April 4, 2017
NDS 2017-01
New Developments Summary
Amendments clarify the definition of a ‘business’
FASB issues ASU 2017-01
Summary
Earlier this year, the Board issued ASU 2017-01, Clarifying the Definition of a Business, which provides a
new framework for entities to determine whether a set of assets and activities (together referred to as “a
set”) is a business. The amendments in the ASU will assist entities when they evaluate whether
transactions should be accounted for as acquisitions (or disposals) either of businesses or of assets. This
distinction is important since there are significant differences between the accounting for business
combinations and the accounting for acquisitions of assets.
The amendments in the ASU provide requirements for a set to qualify as a business and also establish a
sequential approach to analyzing whether a set is a business. The first step is a “screen” that may result
in the determination that a set is not a business. If an entity concludes under the screen that a set is not a
business, no further analysis is required. This bulletin discusses these and other major provisions of
ASU 2017-01 and explores some of the key differences between the new amendments and the existing
guidance in ASC 805, Business Combinations.
For public business entities, the amendments should be applied prospectively for transactions in annual
periods beginning after December 15, 2017, including interim periods within those annual periods. All
other entities should apply the amendments in annual periods beginning after December 15, 2018 and in
interim periods in annual periods beginning after December 15, 2019.
Early adoption is permitted for certain transactions, but only when these transactions have not been
reported in financial statements that have been issued or have been made available for issuance.
However, if an entity elects to early adopt ASU 2017-01 for transactions in any period prior to the
applicable effective date(s), the entity is also required to apply the revised guidance to all subsequent
acquisitions or disposals and to certain other accounting determinations.
Contents
A. Overview ................................................................................................................................................. 2
B. Amendments to the definitions of the three elements of a business ...................................................... 3
C. Single or similar asset threshold (referred to as the ‘screen’) ................................................................ 3
Gross assets acquired ............................................................................................................................ 4
Sets with a single identifiable asset or a group of similar identifiable assets ......................................... 4
New Developments Summary
2
D. Framework if the screen is not met ........................................................................................................ 6
Market participant’s ability to replace missing elements ........................................................................ 6
Applying the framework to an acquired set when the screen is not met ................................................ 6
When a set has outputs ................................................................................................................... 6
When a set does not have outputs .................................................................................................. 7
E. Other minor clarifications ........................................................................................................................ 8
Liabilities ................................................................................................................................................. 8
Goodwill .................................................................................................................................................. 8
F. Effective date and transition guidance ................................................................................................... 8
Appendix A .................................................................................................................................................. 11
Accounting differences between a business combination and an asset acquisition ............................ 11
Appendix B .................................................................................................................................................. 12
How the definition of a ‘business’ impacts other areas of accounting .................................................. 12
A. Overview
FASB ASU 2017-01, Clarifying the Definition of a Business, offers a new framework for determining
whether a set of assets and activities (together referred to as “a set”) is a business. The new guidance will
help entities evaluate whether to account for transactions as acquisitions (or disposals) either of
businesses or of assets—an important distinction considering the differences between accounting for
acquisitions or disposals of businesses and acquisitions or disposals of assets.
Under the existing guidance in ASC 805, Business Combinations, an entity determines whether a
transaction is a business combination based on whether the acquired activities and assets meet the
definition of a “business.” Whether the set meets the definition of a business directly impacts the
accounting for acquisitions. If an acquired set constitutes a business, an entity applies the acquisition
method (often referred to as purchase accounting), which in most circumstances results in the recognition
of goodwill. In contrast, acquisitions of sets that do not meet the definition of a business (that is, asset
