Proposal to expense start-up costs.

Many CPAs have searched for broad authoritative guidance on the financial accounting of start-up costs. Except for those in a few specialized industries, noted below, most have been unable to find such guidance because there is none. The American Institute of CPAs accounting standards executive committee (AcSEC), looking to fill the gap, 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already exists for construction contractors, federal government contractors, airlines and casinos, it all would be superseded by the proposed SOP.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.

Tax issue

Organization costs are excluded from the ED's scope. However, AcSEC's definition of organization costs is narrower than that contained in the tax code. The SOP could thus lead to temporary tax differences related to costs technically outside the document's scope. Most FASB members would have preferred the ED to include organization costs in the scope and that those costs also would be expensed as incurred. However, they cleared the document anyway.

AcSEC invites opinions on these and other issues identified in the document. One free copy of the ED (product no. 800113JA) may be ordered from the AICPA order department at 800-862-4272. It is also on the AICPA Web site (http://www. aicpa.org) in the accounting standards area. Comments are due by July 22.

--Charles L. McDonald, chairman of the start-up costs task force, and Daniel J. Noll, technical manager, AICPA accounting standards