Definition of a business

Date recorded:

Summary of the comments received — Agenda paper 13


This paper summarised 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 was 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 were 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 would be a business if market participants could 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 could 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 was concentrated in a single identifiable asset or group of similar identifiable assets, the set of activities and assets acquired would 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 was met, it would be inappropriate to assess further whether the acquired set of activities and assets was a business. These respondents were concerned that the screening tests might 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 would be 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 was 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 included alignment with the FASB’s examples, as well as re-drafting to help clarify the understandability and consistency of the examples.


Most respondents agreed with the proposal to specify that presence of an insignificant amount of goodwill did 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 constituted a business might not be consistent with the new guidance on substantive process. They believed that this test had limited conceptual merit. Since the determination of whether goodwill was present was performed after the determination of whether a transaction was a business, its use as an indicator that an acquiree was a business would be 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 had 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.


There was not much discussion in this session.

One Board member asked the Staff to consider whether it was a communication issue that led to what she perceived to be ‘more negative feedback than was expected’ from the respondents. For example, she wondered whether the ED had clearly set out the objective and purpose of the screening test (that it was meant to be a simplification and that characterising it as a rebuttable presumption would defeat that very purpose), and that the Board was not trying to use the presence of goodwill as a test to see whether the acquired assets constituted a business. She also asked the Staff to consider the approach that they would take to address suggestions from respondents that might not align with the FASB’s related amendments.

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