The Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2017-01 in order to have more consistent application of accounting principles relating to business and asset acquisitions and disposals. The ASU aims to achieve this by clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. There are far reaching consequences to the update as it impacts a number of areas of accounting such as acquisitions, disposals, goodwill and consolidation.
A key difference in the clarification of the definition of business in the ASU is changing the definitions of the three components of a business which form an integrated set of activities: inputs, processes and outputs. Some of the changes include modifying the definitions of inputs and processes from possessing 'the ability to create outputs' to 'the ability to contribute to the creation of outputs'. The definition of output has also been expanded to include 'goods and services to customers, investment income (such as dividends or interest) or other revenues.'
In addition to modifying the definition of a business, the ASU provides guidelines on when an integrated set of activities and assets would be considered a business. The accounting treatment can vary depending on whether the assets acquired are recognized and measured as a single identifiable asset or a group of similar identifiable assets. There is also a framework within the ASU for when an integrated set of activities does not include outputs.
The ASU amendments will apply to public business entities for annual periods beginning after Dec.15, 2017, including interim periods within those periods. For all other entities, the ASU amendments will apply to annual periods beginning after Dec.15, 2018 and interim periods within annual periods beginning after Dec.15, 2019. Early application of the ASU amendments is allowed in certain instances where a transaction occurs before the effective date of the ASU if the transaction has not yet been reported in financial statements that have been either issued or made available for issuance.
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By Jeremy Bamford