FASB clarified the definition of a business Thursday in an effort to help financial statement preparers evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The clarification is described in Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business.
“Stakeholders expressed concerns that the definition of a business is applied too broadly and that many transactions recorded as business acquisitions are, in fact, more akin to asset acquisitions,” FASB Chairman Russell Golden said in a news release. “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of these transactions.”
The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation. The new standard presents a new framework to use to determine whether a set of assets and activities is a business.
FASB designed the framework to provide for more consistent application, to lower the costs of application, and to make the definition of a business more operable.
The new standard affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. For public companies, the standard takes effect for annual periods beginning after Dec. 15, 2017, including interim periods within those periods. For all other companies and organizations, the standard takes effect for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.
—Ken Tysiac (firstname.lastname@example.org) is a JofA editorial director.