acquisitions) are accounted for using a cost accumulation model, and there is no recognition of goodwill
or bargain purchase. The definition of a business also impacts other areas of accounting, such as
disposals, goodwill, reporting units, and consolidation.
The Board considered feedback received from stakeholders in connection with the Post-Implementation
Review Report on FASB Statement 141 (revised 2007), Business Combinations, now codified in
ASC 805. This feedback indicated that the current definition of a business in ASC 805 is being applied too
broadly, resulting in many transactions being recorded as business combinations that appear to be more
akin to asset acquisitions. Stakeholders also indicated that analyzing transactions under the existing
guidance is difficult and costly, and does not permit the use of reasonable judgment. For example, the
existing guidance does not specify the minimum inputs and processes required for a set to meet the
definition of a business. This lack of clarity, along with the current definition of an output in ASC 805, have
also led to broad application of what constitutes a business.
As an initial step in determining whether a set is a business, the amendments now provide a screen to
determine when a set is not a business. When applying the screen, if substantially all of the fair value of
the gross assets acquired is concentrated in a single identifiable asset or in a group of similar identifiable
assets, the set is not a business, and no further assessment is required. If the screen is not met, an entity
then performs an assessment to determine whether the set is a business by using a framework outlined
in the ASU. To be considered a business under this framework, a set must include, at a minimum, an
input and a substantive process that together significantly contribute to the set’s ability to create outputs.
New Developments Summary
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The amendments do not impact the SEC’s definition of a business under Rule 11-01 (d) of
Regulation S-X. For example, the amendments will not change how a registrant evaluates whether the
financial statements of an acquired business should be filed with the SEC under Rule 3-05 of
Regulation S-X. As a result, there may be circumstances in which a transaction is not accounted for as an
acquisition of a business in the registrant’s U.S. GAAP financial statements, but may be viewed as an
acquisition of a business for other SEC reporting purposes.
The sections that follow discuss the key determinations an entity will make when applying the sequential
approach outlined in the ASU, and how the entity should respond to each of the conclusions it might
reach.
B. Amendments to the definitions of the three elements of a business
Outputs
In the Basis for Conclusions section of the ASU, the Board acknowledged that the existing definition of an
“output” contributed to broad interpretations of the definition of a business, because many acquired sets
can provide a return in some form, such as lower costs or other economic benefits.
As a result, the definition of an output in the ASU has been narrowed to include inputs and processes
applied to those inputs that do provide goods or services to customers, investment income, or other
revenues.
The amendments to the definition of an output are now generally consistent with how outputs are
discussed in ASC 606, Revenue from Contracts with Customers, that is, goods or services provided to
customers. However, investment income and some other forms of revenue outside the scope of ASC 606
are also included in the revised definition of output in the new guidance. In the Basis for Conclusions, the
Board stated that this reference to investment income indicates that the acquisition of an investment
company could still be accounted for as a business combination.
Inputs and processes
The ASU also includes minor amendments to the definitions of “input” and “process,” the other two
elements of a business, to indicate that each has the ability to “contribute to the creation of” outputs.
These definitions are in contrast to the existing guidance in ASC 805, which indicates that processes
create outputs when applied to inputs. Further, the definition of a process has been revised to indicate
that the intellectual capacity of an organized workforce is the attribute that may provide necessary
processes toward the creation of outputs.
C. Single or similar asset threshold (referred to as the ‘screen’)
As an initial step in determining whether a set is a business, the amendments provide a screen to
determine when a set is not a business. The principle of the screen is that a set is not a business if
substantially all of the value of gross assets acquired resides in a single asset or group of similar assets.
If this is the case, the entity meets the screen, and the set therefore is not a business. If the value does
not reside in a single asset or group of assets, however, then the screen is not met, and further evaluation
is needed to determine whether the set is a business, as discussed in Section D, “Framework if the
screen is not met.”
Application of the screen begins with determining the fair value of gross assets acquired, followed by
identifying single assets or a group of similar assets to be compared to that fair value.
New Developments Summary
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The amendments also include additional guidance related to applying the screen, including clarifying the
characteristics of (1) gross assets, (2) a single identifiable asset, and (3) a group of similar identifiable
assets, all of which are summarized below.
Gross assets acquired
Under the new guidance, gross assets acquired should

