ASC

ASC 720-15

Start-Up Costs

720 Other Expenses

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In brief

IntroductoryRecognitionInitial measurementNot-for-profit

ASC 720-15 governs the accounting for start-up activities — including one-time activities to open a new facility, introduce a new product or service, conduct business in a new territory or with a new class of customer, initiate a new process in an existing facility, or organize a new entity (organization costs). The single core rule is that costs of start-up activities, including organization costs, must be expensed as incurred (720-15-25-1). The Subtopic defines start-up activities by their nature rather than by the time period in which they occur, and carves out numerous costs governed by other GAAP.

Key points (7)
  • Costs of start-up activities, including organization costs, shall be expensed as incurred (720-15-25-1); no capitalization or deferral is permitted.
  • The Subtopic applies to all nongovernmental entities, including not-for-profit entities (720-15-15-1), and start-up activities are identified by the nature of the activity, not the time period in which it occurs (720-15-15-2).
  • Terms such as preopening costs, preoperating costs, and organization costs are all treated as start-up costs under this Subtopic (720-15-15-3).
  • Excluded from scope are, among others, ongoing customer acquisition and loan origination costs, merger/acquisition activities, business process reengineering (720-45), costs of acquiring or constructing long-lived assets, inventory costs, intangible asset acquisition costs, internally developed assets such as internal-use software, R&D under 730-10-15, regulatory costs under 980-10-15, NFP fundraising, capital-raising, advertising, and contract-related learning and acquisition costs under 340-40 (720-15-15-4).
  • Although the cost of acquiring long-lived, intangible, and internally developed assets is outside the scope, the cost of using those assets that is allocated to start-up activities (for example, depreciation of computers or amortization of a purchased patent) is within the scope and expensed (720-15-15-4(f), (h), (i)).
  • Excluded costs are not automatically capitalizable; they are capitalized only if they qualify under other GAAP (720-15-55-1).
  • Illustrative in-scope costs include feasibility study and consulting costs, employee recruiting and training, salary-related costs, post-construction security/property taxes/insurance/utilities, and nonrecurring operating losses (720-15-55-3, 55-6, 55-9).

For students. The rule itself is one sentence — expense start-up costs as incurred — so exam questions almost always test scope: distinguishing preopening/training/feasibility costs (expensed) from long-lived asset, inventory, software, and advertising costs (governed elsewhere). The common misunderstanding is assuming that anything excluded from 720-15 may be capitalized; 720-15-55-1 says such costs are capitalized only if other GAAP allows it.

start-up costsorganization costspreopening costsexpense as incurrednonrecurring operating lossesscope exceptionsnot-for-profit entitiesallocated depreciation and amortization

Machine-generated study aid for ASC 720-15. Check the source paragraphs below.

720-15-00Status

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720-15-00-1
The following table identifies the changes made to this Subtopic.
ParagraphActionAccounting Standards UpdateDate
ContractAddedAccounting Standards Update No. 2014-0905/28/2014
CustomerAddedAccounting Standards Update No. 2014-0905/28/2014
RevenueAddedAccounting Standards Update No. 2014-0905/28/2014
720-15-15-1AmendedAccounting Standards Update No. 2014-1006/10/2014
720-15-15-4AmendedAccounting Standards Update No. 2014-0905/28/2014
720-15-55-7AmendedAccounting Standards Update No. 2014-0905/28/2014

720-15-05Overview and Background

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720-15-05-1
This Subtopic provides guidance on the financial reporting of start-up and organization costs. This Subtopic defines start-up activities and provides Examples to help entities determine which costs fall within the scope and outside the scope of this Subtopic.

720-15-15Scope and Scope Exceptions

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Entities

Transactions

720-15-15-2
The guidance in this Subtopic applies to start-up activities. The definition of start-up activities is based on the nature of the activities and not the time period in which they occur. Start-up activities include activities related to organizing a new entity (commonly referred to as organization costs).
720-15-15-3
Various terms are used to refer to start-up costs, such as preopening costs, preoperating costs, and organization costs. For purposes of this Subtopic, these costs are referred to as start-up costs.
720-15-15-4
Certain costs that may be incurred in conjunction with start-up activities are outside the scope of this Subtopic. Such costs should be accounted for in accordance with other existing authoritative accounting literature. The guidance in this Subtopic does not apply to the following transactions and activities:
  1. a
    Ongoing customer acquisition costs, such as policy acquisition costs (see Subtopic 944-30)
  2. b
    Loan origination costs (see Subtopic 310-20)
  3. c
    Activities related to routine, ongoing efforts to refine, enrich, or otherwise improve upon the qualities of an existing product, service, process, or facility
  4. d
    Activities related to mergers or acquisitions
  5. e
    Business process reengineering and information technology transformation costs addressed in Subtopic 720-45
  6. f
    Costs of acquiring or constructing long-lived assets and getting them ready for their intended uses (however, the costs of using long-lived assets that are allocated to start-up activities [for example, depreciation of computers] are within the scope of this Subtopic)
  7. g
    Costs of acquiring or producing inventory
  8. h
    Costs of acquiring intangible assets (however, the costs of using intangible assets that are allocated to start-up activities [for example, amortization of a purchased patent] are within the scope of this Subtopic)
  9. i
    Costs related to internally developed assets (for example, internal-use computer software costs) (however, the costs of using those assets that are allocated to start-up activities are within the scope of this Subtopic)
  10. j
    Research and development costs that are within the scope of Section 730-10-15
  11. k
    Regulatory costs that are within the scope of Section 980-10-15
  12. l
    Costs of fundraising incurred by NFPs
  13. m
    Costs of raising capital
  14. n
    Costs of advertising
  15. o
    Learning or start-up costs incurred in connection with existing contracts with customers and in anticipation of follow-on or future contracts for the same goods or services (see Subtopic 340-40 on other assets and deferred costs).
  16. p
    Costs incurred in connection with acquiring a contract with a customer (see Subtopic 340-40).
720-15-15-5
Section 720-15-55 provides Examples of costs that are within the scope and outside the scope of this Subtopic.

