Project Update

Clarifying the Definition of a Business Phase 1 (Formerly Application of Asset- or Entity-Based Guidance to Nonfinancial Assets in an Entity)

Last updated on September 2, 2016.  Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Objective
Due Process Documents
*Decisions Reached at Last Meeting
Tentative Board Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information


Project Objective

The purpose of this project is to clarify 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.

Due Process Documents

On November 23, 2015, the Board issued the proposed Accounting Standards Update, Business Combinations (Topic 805): Clarifying the Definition of a Business.

*Decisions Reached at Last Meeting (AUGUST 24, 2016)

See meeting minutes below.

The Board continued its redeliberations of its proposed Accounting Standards Update, Business Combinations (Topic 805): Clarifying the Definition of a Business, and discussed the following topics:
  1. Threshold
  2. Substantive Processes
  3. Definition of Output
Threshold

The Board affirmed its decision to include the threshold as a practical screen. When applying the threshold, the set is not a business if substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If the threshold is not met, an entity would evaluate the rest of the implementation guidance to determine whether the set is the acquisition or disposition of a business or an asset or assets.

When applying the threshold, the Board clarified that:
  • A single identifiable asset includes any asset that could be recognized and measured as a single identifiable asset under Topic 805, Business Combinations, for financial reporting purposes with the following exceptions:
    • A tangible asset that is attached to and cannot be physically removed and used separately from other tangible assets (or intangible asset representing the right to use a tangible asset), without incurring significant cost, significant diminution in utility, or fair value to either asset
    • In-place lease intangible assets (including favorable or unfavorable lease assets and liabilities) and related real estate assets should be considered a single asset.
  • Deferred tax assets and the effects of deferred tax liabilities should be excluded from the gross assets acquired.
  • Identifiable assets within the same major asset class that have significantly different risk characteristics should not be considered similar assets.
Substantive Processes

The Board affirmed its decision that to be accounted for as a business, at a minimum, the set must include an input and a substantive process that together significantly contribute to the ability to create outputs.

The Board decided that when a set does not have outputs, a set would need to include employees that perform a substantive process.

The Board decided not to provide guidance on how to assess whether contracts for future goods or services entered into at the same time with the same counterparty are part of the set.

The Board affirmed its decision that the presence of more than an insignificant amount of goodwill is an indicator that the acquired set includes a substantive process.

Definition of Output

The Board affirmed its decision to define output as the result of inputs and processes applied to those inputs that provide goods or services to customers, other revenues, or investment income, such as dividends or interest.

Tentative Board Decisions Reached to Date

May 29, 2013

The Board decided to add a standard-setting project to clarify the definition of a business with the objective of addressing whether transactions involving in-substance nonfinancial assets (held directly or in a subsidiary) should be accounted for as acquisitions (or disposals) of nonfinancial assets or as acquisitions (or disposals) of businesses. The project will include clarifying the guidance for partial sales or transfers and the corresponding acquisition of partial interests in a nonfinancial asset or assets.

December 17, 2014

Processes

The Board decided that the staff should explore a threshold to be used in the definition of a business similar to the de minimis threshold in EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.” Issue 98-3 said that if all but a de minimis amount of the fair value of the transferred set of activities and assets was represented by a single tangible or identifiable intangible asset, that was an indicator that the transferred set was an asset rather than a business.

The Term Capable Of

The Board decided to retain the concept of capable of in the definition of a business. The Board decided to revise the definition of outputs to focus on goods and services to customers.

Market Participant

The Board decided not to explore changes to the concept of a market participant in the definition of a business.

Examples

The Board may explore adding examples to help with the interpretation of what is considered a business.

April 7, 2015

Definition of a Business

The staff updated the Board on progress made on the first phase of the project—clarifying the definition of a business—since the December 17, 2014 meeting. The Board made no technical decisions. The Board plans to continue deliberations on this project phase in May.

May 21, 2015

Substantive Processes

The Board decided to include a framework to determine whether a substantive process is included in a set of acquired assets and activities.

The Board decided that when a set does not have outputs (for example, an early stage company that has not generated revenues), in order to have a substantive process, the acquired set should include both of the following:
  1. An organized workforce that has the skills, knowledge, or experience necessary to complete one or more acquired processes that are critical to the ability to create outputs.
  2. Rights or access to inputs that are being or could be developed into goods or services that can be provided to customers.
The Board decided that if a set has outputs (for example, there is a continuation of revenues before and after the transaction), having outputs is not determinative on its own and an entity should exclude customer contracts, customer lists, leases, or other similar arrangements from the determination of whether the set has a substantive process. When the set has outputs, either of the following would indicate that the set includes a substantive process:
  1. The set includes an organized workforce that has the skills, knowledge, or experience necessary to complete one or more acquired processes that are critical to the ability to create outputs.
  2.  The acquired process (or group of acquired processes together) is unique, scarce, or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs
Market Participant’s Ability to Replace Missing Elements

The Board decided to remove the language in the current guidance that states that a business need not include all of the inputs and processes that the seller used in operating the business if market participants are capable of acquiring the business and continuing to produce outputs. This requirement is replaced by the framework that describes when a set has a substantive process.