Include the amount, if any, by which consideration transferred (which includes the fair value of any
noncontrolling interests and previously held interests) exceeds the fair value of the net identifiable
assets acquired

Exclude cash and cash equivalents, deferred tax assets, and any goodwill resulting from the effects
of deferred tax liabilities
Further, gross assets are not reduced by debt, such as assumed mortgage debt related to an acquired
building. The Basis for Conclusions explains that the Board intended to avoid debt and other liabilities
impacting gross assets used in applying the screen. That is, including liabilities as a component of gross
assets acquired could potentially result in a group of assets that would otherwise not meet the screen
being exempt from further assessment, solely because the transaction includes liabilities in addition to
assets. For example, assume that the fair values of a single asset, gross assets, and debt assumed are
$100, $150, and $50, respectively. Comparing the $100 asset with the $150 of gross assets indicates that
substantially all of the fair value does not reside in the single asset. Therefore, the screen is not met, thus
requiring further evaluation. However, if the $100 asset is compared with $100 in gross assets reduced
for debt, the screen incorrectly would appear to have been met because all of the fair value resides in the
single asset.
After the entity determines the gross assets acquired and their fair value, it then evaluates, on a
disaggregated basis, certain attributes, including the fair value, of all of the identifiable assets that are part
of the gross assets acquired. An entity evaluates next whether the screen is met by comparing the fair
value of the gross assets acquired to either the fair value of the single identifiable asset or the fair value of
a group of similar identifiable assets, as the case may be.
Sets with a single identifiable asset or a group of similar identifiable assets
A single identifiable asset includes any individual asset or group of assets that could be recognized and
measured as a single identifiable asset in a business combination. Examples of assets that might be a
single identifiable asset include receivables, inventory, fixed assets, and intangible assets. Additionally,
the ASU includes an exception for certain groups of assets and considers the following groups of assets
also to be a single identifiable asset:

Tangible assets that are attached to each other, such as land and a building residing on the land,
which cannot be physically removed and used separately from each other (or an intangible asset
representing the right to use a tangible asset) without incurring significant cost or significant
diminution in utility or fair value to either asset

Intangible assets representing the right to use a tangible asset, such as in-place lease intangibles
(including favorable and unfavorable lease intangibles) and the related asset being leased
If an entity determines that the set includes a single identifiable asset, and the fair value of this asset
represents substantially all of the fair value of the gross assets acquired, the screen is met, and no further
analysis of the set is required.
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However, if an entity determines that the set includes several identifiable assets, none of which
individually has a fair value that is considered substantial in relation to gross assets acquired, the screen
also considers whether the fair value of one or more of these single identifiable assets can be aggregated
into a group or groups of similar identifiable assets. In that case, the entity determines whether the fair
value of a group represents substantially all of the fair value of the gross assets acquired.
The ASU includes guidance for entities to consider when they must evaluate whether two or more single
identifiable assets can be aggregated into a group or groups of similar assets. A group of similar assets
includes multiple assets identified when applying the single identifiable asset guidance discussed above.
An entity evaluates whether assets are similar (and therefore a group of similar identifiable assets for
applying the screen) by considering the nature of each single identifiable asset and the risks associated
with managing and creating outputs.
Further, the guidance states that the following types of identifiable assets should not be considered
similar assets:

A tangible asset and an intangible asset that together are not considered a single identifiable asset

Identifiable intangible assets in different major identifiable asset classes, such as customer-related
intangibles and in-process research and development

A financial asset and a nonfinancial asset

Financial assets in different major classes, such as accounts receivable and marketable securities

Tangible assets in different major classes, such as inventory, manufacturing equipment, and vehicles

