Proposed clarifications to definition of a business
FINANCIAL REPORTING INSIGHTS |
The definition of a business affects many areas of accounting, such as acquisitions, disposals, goodwill impairment and consolidation. However, many stakeholders believe that the current definition of a business in Accounting Standards Codification Topic 805, Business Combinations, is applied too broadly, requiring many transactions to be treated as businesses when they should be treated as assets. Under the current implementation guidance, there are three elements of a business — inputs, processes and outputs. While a set of assets and activities (collectively referred to as a “set”) that is a business usually will have outputs, outputs are not required to be present. In addition, all of the inputs and processes that a seller uses in operating a set are not required if market participants are capable of acquiring the set and continuing to produce outputs. Also, Topic 805 does not specify the minimum inputs and processes required for a set to meet the definition of a business.
To clarify the definition of a business, the Financial Accounting Standards Board has issued a proposed Accounting Standards Update (ASU), Business Combinations (Topic 805): Clarifying the Definition of a Business. The proposed amendments would require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs, and would remove the evaluation of whether a market participant could replace any missing elements. Among other amendments, the proposed ASU also would provide a framework to assist entities in evaluating whether both an input and a substantive process are present.
If finalized, the amendments in the proposed ASU would be applied prospectively to any transaction that occurs on or after the effective date. No disclosures would be required at transition. The FASB will determine the effective date and whether the proposed amendments may be applied before the effective date after it considers stakeholder feedback on the proposed amendments.
The proposed ASU is available for comment until January 22, 2016.