FASB Proposes to Clarify Definition of Business

The Financial Accounting Standards Board has issued a proposed accounting standards update to clarify the definition of a business in an effort to improve financial reporting of acquisitions of nonfinancial assets.

The new guidance would help organizations evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses.

The definition of a business affects many areas of accounting, including acquisitions, disposals, consolidation and goodwill impairment, FASB noted. However, many stakeholders have told FASB the current definition of a business is applied too broadly, requiring many transactions to be treated as businesses when they should be treated as assets. They also noted that analyzing such transactions is costly and complex. Such concerns were raised in connection with a post-implementation review report on FASB Statement No. 141 (revised 2007), Business Combinations (Statement 141(R)).

The guidance in the proposed accounting standards update would address these concerns by providing a stronger framework for determining when a set of assets and activities is a business. The framework would provide more consistency in the application of the guidance, reduce the costs of its application, and make the definition of a business more operable, according to FASB.

FASB is asking stakeholders to review and provide comment on the proposal by Jan. 22, 2016. More information about the proposed update—including a high-level FASB in Focus overview—is available at www.fasb.org.