Identifiable assets within the same major asset class that have significantly different risk
characteristics
If an entity determines that the set includes a group or groups of similar identifiable assets, and the fair
value of one of these groups represents substantially all of the fair value of the gross assets acquired, the
screen is met, and no further analysis of the set is required.
However, if an entity determines that substantially all of the fair value of the gross assets acquired is not
concentrated in either a single identifiable asset or in a group of similar identifiable assets, the screen is
not met, and the entity then performs an assessment to determine whether the set is a business by using
the framework outlined in the ASU (see Section D).
Applying the screen
The screen is expected to reduce the number of transactions that require further evaluation;
however, the determinations that an entity must make to apply the screen may require the entity
to exercise a significant amount of judgment.
In the Basis for Conclusions, the Board stated that the screen should be based on whether the
fair value of a single identifiable asset or a group of similar identifiable assets represents
substantially all of the fair value of the gross assets acquired, and stakeholders indicated that
they would be comfortable in applying this concept.
Further, the consideration of substantially all of the fair value implies a quantitative approach to
the determination. There also could be some qualitative considerations when applying the
New Developments Summary
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screen, for example, when facts and circumstances indicate that either substantially all of the
fair value lies in one asset or group of similar identifiable assets and it is very clear the screen
will be met (or, on the other hand, the fair value is in assets that are not similar, and the screen
will not be met).
Entities should evaluate each situation based on the facts and circumstances and not view a
qualitative assessment either as an option available in all situations or as evidence typically
compelling enough to override a conclusion based on appropriately developed quantitative
evidence.
Despite some qualitative aspects of the determination, the entity nonetheless is required to
determine the fair values of each asset when recording a business combination or asset
acquisition. Therefore, any qualitative considerations are not expected to reduce either the cost
or complexity of the ultimate accounting.
D. Framework if the screen is not met
If the screen is not met, an entity applies the framework outlined in the ASU. To be considered a business
under this framework, a set must include, at a minimum, an input and a substantive process that together
significantly contribute to the set’s ability to create outputs.
Market participant’s ability to replace missing elements
Under existing guidance, all the inputs and processes that a seller used in operating a set are not
required for the set to constitute a business if a market participant can acquire the set and continue to
produce outputs through, for example, integration with the acquirer’s existing inputs and processes. This
guidance resulted in the definition of a business being met for many acquired sets that lacked some
inputs and/or processes.
The amendments remove the evaluation of whether a market participant can replace any missing
elements, which represents an important change to how an entity evaluates an acquired set that does not
include all the inputs and processes that the seller had used.
Consistent with existing guidance, whether the seller operated the set as a business or whether the buyer
intends to operate the set as a business are not relevant factors that the entity considers when it applies
the amended guidance.
Applying the framework to an acquired set when the screen is not met
The framework assists entities in evaluating whether both an input and a substantive process are present
that together significantly contribute to the set’s ability to create outputs. This framework includes
separate criteria for making evaluations based on whether a set does or does not have outputs, as
summarized below.
When a set has outputs
The Basis for Conclusions indicates that there has been diversity in stakeholder views as to whether a
process is presumed to exist when there is a continuation of revenue. The new guidance introduces an
additional assessment that is required in these circumstances. That is, when a set has outputs (a
continuation of revenue both before and after the transaction), the set is considered to have both an input
New Developments Summary
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and a substantive process and, as a result, is a business if any one of the following attributes is present in
the set:

Employees that form an organized workforce with the necessary skills, knowledge, or experience to
perform an acquired process that, when applied to an acquired input or inputs, is critical to continue to
produce outputs. In the Basis for Conclusions, the Board indicated that the “intellectual capacity” (the
necessary skills, knowledge, or experience) of the employees that form an organized workforce is
important in determining whether this characteristic is present in the set, because the Board did not
intend for the existence of any employee to indicate that a set with outputs is a business. Also, the
Board indicated that a process is not “critical” if it is considered ancillary or minor in the context of all
of the processes required to continue producing outputs.