720-15-25Recognition

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720-15-25-1
Costs of start-up activities, including organization costs, shall be expensed as incurred.

720-15-55Implementation Guidance and Illustrations

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Implementation Guidance

720-15-55-1
Accounting for certain costs incurred in conjunction with start-up activities are not covered by this Subtopic. An entity should not conclude that costs outside the scope of this Subtopic are to be capitalized. Such costs shall be capitalized if they qualify for capitalization under other generally accepted accounting principles (GAAP).

Illustrations

720-15-55-2
This Example illustrates application of the guidance in Section 720-15-15.
720-15-55-3
A major U.S. beverage entity begins construction of a new plant in China. This represents the entity's initial entry into the Chinese market. As part of the overall strategy, the entity plans to introduce into China, on a locally produced basis, its major U.S. beverage brands. The following costs that might be incurred in conjunction with start-up activities are subject to the provisions of this Subtopic:
  1. a
    Travel costs, employee salary-related costs, and consulting costs related to feasibility studies, accounting, legal, tax, and governmental affairs
  2. b
    Training of local employees related to production, maintenance, computer systems, engineering, finance, and operations
  3. c
    Recruiting, organization, and training related to establishing a distribution network
  4. d
    Nonrecurring operating losses
  5. e
    Depreciation, if any, of new computer data terminals and other communication devices.
720-15-55-4
The following costs that might be incurred in conjunction with start-up activities are outside the scope of this Subtopic:
  1. a
    Costs of long-lived asset additions, such as the new plant, production equipment, and packaging lines
  2. b
    Internal-use computer software systems development costs
  3. c
    Costs that are capitalizable as inventory
  4. d
    Deferred financing costs.
720-15-55-5
This Example illustrates application of the guidance in Section 720-15-15.
720-15-55-6
A retail chain is constructing and opening two new stores. One will open in a territory in which the entity already has three stores operating. The other will open in a territory new to the entity. (Costs related to both openings are treated the same for purposes of this Subtopic.) All of the stores provide the same products and services. The following costs that might be incurred in conjunction with start-up activities are subject to the provisions of this Subtopic:
  1. a
    Salary-related expenses for new employees
  2. b
    Salary-related expenses for the management store opening team
  3. c
    Training costs and meals for newly hired employees
  4. d
    Hotel charges, meals, and transportation for the opening team
  5. e
    Security, property taxes, insurance, and utilities costs incurred after construction is completed
  6. f
    Depreciation, if any, of new computer data terminals and other communication devices
  7. g
    Nonrecurring operating losses.
720-15-55-7
The following costs that might be incurred in conjunction with start-up activities are outside the scope of this Subtopic:
  1. a
    Store advertising costs
  2. b
    Coupon giveaways within the scope of Topic 606 on revenue from contracts with customers (see paragraphs
    606-10-32-25 through 32-27
    for guidance on consideration payable to a customer)
  3. c
    Costs of uniforms
  4. d
    Costs of furniture and cash registers
  5. e
    Costs to obtain licenses, if any
  6. f
    Security, property taxes, insurance, and utilities costs related to construction activities
  7. g
    Deferred financing costs (see Subtopic 835-30).
720-15-55-8
This Example illustrates application of the guidance in Section 720-15-15.
720-15-55-9
A not-for-profit entity (NFP) that provides meals to the homeless is opening a shelter to house the homeless. The entity will rent the facility. This will be its first shelter and it will conduct a fundraising campaign to raise money to start up the shelter. The entity will lease space for the shelter and will incur capital expenditures for leasehold improvements and furniture. The entity expects that it will require three months to set up the space for the shelter. The entity will hire a security firm to secure the premises during the three-month period in which the shelter is built. The following costs that might be incurred in conjunction with start-up activities are subject to the provisions of this Subtopic:
  1. a
    Employee salary-related costs related to needs and feasibility studies
  2. b
    Staff recruiting and training
  3. c
    Rent, security, insurance, and utilities
  4. d
    Consultant fees for developing policies and procedures for operating the shelter
  5. e
    Amortization and depreciation, if any, of leasehold improvements and furniture
  6. f
    Costs of social workers.
720-15-55-10
The following costs that might be incurred in conjunction with start-up activities are outside the scope of this Subtopic (see Subtopic 958-720):
  1. a
    Costs of fund-raising
  2. b
    Costs of leasehold improvements and furniture
  3. c
    Architect fees for the leasehold improvements
  4. d
    Advertising costs to publicize the shelter.

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