business Business vs. Asset Purchases: An Important Distinction for Financial Reporting Purposes November 06, 2017 Merging and acquiring (M&A) has become a top priority for business owners of late. Learn how you can expand into new markets while following important reporting requirements. Are you planning to merge with or acquire another business? KLR’s 2017 Manufacturing Industry Outlook report found that M&A was a top priority for 16% of respondents. M&A can be an effective way to expand into new markets and take advantage of synergies and economies of scale. But the financial reporting requirements can be daunting under U.S. Generally Accepted Accounting Principles (GAAP). The first question the buyer must ask is: Are we buying a business or a group of assets? Earlier this year, the Financial Accounting Standards Board (FASB) issued guidance that may allow buyers to sidestep the complex business combination accounting requirements. New-and-Improved Definition Accounting Standards Update (ASU) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, revises the definition of a “business.” It lays out new minimum requirements for a set of assets and activities to be considered a business. The differentiation between business vs. asset purchase affects the accounting for the transaction, including purchase price allocation and goodwill. A set of assets must, at minimum, include an “input” and a substantive process that together significantly contribute to create outputs. Inputs can include people, intellectual property or raw materials. The standard provides guidance to determine whether both an input and a substantive process are present. Although outputs aren’t required for an asset set to be a business, outputs generally are a key element of a business. Outputs are goods or services for customers that provide (or have the ability to provide) a return to the business’s investors in the form of dividends, lower costs or other economic benefits of integration to the acquirer. Additionally, the update provides a shortcut to determine whether a set of assets is a business or an asset combination: If substantially all the fair value of the gross assets acquired is concentrated in a single asset or a group of similar identifiable assets, the set is not a business. A Welcome Change ASU No. 2017-01 goes into effect in 2018 for public companies and 2019 for private ones. The updated standard is expected to reduce the number of transactions that qualify as business combinations. As a result, fewer entities will need to engage in complex purchase price allocations or estimate the fair value of goodwill and other intangibles acquired in a business combination. Many companies are expected to adopt the new definition early and, instead of following the complex rules for business combinations, report their transactions as routine asset purchases. Need Help? When operating a private business, M&A isn’t something that happens every day — or even once a year. So, few owners and managers have experience applying the current accounting guidance for acquisitions. We can help you assess whether a transaction qualifies as an asset or a business acquisition, and then apply the appropriate financial reporting rules. Contact our accounting and assurance team for assistance.