Rule Clarifying Business Definition Set for December Release

Companies should be able to better distinguish between a business that is being bought or sold and a bundle of assets that are transferred, under a new accounting rule to be issued in December by the Financial Accounting Standards Board (FASB).

The planned final standard, the release of which FASB authorized on November 9, is expected to lead to more asset classifications and fewer sales and acquisitions treated as business combinations. Currently, the definition of a business in ASC 805, on business combinations, is applied too broadly, according to FASB staff, leading to transfers of assets being labeled combinations.

FASB members said the new rule will put in place a practical way to differentiate between the sales at issue for accounting purposes.  “I think, from my perspective, this standard just kind of puts some common-sense judgment into whether something’s a business versus an asset,” said FASB member Lawrence Smith.  FASB Chairman Russell Golden said he had hoped for bigger improvements on the topic, “but I believe this is a very important interim step.”  Golden said he hopes “that people will apply judgment, but I do think that the threshold is important to take out some of the costs in the system on asset purchases that clearly are not business combinations.”

FASB voted to allow companies to adopt the standard earlier than the planned rule’s required effective date.

Companies may apply the new definition to acquisitions or disposals carried out in the current quarter, if financial statements covering the period have not been issued yet or, in the case of private companies, not yet made available for issuance.

Public companies on calendar-year reporting timetables will be required to use the new definition of a business in reporting for fiscal years starting after Dec. 15, 2017, and interim periods within those years. Non-public enterprise will have a year beyond that to apply the planned standard.

FASB also plans to issue final rules, probably in January, on a related effort. That topic, formerly called definition of a business phase 2, pertains to accounting for partial sales of nonfinancial assets.

A FASB staff update on the project on defining a business is at available here.

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