FASB clarifies business definition

By Michael Cohn, AccountingToday

The Financial Accounting Standards Board has released guidance aimed at clarifying the official definition of a “business” for purposes of the accounting rules.

The new accounting standards update issued Thursday by FASB affects any company or other type of reporting organizations that needs to determine whether it has acquired or sold a business.

The definition of a business can have an impact on many areas of accounting, such as acquisitions, disposals, consolidations and goodwill. The new standard should provide more assistance to companies and other types of organizations in deciding whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in the update offer a framework accountants can use for weighing when a set of assets and activities actually constitutes a business. The changes come in response to demand from FASB constituents who asked for further clarification on the definition, especially in terms of how to account for acquisitions.

“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,” said FASB chairman Russell G. Golden in a statement. “The new standard addresses this by clarifying the definition of a business while reducing the cost and complexity of analyzing these transactions.”

For publicly traded companies, the update takes effect for annual periods beginning after Dec. 15, 2017, including interim periods within those annual periods. For all other companies and organizations, the update is effective for annual periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019.

The final accounting standards update, along with a FASB in Focus summary of the new guidance, is available at www.fasb.org.