The Financial Accounting Standards Board (FASB) recently issued a Financial Accounting Standards Update (ASU), Business Combinations (ASU 2017-01), to address concerns that the current definition of a “business” is overly broad. As a result, many transactions have been recorded as business acquisitions when they are more akin to asset acquisitions. When the acquired assets are defined as a business, several areas of accounting are affected, including consolidation, goodwill, acquisitions, and disposals.
This ASU provides a “screen” that may result in more transactions being accounted for as asset acquisitions as opposed to business combinations. This screen instructs that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset, or a group of similar identifiable assets, then that set of assets is not a business. This screen is intended to reduce the number of transactions that should be further evaluated and accounted for as business combinations.
The ASU defines a single identifiable asset as any individual asset or group of assets that could be recognized and measured as a single identifiable asset in a business combination. Specifically, it states the following should be considered single assets:
- A tangible asset that is attached to, and cannot be physically removed and used separately from, another tangible asset without incurring significant cost
- In-place lease intangibles, including favorable and unfavorable intangible assets or liabilities, and the related leased assets
When determining whether assets are similar, an entity should evaluate the nature of each single identifiable asset and the risks involved with managing and creating outputs from the assets. The ASU states the following should not be considered similar assets:
- A tangible asset and an intangible asset
- Identifiable intangible assets in different major intangible asset classes (i.e., customer-related intangibles, trademarks)
- A financial asset and a non-financial asset
- Different major classes of financial assets (i.e., accounts receivable and marketable securities)
- Different major classes of tangible assets (i.e., inventory, manufacturing equipment, and automobiles)
- Identifiable assets within the same major asset class that have significantly different risk characteristics
The ASU also provides an additional framework with regard to evaluating a business under other scenarios.
These amendments will be effective for public business entities for periods beginning after December 15, 2017. All other entities will apply the amendments to annual periods beginning after December 15, 2018.
If you have questions about this new ASU, or would like to request a speaker on this topic for your organization or event, contact one of our executives below, (800) 270-9629.