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On January 5, 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU seeks to clarify the current definition of a business to provide guidance for the evaluation of whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses. In June 2016, the International Accounting Standards Board (IASB) issued an Exposure Draft titled
Definition of a Business and Accounting for Previously Held Interests which proposes similar amendments to those in this ASU.
Concerns with the Current United States Generally Accepted Accounting Principles’ Guidance
Topic 805 currently outlines three elements of a business – inputs, processes, and outputs. However, the current definition has contributed to broad interpretations of what constitutes a business because:
Impact of the ASU
The ASU introduces a ‘screening’ test to determine when a set is not a business, thus, generally reducing the need for further evaluation of transactions. More specifically, 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.
If the screening test is not met, then:
The ASU provides two sets of criteria to assist in evaluating whether both an input and a substantive process are present, dependent on whether the set also has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business. Thus, the ASU introduces more stringent criteria for a set without outputs.
The ASU also narrows the definition of the term ‘output’ so that it is consistent with how it is described in Topic 606
Revenue from Contracts with Customers. Namely, outputs are the result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.
Effective Date and Transition
The amendments are effective as follows:
The amendments should be applied prospectively on or after the effective date. No disclosures are required at transition.
Earlier adoption is allowed for the following transactions when they have not been reported in financial statements that have been issued or made available for issuance:
To access the full script of ASU No. 2017-01, click
This communication contains a general overview of the topic and is current as of January 5, 2017. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2017. All rights reserved.
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