FASB Revises Definition of a Business

Published date01 May 2017
AuthorPaul Munter
Date01 May 2017
© 2017 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22267
FASB Revises Definition of a Business
Paul Munter
When the Financial Account-
ing Standards Board (FASB)
issued FAS 141R in 2007, it
redefined what constitutes a
business for financial report-
ing purposes.1 In doing so, the
FASB decided that the previ-
ous definition of a business
was too narrow. Accordingly,
“theFASB decided to expand
the definition of a business
combination to include all
transactions or other events in
which an entity obtains control
of a business.”2
The FASB developed
FAS141R in a joint project
with the IASB.3 As a conse-
quence, the definition of a
business under U.S. generally
accepted accounting principles
(GAAP) and International
Financial Reporting Standards
(IFRS) was defined identically
when the Boards finished their
joint business combinations
An important part of
the FASB’s due process is
the “feedback loop” wherein
after a standard has been
effective for a period of time,
there is an evaluation of it in
practice to determine whether
the standard was effective
in addressing the objectives
established by the FASB
when issuing the standard.
This is done through a post-
implementation review (PIR)
of the standard performed
by the Financial Accounting
Foundation (FAF). The FAF’s
post- implementation review of
FAS 141R concluded that4
It resolved some practice
issues associated with the
application of the purchase
method and is largely con-
verged with IFRS 3; how-
ever, it left other important
practice issues unresolved.
Its principles and require-
ments are understand-
able and generally can be
applied as intended.
It resulted in improve-
ments in the relevance and
completeness of business
combination information.
Additionally, increased
comparability, reliabil-
ity, and representational
faithfulness were achieved,
although not fully, due to
some of the challenges in
hard-to-value items.
Investors generally find
the information useful
in understanding and
analyzing most business
The greatest applica-
tion difficulties relate to
measuring certain assets
acquired and liabilities
assumed and contingent
consideration atfair value
and determining whether
the transaction is a business
combination or an asset
acquisition. (emphasis
It certainly was not sur-
prising that many business
combinations involve valua-
tion challenges particularly
for items such as contingent
consideration, identifiable
intangible assets such as in-
process research and devel-
opment (IPRD), privately
held equity securities, and
complex debt instruments.
What was, perhaps, less obvi-
ous before theissuance of the
PIR report was the difficulties
around determining whether
an acquired set is or is not a
The International Account-
ing Standards Board (IASB)
also conducted a PIR of
IFRS3 and one its key find-
ings was “that the definition
of a business is too broad and
that more guidance is needed

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