An acquired contract that provides access to an organized workforce with the necessary skills,
knowledge, or experience to perform an acquired process that, when applied to an acquired input, is
critical to the ability to continue to produce outputs

The acquired process (or processes) that, when applied to an acquired input or inputs, significantly
contributes to the ability to continue producing outputs and (1) cannot be replaced without significant
cost, effort, or delay, or (2) is considered unique or scarce
Even if a set has outputs, continuation of revenue does not, on its own, indicate that the acquired set
contains a substantive process, so an entity will still be required to evaluate whether there is a
substantive process based on the presence of any of the factors described above. As a result, assumed
contractual arrangements that provide for the continuation of revenue, such as customer contracts,
customer lists, and leases (when the acquired set is a lessor), do not constitute a business, unless the
acquired set has a substantive process.
If, however, the acquired set also includes an assumed contract that provides access to an organized
workforce that performs the process (or processes) critical to the continuation of revenue, the set may
include a substantive process and therefore may constitute a business. For example, a set may be
operated by the seller with no organized workforce under a management contract with a third party to
provide a workforce. If the acquirer assumes the seller’s existing management contract, the set may
include a substantive process. This situation is in contrast to an acquirer separately obtaining its own
workforce or utilizing another existing management contract to provide the workforce. In that case, the
acquired set does not include a substantive process because the workforce is not acquired as part of the
set.
When a set does not have outputs
A set may include inputs and processes but lack any outputs because the seller has not yet produced a
product that is capable of being sold, for example, an entity with no revenue that is developing a
prescription drug or a software product from which it hopes to generate revenue in the future. Under both
the existing guidance and the new guidance, outputs are not required for a set to be a business, but
outputs generally are a very important element of a business. As a result, and in response to stakeholder
concerns, the new guidance includes more stringent criteria for a set without outputs to meet the
definition of a business, for example, a pre-revenue company.
A set that does not have outputs is considered to have both an input and a substantive process and, as a
result, is a business only if the set includes (1) employees that form an organized workforce (as discussed
above) and (2) an input such as intellectual property, mineral rights, or in-process research and
development that this workforce could develop or convert into outputs. In other words, the organized
workforce must possess certain attributes that allow it to perform an acquired process that, when applied
New Developments Summary
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to another acquired input or inputs, is critical to the ability to develop or convert that acquired input or
inputs into outputs.
The amendments also include additional guidance for an entity to consider when it evaluates whether the
acquired workforce is performing a substantive process. This additional guidance discusses
circumstances when a process is not critical, and provides examples of inputs that an organized
workforce could develop (or is developing) or could convert into outputs.
Determining existence of a ‘substantive process’ requires judgment
The framework outlined in the ASU clearly delineates when a “substantive process” exists. In
transactions where the continuation of revenue is present, the requirement to further assess
whether the process is substantive likely will reduce the number of acquired sets that meet the
definition of a business, although this assessment may require the entity to exercise more and
different judgments than in past acquisitions. For example, with regard to employees, significant
judgment may be required to determine whether employees included with a set have the
attributes necessary to be considered an organized workforce that comprises a substantive
process.
E. Other minor clarifications
The ASU clarifies certain existing guidance that discusses the presence of liabilities and goodwill within a
set, and how they are considered in an entity’s evaluation of whether an acquired set is a business.
Liabilities
Existing guidance indicating that a business need not have liabilities has been expanded to also indicate
that a set that is not a business may have liabilities.
Goodwill
The ASU also indicates that when applying the framework described above to either a set with outputs or
a set without outputs, the presence of more than an insignificant amount of goodwill (which may include
the fair value associated with a workforce) may be an indicator that the acquired process is substantive
and that the acquired set is a business. This new guidance supersedes the presumption in existing
guidance that, absent evidence to the contrary, the presence of goodwill indicates that the acquired set is
a business.
F. Effective date and transition guidance
Application of the amended guidance is prospective. For public business entities, the amendments are
effective for annual periods beginning after December 15, 2017, including interim periods within those
annual periods. For all other entities, the amendments are effective for annual periods beginning after
December 15, 2018 and in interim periods in annual periods beginning after December 15, 2019.
Early adoption is permitted for acquisition transactions and transactions resulting in deconsolidation of a
subsidiary or derecognition of a group of assets that have occurred prior to the effective date only if these
transactions have not been reported in financial statements that have been issued or have been made
New Developments Summary
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available for issuance. However, an entity electing to early adopt ASU 2017-01 for transactions that have
occurred in any period prior to the applicable effective date(s) should be aware of the requirements to