Threshold

The Board decided that if substantially all the fair value of the gross assets acquired is concentrated in a single tangible or identifiable intangible asset (or group of similar tangible or identifiable intangible assets), the set is not a business. The Board directed the staff to develop indicators and examples to describe what constitutes similar assets.

July 9, 2015

The Board continued its deliberations, discussing transition.

The Board decided that an entity would apply the proposed guidance prospectively to any transactions that occur on or after the effective date.

The Board will not include a proposed effective date in the Exposure Draft.

The Board decided that an entity would not be required to provide the disclosures in paragraphs 250-10-50-1 through 50-3 or make any additional disclosures at transition.

The Board directed the staff to draft a proposed Accounting Standards Update for vote by written ballot, with a comment period of 60 days.

*Next Steps

The Board directed the staff to prepare a draft for external review. Given the interaction with the amendments in the proposed Update on Phase 2, the staff plans to redeliberate Phase 1 transition and effective date with the redeliberations of Phase 2 transition and effective date.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.


*August 24, 2016 Board Meeting —The Board redeliberated certain issues relating to the definition of a business.
July 27, 2016 Board Meeting —The Board did not make any decisions at this meeting.
September 23, 2015 Board Meeting—The Board discussed clarifying the definition of a business in a joint meeting with the IASB. No decisions were made.
July 9, 2015 Board Meeting—The Board voted on certain issues related to transition, and gave the staff permission to ballot.
May 21, 2015 Board Meeting—The Board voted on certain issues relating to the definition of a business.
December 17, 2014 Board Meeting—The Board voted on certain issues relating to the definition of a business.
October 8, 2014 Board Meeting—Non-decision-making meeting to provide an update on research performed and to get feedback from the Board on the direction of the project
May 29, 2013 Board Meeting—Added the project as a standard-setting project
November 30, 2011 Board Meeting—Agenda announcement

Background Information

Stakeholders have indicated that the definition of a business in Topic 805, Business Combinations, is applied too broadly, which results in many transactions that qualify as a business that to some seem more akin to asset acquisitions. In addition, stakeholders have said that analyzing transactions under the current definition can be difficult and costly. Those concerns about the definition of a business were among the primary issues raised in connection with the Post-Implementation Review Report on FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141(R)), which is now codified in Topic 805.

In addition to concerns about the broad application of the definition of a business, the scope of Subtopic 610-20, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets, which was created as part of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), excludes a set of activities and assets that is a business unless that business is deemed to be an in substance nonfinancial asset. Stakeholders also indicated that in certain cases it may be unclear when a set of activities and assets that meets the definition of a business is an in substance nonfinancial asset.

To address those concerns, the Board added a standard-setting project to its agenda at its May 29, 2013 meeting to clarify the definition of a business with the objective of adding guidance to assist entities in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or acquisitions (or disposals) of businesses. When the Board added the project, it anticipated clarifying the reference to in substance nonfinancial assets and the accounting for partial sales of nonfinancial assets. At its October 8, 2014 meeting, the Board decided to split the project into three phases:
  1. Phase 1: Clarify the definition of a business
  2. Phase 2: Address (a) the scope of Subtopic 610-20 and clarify the reference to in substance nonfinancial assets and (b) the guidance on partial sales or transfers of assets within the scope of Subtopic 610-20 and the corresponding accounting for retained interests in those assets.
  3. Phase 3: Discuss whether there are differences in the acquisition and derecognition guidance for assets and businesses that could be aligned.
The Board decided to approach this project in phases because of the interdependency of the Topics. For example, the definition of the business in Phase 1 affects the scope of Subtopic 610-20 in Phase 2. That is, the types of transactions that meet the definition of a business may provide insight to the Board on how to clarify the scope of Subtopic 610-20.

For information on Phase 2, please refer to the related project, Clarifying the Scope of Subtopic 610-20 and Accounting for Partial Sales of Nonfinancial Assets. A project update page will be created for Phase 3 when the Board begins initial deliberations.

*Contact Information

Adriana Yepes
Supervising Project Manager
ayepes@fasb.org

Chiara Gilioli
Assistant Project Manager
cgilioli@fasb.org

Kramer Holle
Postgraduate Technical Assistant
kkholle@fasb.org