should be capitalized, given that entities undertake start-up activities expecting them to result in future benefits. However, the committee concluded the future economic benefits of start-up activities have indeterminate lives and, if those costs were capitalized, amortization periods would be arbitrary. Also, it had not heard a good answer to the question, “If these costs are capitalized, what exactly is the asset?”

The ED, which applies to all nongovernmental entities, would affect the accounting for start-up activities of entities in the development stage as well as those that are established operating entities, as defined by Financial Accounting Standards Board Statement no. 7, Accounting and Reporting by Development Stage Enterprises.

AcSEC believed the ED would reduce the current diversity in financial reporting. Currently, some entities capitalize costs while others expense as incurred. For years, AcSEC has heard complaints about inconsistencies in the financial reporting of start-up costs and about the lack of authoritative accounting guidance. In fact, the Securities and Exchange Commission staff has expressed concern periodically about the accounting for these costs.

The ED represents the next phase of AcSEC’s series of projects related to reporting on the costs of certain activities undertaken to create future economic benefits (for example, start-up, training, customer acquisition and other similar activities). The first phase resulted in the issuance of SOP 93-7, Reporting on Advertising Costs.

 

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2 thoughts on “Start Up Cost – GAAP”

  1. Today, I went to the beach with my children. I found a sea shell and gave it to my 4 year old daughter and said “You can hear the ocean if you put this to your ear.” She placed the shell to her ear and screamed. There was a hermit crab inside and it pinched her ear. She never wants to go back! LoL I know this is completely off topic but I had to tell someone!

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