Definition of a Business and Disposal of Asset Group: How FASB's New Standards Interact

• Author: Paul Munter
• Published date: 01 April 2018
• DOI: http://doi.org/10.1002/jcaf.22323
• Date: 01 April 2018

155

© 2018 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22323

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Definition of a Business and Disposal

of Asset Group: How FASB’s

New Standards Interact

Paul Munter

When the FASB issued its rev-

enue standard (FASB Account-

ing Standards Update 2014-09)

[developed jointly with the

IASB (IASB, IFRS 15)] it also

created ASC Subtopic 610-20

(FASB Accounting Standards

Codification Subtopic 610-20).

ASC Subtopic 610-20 generally

required the application of the

revenue model of ASC Topic

606 (FASB Accounting Stan-

dards Codification Topic 606)

in accounting for the derecog-

nition of nonfinancial assets

and in-substance nonfinancial

assets. However, in its original

guidance, the FASB did not

define in-substance nonfinan-

cial assets nor did it specify

how to determine when a group

of assets should be treated as

nonfinancial assets. Addition-

ally, the original guidance was

unclear about the interaction

between the accounting for the

derecognition of nonfinancial

assets and the derecognition

of a business. Finally, it was

unclear how that guidance

interacted with long-standing

guidance on partial sales of

real estate (FASB Accounting

Standards Codification Sub-

topic 970-323). Because ASC

Subtopic 610-20 has the same

effective date as ASC Topic

606 (periods beginning after

December 15, 2017 for public

business entities) (Holzmann

and Munter, 2014; 2015), these

questions began to take on an

urgency as entities prepared for

the adoption of ASC Topic 606

and Subtopic 610-20.

As the FASB started work-

ing to address these questions,

it also was deciding how it

should respond to issues that

had been identified in the

post-implementation review of

business combination account-

ing (Financial Accounting

Foundation, 2013). Among the

key issues identified as caus-

ing implementation challenges

in applying the requirements

of FAS 141R (FASB State-

ment No. 141, 2007) was the

determination of whether the

acquired set was a business or

an asset group In response, the

FASB decided that it should

re-define the definition of a

business in a narrower manner

such that fewer transactions

constituted the acquisition or

disposition of a business and

more constituted the acquisi-

tion or disposition of an asset

group. While much of the focus

of the FASB’s project on the

definition of a business was on

“in-bound” transactions (i.e.,

the acquisition of a business or

asset group), the same defini-

tion is applied to out-bound

transactions (i.e., the disposi-

tion of a business or asset

group).

As a consequence, there

is now significant interaction

between the FASB’s recent

guidance clarifying the defi-

nition of a business (FASB,

Accounting Standards Update

2017-01), its clarification of

the scope of ASC Subtopic

610-20 (FASB Accounting

Standards Update 2017-05),

and determining what com-

ponents of the entity goodwill

should be assigned to both for