FASB clarifies the definition of a business

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Jan 05, 2017

On January 5, 2017, the US Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-01, "Clarifying the Definition of a Business", which provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

The ASU amends ASC 805 to “provide a more robust framework to use in determining when a set of assets and activities is a business.” In addition, the amendments “provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable.”

The ASU discusses its divergence with IFRS:

The definition of a business in GAAP is currently identical to the definition in IFRS. However, the Board observed that although the definition is identical, it does not appear to be interpreted or applied consistently in practice between jurisdictions that apply GAAP and jurisdictions that apply IFRS. That is, stakeholders have said that in jurisdictions that apply IFRS, the definition of a business generally is not applied as broadly as it is in jurisdictions that apply GAAP. In response to concerns from its stakeholders about the complexity of the definition of a business, the IASB added a project on the definition of a business to its agenda and issued an Exposure Draft, Definition of a Business and Accounting for Previously Held Interests, which proposes similar amendments to those in this Update.

Review the press release, ASU, and FASB in Focus newsletter on the FASB’s website.

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