Apply ASU 2017-01 to all acquisitions or disposals that occur after the early adoption date

Apply the revised definition of a business to certain accounting determinations made after the early
adoption date that impact other areas of accounting
Appendix B discusses how the definition of a business affects some areas of accounting other than
acquisitions or disposals, such as subsequent accounting for goodwill and consolidation. For example,
assume that an entity made an acquisition on November 15, 2016 and elects early adoption. The entity
also has an annual goodwill impairment test as of December 1, 2016. The entity should apply the
amended definition of a business when including the November 15 acquisition in a reporting unit(s) prior
to performing its annual goodwill impairment test. Similarly, an entity that evaluates (or reevaluates) a
variable-interest entity after early adoption should apply the amended definition.
An entity may not early adopt ASU 2017-01 during any annual or quarterly period(s) for which its financial
statements have already been issued or made available for issuance. In other words, an entity may not
retrospectively reconsider previous applications of the definition of a business.
The amendments do not require incremental transition disclosures in addition to those required by
ASC 250, Accounting Changes and Error Corrections, related to a change in accounting principle.
Examples of early adoption for acquisitions by public business entities
Assume that a calendar-year public business entity has

Filed its quarterly reports with the SEC for the first three quarters of calendar year 2016

Has not issued, or made available for issuance, its financial statements for both the
quarterly period and the annual period ended December 31, 2016

Completed the acquisition of a set on November 15, 2016
In this example, the public business entity acquired the set prior to the issuance of
ASU 2017-01, but it has not issued any interim or annual financial statements that have
reported the acquisition of the set. As result, the public business entity may elect to apply the
guidance in ASU 2017-01 when it determines whether the set acquired on November 15, 2016
(and all sets acquired after that date) is a business.
In contrast, assume that the public business entity instead completed the acquisition of the set
on August 31, 2016. In this case, the public business entity may not elect to apply the guidance
in ASU 2017-01, as it has already reported the acquisition in its September 30, 2016 unaudited
interim financial statements, and it has already applied the existing guidance to evaluate
whether the set acquired on August 31 is a business. Further, the public business entity also
may not “revisit” the accounting for other acquisitions completed in any annual or quarterly
period(s) that ended prior to September 30, 2016, because financial statements for those
periods have already been issued, and the amendments are applied prospectively.
The same principles apply to entities that are not public business entities, and the conclusion
depends primarily on whether the entity has issued its financial statements, or made the
financial statements available for issuance, for the period that includes the acquisition. Entities
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other than public business entities typically do not issue, or make available for issuance, interim
financial statements. As a result, other entities that have not issued, or made available for
issuance, the December 31, 2016 annual financial statements (or the financial statements for
any interim period in 2016) may apply ASU 2017-01 to acquisitions completed in 2016.
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This Grant Thornton LLP bulletin provides information and comments on current accounting issues and
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relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to
arrive at conclusions that comply with matters addressed in this bulletin.
For additional information on topics covered in this bulletin, contact your Grant Thornton LLP
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Appendix A
Accounting differences between a business combination and an asset acquisition
Under ASC 805, Business Combinations, an entity determines whether a transaction is a business
combination based on whether the acquired set meets the definition of a business. If the acquired set is
not a business, an entity should not account for the acquisition of the set as a business combination.
Instead, the entity should apply the guidance on asset acquisitions included in ASC 805-50, Related
Issues. This distinction is important since there are significant differences between the accounting for an
acquisition of a business and for an acquisition of assets under ASC 805-50. Some of the differences
include

