ASC 720-15: What Qualifies as a Start-Up Cost?

The Financial Accounting Standards Board (FASB) provides specific guidance on how companies must handle the costs associated with their initial phases. This guidance, found in Accounting Standards Codification (ASC) 720-15, establishes a uniform method for accounting for start-up expenditures. The standard provides a clear rule for how these costs should be treated on financial statements, ensuring all entities report these expenses consistently.

Defining Start-Up Activities

Start-up activities are narrowly defined under ASC 720-15 as one-time efforts related to specific initiating events. These events include organizing a new legal entity, opening a new facility, introducing a new product or service, or starting a new process. The scope is limited to costs incurred for these activities before the entity’s primary operations have begun.

The guidance focuses on the nature of the activity itself, not the period over which the costs are incurred. For example, costs associated with forming a corporation, such as legal and state filing fees, fall under this definition. Expenses for preparing a new retail location for its grand opening are also considered start-up activities.

This definition separates these initial expenditures from the ongoing costs of running a business. Activities such as training a new workforce for a new factory or conducting market analysis for a new product launch are included. Once the facility opens or the product is available for sale, the start-up phase for that endeavor is complete.

Costs Covered by the Standard

The guidance in ASC 720-15 applies to expenditures incurred during the formation and launch phases, often called pre-opening or pre-operating costs. Examples of costs that fall within the scope of this standard include:

• Salaries and wages of employees who are engaged in pre-opening activities
• Legal fees associated with drafting organizational documents
• Administrative tasks essential to organizing the new entity, such as establishing accounting systems
• Marketing and advertising costs to announce the opening of a new business or product

Costs Excluded from the Standard

Not every cost incurred during a company’s initial phase is a start-up cost under ASC 720-15, as the standard excludes expenditures addressed by other specific accounting rules. These excluded costs include:

• The cost of acquiring long-lived assets like property, plant, and equipment, which are capitalized under ASC 360.
• Costs of purchasing inventory for resale, which are capitalized under ASC 330 and recognized as cost of goods sold when sold.
• Costs related to research and development (R&D) activities, which are accounted for under ASC 730.
• Costs of acquiring intangible assets as part of a business combination, which are handled under ASC 805.
• Costs to obtain financing for a project, which are not start-up costs and are addressed by ASC 835.

Accounting Treatment and Disclosure

Once costs have been identified as start-up activities, the accounting treatment is mandatory. The standard requires that all start-up costs be recognized as expenses in the period they are incurred. This means these costs cannot be recorded as an asset on the balance sheet and amortized but must be charged against income immediately.

This approach simplifies the accounting process and promotes consistency across all reporting entities. It avoids the complexity and subjectivity that would be involved in determining an appropriate period over which to amortize such costs.

For financial statement disclosure, a company should disclose its accounting policy for start-up costs in the notes to the financial statements. If the amount of start-up costs is significant, the company should present this amount as a separate line item on the income statement or disclose the amount in the footnotes.