December 1998 Issue



By John F. Burke, CPA, The CPA Journal

SOP 98-5, Reporting on the Costs of Start-Up Activities, is the second in a series of projects by the AICPA Accounting Standards Executive Committee (AcSEC) on reporting the costs of activities undertaken to create future economic benefits. The first was SOP 93-7, Reporting on Advertising Costs. The SOP covers all nongovernmental entities and applies to development-stage entities as well as established operating entities. It amends a number of SOPs and audit and accounting guides that address start-up costs.

Basic Accounting

The basic premise of the SOP is simple: All start-up costs should be expensed as incurred. These include organization costs, which were excluded from the definition in the exposure draft.

Despite the title of the SOP, there are no disclosure requirements. AcSEC considered requiring such disclosures, but decided the costs outweighed the benefits. This decision goes hand in hand with another decision that it is not necessary to develop boundaries for when the start-up period begins and ends.

What Is a Start-Up Activity?

While the accounting may be easy to understand, the major ponderable is the definition of start-up activity. AcSEC uses a broad definition of start-up activities based on that used in the 1973 FASB discussion memorandum, Accounting for Research and Development Costs. The SOP defines start-up costs as "those one time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, or commencing some new operation." Such costs go under different names, such as preopening costs, preoperating costs, organization costs, and start-up costs.

Costs relating to the following are specifically excluded from the scope of the SOP:

* Acquiring or constructing long-lived assets and getting them ready for their intended use

* Inventory

* Intangible assets

* Internally developed assets

* Research and development and those costs covered under SFAS No. 71, Accounting for the Effects of Certain Types of Regulation

* Fund raising incurred by not-for-profit organizations

* Capital raising

* Advertising

* Those incurred in connection with existing contracts under paragraph 75d of SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.

The costs of using long-lived assets, intangible assets, and internally developed assets that are allocated to start-up activities are within the scope of the SOP. Two footnotes to the SOP also exclude certain industry-specific costs covered in SFAS nos. 60 and 91, as well as those costs covered in EITF No. 97-13 relating to business process reengineering and information technology transformation. An appendix to the SOP contains three illustrations that provide examples of costs that would be included and excluded from the scope of the SOP.

Effective Date and Accounting for a Change in Accounting

The SOP is effective for financial statements for fiscal years beginning after December 15, 1998, with earlier application encouraged in fiscal years for which annual financial statements previously have not been issued.

Except for certain entities, initial application should be reported as the cumulative effect of a change in accounting as described in APB No. 20, Accounting Changes. Entities are not required to report the pro forma effects of retroactive application.

Entities excluded are those such as open-end mutual companies that report substantially all investments at market or fair value, issue and redeem shares, units, or ownership interests at net asset value and have sold their shares, units, or ownership interests to independent third parties before June 30, 1998. In a change from the exposure draft, such entities prospectively adopt the SOP. *

Douglas R. Carmichael,
Baruch College

John F. Burke, CPA
The CPA Journal

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