With its first Accounting Standards Update of 2017 (ASU 2017-01), the FASB revised the definition of a business under U.S. GAAP. This update was issued to provide more clarity to entities in determining whether transactions should be classified as an acquisition (or disposal) of assets or businesses. Stakeholders had communicated to the FASB that the existing definition of a business was being applied too broadly, resulting in many transactions being treated as business acquisitions when the stakeholders felt that the transactions were more akin to asset acquisitions. This resulted in additional costs to the entities as the accounting requirements related to purchasing and selling a business are more complicated than the accounting requirements related to purchasing or selling an asset or group of assets.
The new guidance provides a screen that is used to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. The screen requires that when substantially all of 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 is not a business. Sets that pass through this screen required additional assessment to determine whether the set is a business. Under the new guidance, in order 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. The new guidance also provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU also provide multiple illustrative examples of the application of the amendments in determining whether a set constitutes a business.
While the amendments under this update are not applicable to nonpublic entities until annual periods beginning after December 15, 2018, early adoption is allowed for transactions in which the acquisition date occurs in a period for which financial statements have not been issued or made available for issuance. Entities may want to consider whether to early adopt and apply the amendments to any future acquisitions as the amendments narrow the scope of sets that constitute a business. Being able to determine that a set does not constitute a business will bring tremendous cost savings (and less accounting headache) as the complicated accounting requirements associated with business combinations will not be required.
Jonathan Poppel, CPA