The FASB's new definition of a business - what you need to know

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The FASB's new definition of a business - what you need to know

The FASB's updated guidance on the definition of a business is now effective for public companies. It determines whether a transaction should be accounted for as a business combination or asset acquisition. Listeners will learn more about the new definition and the impacts - both direct and indirect - on various areas of accounting.

Show notes

Broadly speaking, when determining if an integrated set is a business (i.e., the set of activities and/or assets being evaluated when assessing whether that "set" is a business), the three elements of a business need to be considered: inputs, process, and outputs. The new guidance changed how many or how much of these elements are needed for a set to be considered a business.

The new guidance also adds a screen test. The screen test asks whether substantially all of the fair value of the set's gross assets acquired - is concentrated in a single asset - or group of similar assets. If that's the case, then the set is not a business. If substantially all of the fair value of the set's gross assets is not in a single asset or similar assets, then further evaluation is needed under the framework for identifying business. It is important to note that the screen test is not optional.

The new framework also specifies what a "substantive process" is, and provides different criteria to consider for sets with outputs and sets without outputs. In both cases, a workforce would generally be an indicator of a substantive process, and thus indicate that the set is a business.

There was a sense that under the old definition, too many acquisitions were determined to be businesses and the new guidance was intending to address this. So far, we are seeing more acquisitions being identified as asset acquisitions under the new guidance. There are quite a few differences between business combinations and asset acquisitions.

  • First, asset acquisitions follow a cost accumulation model, whereas business combinations recognize assets and liabilities at fair value.
  • Second, the accounting for contingent consideration is different.
  • The last difference relates to accounting for in-process research and development, or IPR&D.

To learn more about these differences, refer to Chapter 7 in our Business combinations guide.

Note that the asset acquisition guidance does not apply when an entity is initially consolidating a variable interest entity, or VIE, that is not a business. There is actually specific guidance on accounting for non-business VIE acquisitions and the accounting is different.

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Heather Horn

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David Schmid

International Accounting Leader, National Professional Services Group, PwC US

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