At its meeting yesterday, the FASB instructed its staff to begin drafting a proposed Accounting Standards Update (ASU) on clarifying the definition of a business. The tentative decisions reached to date in this project include:¹

• To be a business, “a set of activities and assets must include inputs and one or more substantive processes that together contribute to the ability to create outputs.”
• The guidance would include a framework for determining “whether a substantive process is included in a set of acquired assets and activities.”
• The definition of a business would no longer state that “a business need not include all of the inputs and processes that the seller used in operating the business if market participants are capable of acquiring the business and continuing to produce outputs.”
• A transferred set of activities would be considered an asset (and not a business) if “substantially all the fair value of the gross assets acquired is concentrated in a single tangible or identifiable intangible asset (or group of similar tangible or identifiable intangible assets).” This decision would “(a) provide a practical way to determine when transactions are not a business that can be qualitatively assessed and (b) significantly cut out the amount of work that goes into the analysis in most cases.”

The Board noted that such clarifications are necessary not only because the current definition of a business is broad and difficult to apply but because it “is necessary to clarify the scope of sales or transfers of nonfinancial assets with noncustomers” under ASU 2014-09.² Further, the FASB states that “[i]f the definition of a business is clarified, the reference to in-substance nonfinancial assets may no longer be needed” but that if it is not clarified, “there will be more pressure on what an in-substance nonfinancial asset is, which will result in the need to provide additional guidance on in-substance nonfinancial assets.”

While the Board did not discuss an effective date, it decided that the proposal would be applied prospectively upon adoption and would be exposed for a 60-day comment period. 

For more information about the Board’s project on clarifying the definition of a business, see the project page on the FASB’s Web site.

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1 Quoted material is from the Board’s July 9, 2015, meeting handout.

2 FASB Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers.