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ASC 805 provides a framework for entities to use in evaluating whether an integrated set of assets and activities (collectively a “set”) should be accounted for as an acquisition of a business or a group of assets. It includes an initial screen to determine if substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If that screen is met, the set is not a business. The framework also specifies the minimum required inputs and processes necessary to be a business.
Figure BCG 1-1 provides a summary of the framework for evaluating whether an acquired set is a business or a group of assets.
Figure BCG 1-1
Framework for evaluating whether an acquired set is a business or a group of assets
*An entity may bypass the screen test and first evaluate the set under the more detailed framework. However, if the framework indicates that the acquired set is a business, an entity should be comfortable that the acquired set would not meet the threshold in the screen to be considered an asset acquisition. An entity can evaluate the set in the most cost-effective manner.

1.2.1 The screen test

The screen test is designed to identify, with little cost or effort, a transaction that is clearly more akin to an asset acquisition and remove it from the scope of the business combinations guidance.
In applying the screen test, an entity determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If so, the set is not considered a business. While the standard does not define what constitutes “substantially all,” this term is used in other areas of GAAP (e.g., revenue, leases). There is no bright line, but it is typically interpreted to mean at least 90%. When there is uncertainty around whether the quantitative threshold of the screen test is met because the ratio is close to 90%, additional factors should be considered. Such additional factors may indicate that a set is a business, and therefore the framework should be applied to determine whether the set is a business. Additional factors that may indicate a business include, but are not limited to, the following (no one factor is determinative):
  • Types of assets included in the set. For example, a set that includes distinct types of assets rather than a single primary asset or group of complementary assets.
  • Goodwill. For example, the presence of more than an insignificant amount of goodwill. However, goodwill is not required for a set to be a business. See BCG 1.2.3 for additional information.
  • The set operates independently. For example, a production operation or division that is independent and is inclusive of other substantive elements within the set.
In situations when it is apparent that performing a quantitative test would indicate the transaction is an asset acquisition, the initial screen may be performed qualitatively. For example, assume a company acquires a license for a drug candidate and an at-market service contract. If the at-market contract is qualitatively determined to have little or no fair value, then based on the significance of the license, it is clear that the threshold is met. In contrast, if a set includes multiple licenses for dissimilar drug candidates, and each has more than an insignificant fair value, the entity could qualitatively determine that the threshold is not met.

1.2.1.1 Single asset for the purpose of applying the screen test

As discussed in ASC 805-10-55-5B, a single asset for the purpose of applying the screen test includes any individual asset or group of assets that could be recognized and measured as a single asset under the business combination guidance. For example, ASC 805 allows certain complementary intangible assets with similar useful lives to be grouped as a single asset. Refer to BCG 4.4 for guidance on complementary intangibles.
Certain assets must be grouped for the purpose of applying the screen test. This grouping is only applicable for the screen test, and all assets acquired continue to be recorded separately in acquisition accounting, consistent with current US GAAP.
Below are two scenarios in which separately recorded assets must be grouped into a single asset for the purpose of applying the screen test:
  • A tangible asset that is attached to another tangible asset should be considered a single asset. This includes an intangible asset representing the right to use a tangible asset (e.g., a building with an associated ground lease). To be considered attached, assets cannot be physically removed and used separately without incurring significant costs. For example, land and a building would generally be recognized as separate assets in a business combination, but would be considered a single asset when performing the screen test.
  • In-place lease intangibles, including favorable and unfavorable intangible assets or liabilities, and the related leased assets should be considered a single asset (e.g., a building and an associated in-place lease intangible).
Question BCG 1-1 addresses whether an assembled workforce is a single identifiable asset.
Question BCG 1-1
For purposes of the screen test, is an assembled workforce considered a single identifiable asset?
PwC response
No. ASC 805-20-55-6 does not permit an assembled workforce to be recognized as a separately identifiable intangible asset in a business combination. An acquirer may attribute value to the existence of an assembled workforce, but that value is subsumed into goodwill. Therefore, an assembled workforce cannot be a single asset for purposes of applying the screen test.
An assembled workforce is not a discrete asset recognized under the business combination guidance, rather it is subsumed into goodwill. Therefore, it would not be appropriate to include the fair value of an assembled workforce in the numerator of the screen test. We believe that it would be rare for a reporting entity to acquire only a workforce without also acquiring processes, technology, or equipment. If a reporting entity acquires a workforce that is not generating outputs, judgment will be required to determine if the transaction is a business combination or an asset acquisition. If it is determined that the transaction is an asset acquisition, the assembled workforce would be recognized as a discrete intangible asset on the balance sheet and amortized over its useful life.

