Definition of a BusinessBy
In January, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU will help companies and other organizations decide if they should account for transactions as acquisitions (or disposals) of assets or businesses.
The FASB issued the ASU in response to feedback from stakeholders who felt that companies apply the definition of a business too broadly. Many transactions recorded as business acquisitions actually more resemble asset acquisitions. “The new standard addresses this,” FASB Chairman Russell G. Golden explained, “by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”
The FASB noted that the ASU’s amendments provide a better framework to determine when a set of assets and activities is a business and to apply the guidance more consistently. They also lower the costs of application and make the definition of a business more usable.
PwC Senior Manager John McKeever described the ASU as more than just a simple update. “The FASB has raised the bar on what qualifies as a business,” McKeever pointed out. “And this could have a pervasive impact on the accounting for acquisitions, dispositions, and even consolidations.”