On January 5, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The definition of a business impacts many areas of accounting, such as acquisitions, disposals, consolidations, and goodwill. This ASU affects all reporting organizations that must determine whether they have acquired or sold a business by providing a framework to weigh when a set of assets and activities actually constitutes a business. For publicly traded companies, the update takes effect for annual periods beginning after Dec. 15, 2017.
ASU No. 2017-01 provides a screen to determine when a set of assets and activities is not a business. When substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business.
To be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. Although outputs are not required for a set to be a business, they are generally considered to be a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs.
This standard will become testable on the CPA exam July 2018.
Stay tuned as we provide more updates from the FASB that may be eligible for testing on the CPA exam.
Susan J. Cox, M.Acc., CPA is a Senior Technical Editor for Surgent CPA Review. Susan received her graduate and undergraduate degrees from Florida State University. Prior to joining Surgent, Susan worked as a technical editor for Thomson Reuters, an accounting instructor for the University of South Florida, a senior internal auditor for GTE, and an experienced senior auditor for Arthur Andersen & Co.