1.2.1.2 Similar assets for the purpose of applying the screen test

The screen can also be met if the fair value of the set is concentrated in a group of similar assets. Entities should consider the nature of the assets and the risks associated with managing and creating outputs when determining if assets should be grouped as similar. If the risks are not similar, the assets cannot be combined for the screen test. Identifying similar assets based on the nature of the assets and their risk characteristics is an area that requires significant judgment. When evaluating whether assets are similar, an entity should consider the nature of each single identifiable asset and the risks associated with managing and creating outputs from the assets. Risks that might need to be considered depend on the nature of the asset, but could include class of customers, commercialization risk, location, size, market risk, and regulatory risk. If the assets are not similar, the determination of whether the acquired set constitutes a business should be made using the framework as the acquired processes used to manage the assets may be substantive.
ASC 805-10-55-5C states that the following should not be considered similar assets for the purpose of performing the screen:
  • A tangible asset and an intangible asset
  • Intangible assets in different major intangible asset classes (e.g., customer-related intangibles and trademarks)
  • A financial and a nonfinancial asset
  • Different major classes of financial assets (e.g., accounts receivable and investments)
  • Different major classes of tangible assets (e.g., inventory and fixed assets)
  • Assets within the same major asset class that have significantly different risk characteristics (e.g., real estate investments that consist of residential and commercial properties)
Question BCG 1-2 discusses how assets should be recorded in a reporting entity’s books and records when two or more assets are combined as similar for the purpose of applying the screen test.
Question BCG 1-2
When two or more assets are combined as similar for the purpose of applying the screen test, how should the assets be recorded within a reporting entity’s books and records?
PwC response
The assets used for the screen test can be different from the assets recorded for financial reporting. Assets that are attached and inseparable should be considered a single asset for the purpose of applying the screen test. For example, land, the building on the land, and a related in-place lease intangible asset would be considered a single asset for the purpose of applying the screen test. However, for financial reporting purposes, three separate assets would be recorded in the reporting entity’s financial statements. The three separate assets would be accounted for separately under their respective accounting guidance.

Question BCG 1-3 discusses whether, subsequent to the adoption of ASC 842, Leases, the right-of-use asset should be included for the purpose of applying the screen test.
Question BCG 1-3
Does a right-of-use asset need to be considered in the screen test used to determine whether the transaction is a business combination or an asset acquisition?
PwC response
Yes, the right-of-use asset should be included in the screen test.
A single asset for purposes of the screen test includes any individual asset or group of assets that could be recognized and measured as a single asset under the business combination guidance (ASC 805). With the adoption of ASC 842, a right-of-use asset is recognized as a single asset. The right-of-use asset includes the favorable or unfavorable terms of the lease under the business combinations guidance, as discussed in BCG 4.3.3.7.
Consideration should also be given to whether the right-of-use asset should be grouped with other assets for purposes of applying the screen test. This grouping is only applicable for the screen test, and all assets acquired should be recorded separately in acquisition accounting. One scenario in which separately recorded assets must be grouped into a single asset for the purpose of applying the screen is a tangible asset that is attached to another tangible asset, including an intangible asset that represents the right to use an underlying tangible asset (e.g., a building with an associated right-of-use asset in a ground lease, leasehold improvements with an associated right-of-use asset in an office lease).
A right-of-use asset should be considered when grouping similar assets as well. The screen can also be met if the fair value of the set is concentrated in a group of similar assets. Entities should consider the nature of the assets and the risks associated with managing and creating outputs when determining if assets should be grouped as similar. For example, a company that leases multiple office buildings that each represent separate lease components should assess whether the lease components are considered similar assets that should be grouped for the purpose of applying the screen test.

Example BCG 1-1 discusses a reporting entity’s acquisition of real estate and the consideration of similar assets for the purpose of applying the screen test.
EXAMPLE BCG 1-1
Acquisition of real estate
Company XYZ is a real estate company that owns and manages a group of rental properties. In order to grow its business, Company XYZ purchases a set of ten residential homes (including the land, building, and property improvements) and the in-place leases associated with the properties. The residential homes acquired are located in the same city but are dissimilar in terms of size and layout. No employees or other assets are acquired with the homes and in-place leases.
Has Company XYZ purchased a business or a group of assets?
Analysis
The acquired assets should be considered similar for the purpose of applying the screen test. Although the homes are different in size and layout, the nature of the assets and the risks associated with operating the properties are similar. The in-place leases are related to the real estate and would be considered part of the group of similar assets when applying the screen.
As the land, building, leasehold improvements, and in-place leases are considered similar for the purpose of applying the screen test, 100% of the fair value of the gross assets acquired is concentrated in the group of similar identifiable assets. The set meets the screen test and would be considered an asset acquisition. When accounting for the asset acquisition, the assets would be recorded separately in accordance with US GAAP.