In a business combination, the amount by which consideration transferred exceeds the fair value of
the identifiable assets acquired and liabilities assumed is represented by goodwill. In an asset
acquisition, the accounting follows a cost accumulation model; that is, the total consideration
transferred is allocated ratably among the acquired assets based on their relative fair values and
does not result in the recording of goodwill. Liabilities in an asset acquisition, however, are
recognized at their fair values.

In a business combination, acquisition-related costs incurred by the acquirer are expensed, while in
an asset acquisition, these costs are included in the cost of the assets.

In a business combination, contingent consideration is initially recognized at acquisition-date fair
value as part of the consideration transferred, and, if it is a liability, changes in fair value are
recognized in earnings. In an asset acquisition, contingent consideration is not recognized until the
consideration is paid or becomes payable, at which time it generally is recorded as an increase to the
cost of the assets.

If the initial accounting for a business combination is incomplete by the end of the reporting period in
which the business combination occurred, an acquirer may report provisional amounts for the items
for which the accounting is incomplete. These provisional amounts may be adjusted in subsequent
reporting periods to reflect new information about certain facts and circumstances that existed as of
the acquisition date, over a period not to exceed one year from the acquisition date. Any adjustments
made in subsequent reporting periods that resulted from this analysis are referred to as
“measurement period adjustments.” This accounting guidance does not apply in an asset acquisition
because there is no “measurement period” for an acquisition. Accordingly, the final value of an asset
acquisition should be included in the financial statements for the period that includes the acquisition.
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Appendix B
How the definition of a ‘business’ impacts other areas of accounting
The definition of a business directly impacts other areas of accounting, including disposals, goodwill, and
consolidation, as follows:

Disposals – If an entity sells a portion of a reporting unit and that portion is a business, the entity
allocates an amount of that reporting unit’s goodwill to the disposed portion on a relative fair value
basis. This allocation of goodwill impacts the gain or loss on disposition. An entity does not allocate
goodwill to a disposition that is not a business. Therefore, the new definition of a business in
ASU 2017-01 may impact the allocation of goodwill in a disposal. There is a heightened risk of
goodwill impairment if no goodwill is allocated to the disposal because the reporting unit’s remaining
cash flows may have changed and may no longer support the recorded amount of goodwill.

Reporting units – Entities evaluate goodwill for impairment at the reporting unit level. Under the
existing goodwill impairment guidance in ASC 350, Intangibles – Goodwill and Other, a reporting unit
is either an operating segment, as determined under ASC 280, Segment Reporting, or one level
below an operating segment, which is known as a “component.” A component is a reporting unit if the
component constitutes a business under ASC 805, Business Combinations, and meets other criteria.
As a result, the change in the definition of a business may directly affect how an entity determines its
reporting units. Under the new amendments, an acquired asset set could not be its own reporting unit
because it is not a business. Rather, it should be included in an existing reporting unit(s). In a
reorganization of reporting units, an entity should apply the revised definition of a business as it
determines the new reporting unit structure.

Consolidation – Under ASC 810, Consolidation, certain businesses are not required to be evaluated
as variable-interest entities (VIEs), depending on a number of conditions. As a result, a reporting
entity’s evaluation of whether the other entity constitutes a business may be important in evaluating
whether it is a VIE. Other guidance in ASC 810 is impacted by the revised definition of a business as
well.

Nonmonetary transactions – The guidance in ASC 845, Nonmonetary Transactions, does not apply to
an acquisition of a business that is accounted for under ASC 805. As a result, the accounting for a
transaction involving the transfer of a set not constituting a business might be within the scope of
ASC 845.