FASB Clarifies What Exactly a Business Is
released a new update
To meet this minimum definition, the organized workforce must have the necessary skills, knowledge or experience to perform an acquired process or group of processes that, when applied to another acquired input or inputs, is critical to the ability to develop or convert those inputs into outputs. If the process is considered ancillary or minor in the context of all the processes required to create putouts, then it is not considered critical. Inputs, meanwhile, include intellectual property that could be used to develop a good or service, resources that could be developed to create outputs, or access to necessary materials or rights enabling the creation of future outputs. So for example, according to the FASB, things like technology, mineral interests, real estate and in-process research and development.
Under this definition, an output is still not strictly required under the definition. If a set does include an output, inputs and substantive processes can also include an acquired contract that provides access to an organized workforce, an acquired process or processes when applied to an acquired input contributes to the ability to continue producing outputs and either cannot be replaced without significant cost, effort or delay or significantly contributes to the ability to continue producing outputs and is considered unique or scarce.
The new standard also clarifies that even if a set has outputs, continuation of revenues does not, in its self, indicate that both an input and a substantive process have been acquired, and so contractual arrangements that provide for the continuation of revenues should be excluded from the analysis as to whether a process has been acquired.
“Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions,” stated FASB Chairman Russell G. Golden. “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”
For public companies, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other companies and organizations, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Under this definition, an output is still not strictly required under the definition. If a set does include an output, inputs and substantive processes can also include an acquired contract that provides access to an organized workforce, an acquired process or processes when applied to an acquired input contributes to the ability to continue producing outputs and either cannot be replaced without significant cost, effort or delay or significantly contributes to the ability to continue producing outputs and is considered unique or scarce.
The new standard also clarifies that even if a set has outputs, continuation of revenues does not, in its self, indicate that both an input and a substantive process have been acquired, and so contractual arrangements that provide for the continuation of revenues should be excluded from the analysis as to whether a process has been acquired.
“Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions,” stated FASB Chairman Russell G. Golden. “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”
For public companies, the ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. For all other companies and organizations, the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.