Definition of a business - Summary of the comments received - Agenda paper 13

Background

This paper summarises the feedback received on the proposed amendments to the definition of a business included in the exposure draft ED/2016/1 Definition of a Business and Accounting for Previously Held Interests.

Summary of feedback received

Minimum requirements to be a business

Most respondents agreed with the proposed clarification that for a set of assets and activities to be a business, it must include, at a minimum, an input and a substantive process that together contribute to the ability to create outputs. A couple of respondents observed that it is not clear which inputs and processes should be acquired in order to constitute a business, and that the minimum elements of a business should be expanded to include non-readily available inputs that are required to contribute to the creation of outputs.

Market participant capable of replacing missing elements

Most respondents agreed with the proposal to remove the statement that a set of activities and assets is a business if market participants can replace the missing elements and continue to produce outputs.

Revised definition of output

Most respondents agreed with the proposal to narrow the definition of output to focus on goods and services provided to customers, investment income or other revenues. A few respondents asked for clarification of the term ‘other revenues’ as they believed that this term can be broadly interpreted thus giving rise to diversity in practice.

Assessment of concentration of fair value

Most respondents agreed with the proposal that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set of activities and assets acquired does not constitute a business.

Nevertheless, many respondents were concerned with the proposal to use the above assessment as a ‘screening test’, i.e. if the above condition is met, it would be inappropriate to assess further whether the acquired set of activities and assets is a business. These respondents were concerned that the screening tests may result in inappropriate conclusions in certain circumstances. Instead of characterising the assessment as a screening test, the respondents proposed changing it into an indicator, a rebuttable presumption, or an optional test.

In addition, some respondents requested further guidance on whether, and how, some assets (e.g. goodwill and deferred tax assets) and liabilities (e.g. deferred tax liabilities), as well as bargain purchase gains, should be considered in performing the proposed screening test, in terms of determining the fair value of the gross assets acquired.

Furthermore, some respondents requested additional guidance on determining when it is appropriate to combine assets into a single identifiable asset (e.g. acquisition of a leasehold land and a building attached to that land) and what would be considered ‘similar’ for the purposes of the proposed screening test.

Evaluating whether an acquired process is substantive

Many respondents expressed concerns or requested further clarifications on the proposed guidance on identifying a substantive process, including the guidance on acquired outsourcing agreements. They believed that the proposed assessment is complex and highly judgemental. They recommended that the Board simplify the proposed guidance or provide additional examples on how to apply it.

Illustrative examples

The respondents were generally supportive of these examples. Suggested improvements include alignment with the FASB’s examples, as well as re-drafting to help clarify the understandability and consistency of the examples.

Goodwill

Most respondents agreed with the proposal to specify that presence of an insignificant amount of goodwill does not mean that the acquired assets should automatically be considered a business.

A few respondents observed that the reference to the presence of goodwill as an indicator that an acquiree constitutes a business may not be consistent with the new guidance on substantive process. They believed that this test has limited conceptual merit. Since the determination of whether goodwill is present is performed after the determination of whether a transaction is a business, its use as an indicator that an acquiree is a business is circular. These respondents suggested clarifying this potential inconsistency, or deleting the presence of goodwill as a separate indicator.

Convergence with the FASB’s proposals

Most respondents recommended that the wording of the Board’s proposals be aligned with that of the FASB’s proposals to the extent that the two boards have reached converged conclusions.

Next steps

The Staff will provide an analysis of the comments received together with recommendations on how to proceed at a future meeting.