FASB changes definition of a business

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Video , PwC US Jan 19, 2017

The FASB recently updated the definition of a business, but this is more than just an update to the codification glossary. It raises the bar on what qualifies as a business and may have a pervasive impact on accounting for acquisitions, dispositions, and even consolidations. Watch John McKeever discuss the three key areas of change.

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Transcript

Hi, I’m John McKeever. The FASB recently updated the definition of a business.

But this is more than just an update to the codification glossary. The FASB has raised the bar on what qualifies as a business and this could have a pervasive impact on accounting for acquisitions, dispositions, and even consolidations.

The new guidance does three key things:

  • First, it adds an upfront screen. When substantially all the fair value is concentrated in an asset or similar assets, it’s not a business.
  • Second, the acquired integrated set of activities includes a minimum requirement of an input and a substantive process that together significantly contribute to the ability to create an output.
  • And third, when a set does not have outputs (for example, an early stage company that has not generated revenues), it must include employees that form an organized workforce and an input that the workforce could develop or convert, to outputs.

The changes will likely result in more transactions being accounted for as asset acquisitions, which do not result in goodwill. In addition, there are other differences, such as accounting for transaction costs.

While the FASB changed the definition of a business for financial reporting, the SEC’s definition remains the same for assessing the need for historical financial statements and pro forma information.

The standard is effective in 2018 for public company filings. However, it can be applied earlier, as long as the financial statements have not been issued.

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