FASB update clarifies definition of a business

On Jan. 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.

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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.