FASB Revises Definition of a Business

• Published date: 01 May 2017
• Author: Paul Munter
• Date: 01 May 2017
• DOI: http://doi.org/10.1002/jcaf.22267

73

© 2017 Wiley Periodicals, Inc.

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

DOI 10.1002/jcaf.22267

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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

project.

POST-IMPLEMENTATION

REVIEWS OF FAS 141R

ANDIFRS 3

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

combinations.

• 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

added).

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

business.

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