FASB Interpretation No. 7

INTRODUCTION
The FASB has been asked to explain the applicability of FASB Statement No. 7,
«Accounting and Reporting by Development Stage Enterprises,» to an established operating
enterprise’s financial statements that include the financial statements of a development stage
subsidiary or other investee either by consolidation or by the equity method,1 in terms of the
following questions:
Must the effect of a change in accounting principle adopted in the separate financial
statements of a development stage subsidiary to conform to the provisions of Statement No.
be reflected in the consolidated financial statements of an established operating enterprise
that include the financial statements of that subsidiary?
If it is appropriate that the established operating enterprise’s consolidated financial
statements reflect the effect of its development stage subsidiary’s change to a new principle
of accounting adopted to conform to the provisions of Statement No. 7, how should the
effect of the change be reported in the established operating enterprise’s financial
statements?
Paragraph 10 of Statement No. 7 states:
Financial statements issued by a development stage enterprise shall present
financial position, changes in financial position, and results of operations in
conformity with the generally accepted accounting principles that apply to
established operating enterprises. . . . Generally accepted accounting principles
that apply to established operating enterprises shall govern the recognition of
revenue by a development stage enterprise and shall determine whether a cost
incurred by a development stage enterprise is to be charged to expense when
incurred or is to be capitalized or deferred. Accordingly, capitalization or deferral
of costs shall be subject to the same assessment of recoverability that would be
applicable in an established operating enterprise. For a development stage
subsidiary or other investee, the recoverability of costs shall be assessed within
the entity for which separate financial statements are being presented.

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