The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Update (“ASU 2017-1”) that clarifies the definition of a business under Accounting Standards Codification Topic 805, Business Combinations, and affects all companies and other reporting organizations that must determine whether they have acquired or sold a business.
The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The new standard is intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or of a business.
The amendments in ASU 2017-1 provide a more robust framework to use in determining when a set of assets and activities is a business. They also provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. Specifically, ASU 2017-1 provides a “screen” to determine when a set of assets and activities is not a business. The screen requires that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets and activities is not deemed a business. This screen reduces the number of transactions that need to be further evaluated. Under the ASU, if the screen is not met, the amendments: a) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output, and b) remove the evaluation of whether a market participant could replace missing elements. The ASU also provides a framework to assist entities in evaluating whether both an input and a substantive process are present.
According to FASB Chairman Russell Golden, “Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions.” Golden continued, “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”
For public companies, ASU 2017-1 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other companies and organizations, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early application of the ASU is allowed as follows:
- For transactions for which the acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance
- For transactions in which a subsidiary is de-consolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.
Details can be found at www.fasb.org/News&Media/InTheNews
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