FASB Narrows the Definition of a Business

The Financial Accounting Standards Board (FASB or the Board) recently issued Business Combinations (Topic 805), Accounting Standards Update (ASU) 2017-01, Clarifying the Definition of a Business.  The guidance is intended to assist an entity with evaluating whether a transaction should be accounted for as an acquisition of an asset or that of a business. The definition of a business affects many areas:  acquisitions, disposals, goodwill, and consolidations. 

Because the existing guidance was considered to be applied too broadly — resulting in many transactions being recorded as business acquisitions — the new ASU provides clarifying parameters.  The new ASU is expected to result in more transactions being accounted for as asset acquisitions rather than business combinations. Determining whether to classify a transaction as an asset acquisition or a business acquisition is critical given that the accounting for each is significantly different.