In the last few years, accounting policymakers have relaxed certain requirements to assign value of intangible assets as part of a purchase price allocation (as discussed in a previous Greener Equity blog post). This trend looks to continue, most recently with the FASB presenting an Accounting Standards Update (“ASU”) entitled “Clarifying the Definition of a Business”. The proposed changes that the ASU recommend to ASC 805 could potentially eliminate instances where fair value measurements under purchase accounting rules have previously been required.
In essence, the proposed changes clarify instances where it is unclear whether a transaction constitutes a simple asset purchase or a business acquisition that would require purchase accounting. The update would define a business as having an “input” and a “substantive process”, which together contribute to the ability to create “outputs”. The update also explains that an acquired asset (or assets) would not be defined as a business, if substantially all of the value would be assigned to a single asset or a group of similar identifiable assets.
The proposed changes are still in the comment phase, which ends on January 22, 2016. Once implemented, it is recommended that companies consult with proper auditing and valuation professionals to insure compliance with current accounting standards.