New Definition of a Business

ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business revised the definition of a business, which will reduce the number of transactions that are accounted for as “business combinations” versus “asset acquisitions”. The following are two very important changes:

2. If substantially all of the fair value of the group assets acquired is concentrated in a single identifiable asset (or group of similar identifiable assets), then the transferred assets and activities are not a “business”.
3. A business does not need to include all the inputs or processes that the seller previously used in operating a business. However, a “business” must include, at a minimum, an “input” and at least one “substantive process” that together significantly contribute to the “ability to create outputs”.

The overall evaluation of whether a set of assets is a “business” is performed from the perspective of a market participant.  How a seller operated the set of assets, or how the buyer intends to operate the set of assets, does not affect the analysis.

The impact of accounting for a transaction or event as a “business” combination versus an acquisition of “assets” or “group of assets” may include the following, among other impacts:

1. Business combinations recognize goodwill.
2. Acquisition costs are generally expensed as incurred in a business combination, while these costs are generally part of the cost in an asset acquisition.
3. In-process research and developments costs are capitalized in a business combination, while these costs are expensed in an asset acquisition.
4. Contingent consideration is recognized at fair value in a business combination at the acquisition date, while the consideration is recognized when resolved in an asset acquisition.

ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017, and interim periods within.  It is effective for all other entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.  Early application is only allowed if a transaction has not been already reported in financial statements issued or available to be issued.  The new standard is applied prospectively.