Fortunato Company, which had operated successfully in a single location for many years, opened a branch operation in another city. The products sold by Fortunato in its home office required federal and state regulatory agency approval; the home office had secured such approval long ago. However, new approval of those agencies was required before Fortunato was authorized to produce and sell the same products at the new branch.

After the branch had been established and had begun testing its manufacturing equipment and considering development of possible new products other than those manufactured by the home office, management of Fortunato met to discuss accounting for operating costs of the new branch prior to its authorization to manufacture and sell products. Controller Robert Engle pointed out that when the home office had been established, it was a development stage enterprise prior to obtaining approval for production and sale of its products, with specialized financial statements display requirements provided by FASB Statement No. 7, Accounting and Reporting by Development Stage Enterprises. Engle added that Fortunato, as currently an operating enterprise, was not authorized to use such specialized requirements for the new branch. The vice president for legal affairs, Nancy Kubota, stated that the current regulatory agency environment was much stricter than it had been when Fortunatos home office obtained authorization for its production and sales, and that a several-month waiting period might be anticipated before approval of the branchs operations. Pending such approval, the branch could not legally even manufacture products for stockpiling in inventories.

Chief executive officer Michael Kantor expressed dismay at the prospect described by Kubota, stating that a long period of marking time at the branch, with no revenue available to cover operating costs, would generate substantial losses for Fortunato as a whole unless the costs could be deferred as start-up costs. Financial vice president Mary Sage asked Engle if there were any published financial accounting standards for start-up costs. Engle replied in the affirmative, pointing out that in 1998 the AICPAs Accounting Standards Executive Committee had issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, which mandated expensing of start-up costs. Sage then asked Engle if the marking time costs incurred by the branch prior to regulatory agency approval might be accounted for as deferred charges or intangible assets. Engle stated that he would answer that question after consulting accepted accounting definitions of assets, intangible assets, contingent assets, expenses, and losses.

Instructions

How should Robert Engle answer Mary Sages question? Solve Explain, after researching the foregoing definitions.