Project Update

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

Last updated on July 15, 2015.  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
*Decisions Reached at Last Meeting
*Tentative Board Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
Background Information
*Contact Information

Project Objective

This project is intended 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.

*Decisions Reached at Last Meeting (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.


*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.

Accounting for Partial Sales

The Board began deliberations of the project’s second phase—accounting for partial sales of a nonfinancial asset—and discussed ways to clarify certain accounting issues associated with accounting for partial sales of nonfinancial assets in the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets.

The Board decided that an entity should recognize a gain or loss on the partial sale of a nonfinancial asset (for example, when an entity sells a partial interest in a legal entity that holds only a nonfinancial asset) only if the seller does not consolidate the legal entity and the other criteria in paragraph 610-20-40-1 have been met.

Retained Interests

The Board decided that when an entity sells a part of a nonfinancial asset (for example, when an entity sells a partial interest in a legal entity that holds only a nonfinancial asset), any noncontrolling interest retained by the seller in the entity that holds the nonfinancial asset should be measured at carryover basis.

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.

For most recent decisions, see Decisions Reached at Last Meeting.


*Next Steps

The staff has begun drafting guidance in a proposed Accounting Standards Update on the basis of the tentative decisions reached by the Board.

*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.

*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.
*April 7, 2015 Board Meeting—The Board voted on certain issues related to partial sales of non-financial assets and retained interests.
*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

The amendments in FASB Accounting Standards Update No. 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary—A Scope Clarification, added a scope exception to Subtopic 810-10, Consolidation—Overall, for the deconsolidation/derecognition of sales of in substance real estate. EITF Issue No. 10-E, “Accounting for Deconsolidation of a Subsidiary That Is In Substance Real Estate,” highlighted a concern about in substance real estate in which there is an event or circumstance other than a sale in which an entity may be required to deconsolidate in substance real estate because the reporting entity has lost a controlling financial interest; however, that reporting entity may not be able to derecognize the in substance asset under the guidance in Subtopic 360-20, Property, Plant, and Equipment—Real Estate Sales. The amendments in FASB Accounting Standards Update No. 2011-10, Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—A Scope Clarification, codified the consensus in EITF Issue 10-E and resolved diversity in practice by clarifying that when a parent (reporting entity) ceases to have a controlling financial interest (as described in Subtopic 810-10) in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity shall apply the guidance in Subtopic 360-20 to determine whether it should derecognize the in substance real estate. Furthermore, on the basis of the feedback received, the Task Force recommended that the FASB add a project to its agenda to address lenders’ accounting in situations in which a borrower ceases to have a controlling financial interest in an in substance real estate entity because of a default on its nonrecourse debt. After considering the recommendation of the Task Force and the comments received on Update 2011-10, a research project was added to the Board’s agenda to explore the broader issue of determining when an entity that substantially consists of nonfinancial assets should be accounted for as an in substance asset or as an entity, with the results of the research project being considered in determining whether to add a standard-setting project to the Board’s agenda.

The staff’s research indicated that the accounting ramifications in applying asset-based guidance as compared to entity-based guidance could be significant and whether the transaction involves a business appears to be a key determinant of which accounting to apply. Therefore, although this project began as an asset versus entity project, the staff’s research indicated that the accounting question is mainly whether asset- or business-related guidance should apply. The staff’s research also indicated that the main reasons for the differential or, in some circumstances, the lack of accounting guidance that exists today include (a) the measurement and timing of recognizing gains or losses on sales of assets in which continuing involvement exists, especially partial sales, and (b) the measurement of any retained interests resulting from a sale of a partial interest in an asset. At its May 29, 2013, meeting, the Board discussed the results of the staff’s research and whether to add a standard-setting project to the Board’s agenda. 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.

*Contact Information

Nick Burgmeier
Practice Fellow
nburgmeier@fasb.org

Jennifer Hillenmeyer
Practice Fellow
jhillenmeyer@fasb.org

Christopher Brown
Postgraduate Technical Assistant
cjbrown@fasb.org