Clarifying the Definition of a Business Phase 1

Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business


Overview


On January 5, 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The new guidance clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

To that end, the new guidance provides:
  1. A more robust framework to use in determining when a set of assets and activities is a business
  2. More consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.
Specifically, the new guidance:
  1. Provides a screen to determine when a set 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 is not a business.
  2. Requires that if the screen is not met, 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.
  3. Removes the evaluation of whether a market participant could replace missing elements of the set.
  4. Provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs.
  5. Narrows the definition of the term output so that it is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers.

Effective Dates


The new guidance is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the new guidance to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

The new guidance should be applied prospectively on or after the effective date. No disclosures are required at transition.

Early application of the new guidance is permitted as follows:
  1. For transactions for which the acquisition date occurs before the issuance date or the effective date of the new guidance, only when the transaction has not been reported in financial statements that have been issued or made available for issuance
  2. For transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the new guidance, only when the transaction has not been reported in financial statements that have been issued or made available for issuance.

What Organizations Are Affected by the New Guidance in The Update?


The new guidance affects all reporting organizations that must determine whether they have acquired or sold a business.

Additional Information

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