1.2.1.3 Gross assets for the purpose of applying the screen test

For the purpose of applying the screen test, the fair value of the gross assets acquired is not necessarily the same as the consideration transferred. This may be caused, for example, by liabilities assumed, which are factored into the determination of purchase price but are excluded from gross assets in the denominator of the screen test.
Gross assets will also differ from the consideration transferred in a partial acquisition (i.e., it is impacted when there are noncontrolling interests and previously held interests). When a transaction results in control of a legal entity being obtained, even if less than 100% of the entity is acquired, gross assets used in the screen should include the consideration transferred plus the fair value of any noncontrolling interests and previously held interests. For example, in the acquisition of a 60% controlling interest in an entity, the gross assets would include the 60% acquired interest plus the 40% noncontrolling interest (i.e., 100% of the gross assets would be used as the denominator in the screen). Similarly, this would apply for previously held equity interests. For example, if a company owned an initial 10% interest and subsequently acquired a 70% controlling interest, the gross assets would include the fair value of the 10% previously held equity interest, the 70% acquired interest, and the 20% noncontrolling interest.
The fair value of gross assets includes any consideration transferred in excess of the fair value of the net assets acquired (i.e., what would otherwise be recorded as goodwill in a business combination). However, gross assets acquired excludes the following items:
  • Cash and cash equivalents
  • Deferred tax assets
  • Goodwill resulting from the effects of deferred tax liabilities
These items are excluded as the FASB did not believe the tax form of the transaction and whether cash and cash equivalents were included should affect the determination of whether the set is a business. In addition, ASC 805-10-55-5A does not address whether gross assets should be reduced when a bargain purchase gain exists. Although a bargain purchase gain is not expected to be recognized frequently, we believe a bargain purchase gain should be excluded from the denominator. Otherwise, the bargain purchase gain would reduce the fair value of the gross assets acquired and potentially distort the outcome of the screen test (similar to if liabilities were included in the denominator).
Example BCG 1-2 illustrates a reporting entity acquiring a pharmaceutical company and the related accounting considerations, including the screen test.
EXAMPLE BCG 1-2
Acquisition of a pharmaceutical company
Company P is a pharmaceutical company. Company P acquires a 60% controlling interest in Company D in a nontaxable transaction for $240. The fair value of Company D’s net assets includes $200 cash, deferred tax assets of $50, and in-process research and development assets (IPR&D) of $100. The fair value of the noncontrolling interest is $160.
Are substantially all of Company A’s net assets concentrated in a single or group of similar assets?
Analysis
The gross assets acquired are $150, comprised of the $240 of consideration transferred plus noncontrolling interest of $160 less cash of $200 and deferred tax assets of $50. The excess of the gross assets acquired over the single asset represents what would be recorded as goodwill in a business combination.
The calculation of the screen test is as follows:
Single asset                        = $100 (IPR&D)
Gross assets acquired       = $150
As only 67% of the gross assets acquired are concentrated in a single asset, the screen test is not determinative that the set is an asset acquisition and the framework must be applied.

1.2.2 The framework: definition of a business

It is critical to determine whether the acquired set is a business because the accounting treatment for a business combination under ASC 805 differs from the accounting for an asset acquisition. ASC 805-10-55-3A defines a business.

Excerpt from ASC 805-10-55-3A

A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.

In order to be a business, a set needs to have an input and a substantive process that together significantly contribute to the ability to create outputs. The framework to evaluate whether an input and a substantive process are present includes different criteria to consider depending on whether the set has outputs or does not have outputs. The framework includes more stringent criteria for sets without outputs to be considered businesses. The definition of “outputs” is consistent with how outputs are described in ASC 606, Revenue from Contracts with Customers (i.e., the ability to generate goods or services provided to customers). See RR 1.2 for additional information. ASC 805 defines a business, inputs, processes, and outputs.

ASC 805-10-55-4

A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business. The three elements of a business are defined as follows:

  1. Input. Any economic resource that creates, or has the ability to contribute to the creation of, outputs when one or more processes are applied to it. Examples include long-lived assets (including intangible assets or rights to use long-lived assets), intellectual property, the ability to obtain access to necessary materials or rights, and employees.
  2. Process. Any system, standard, protocol, convention, or rule that when applied to an input or inputs, creates or has the ability to contribute to the creation of outputs. Examples include strategic management processes, operational processes, and resource management processes. These processes typically are documented, but the intellectual capacity of an organized workforce having the necessary skills and experience following rules and conventions may provide the necessary processes that are capable of being applied to inputs to create outputs. Accounting, billing, payroll, and other administrative systems typically are not processes used to create outputs.
  3. Output. The result of inputs and processes applied to those inputs that provide goods or services to customers, investment income (such as dividends or interest), or other revenues.

Inputs and processes that are not used to create outputs are generally not considered significant to the determination of whether the acquired group is a business. As discussed in ASC 805-10-55-4, whether the acquired group includes or excludes certain administrative or support processes, such as accounting, payroll, and other administrative systems, generally will not impact the determination of whether a business exists.
The nature of the elements (i.e., inputs, processes, and outputs) of a business varies based on industry, structure (i.e., locations of operations), and stage of development. The analysis of whether the necessary elements in an acquired group constitute a business is fact specific. For example, a new business may have fewer inputs or processes, and may only have a single output (or no outputs) compared to a mature business. As discussed in ASC 805-10-55-6, while nearly all businesses have liabilities, an acquired group need not have any liabilities to be considered a business. Conversely, a transferred set of assets and activities, including liabilities, may not represent a business. An acquired group or acquired input that contains no processes is not a business.
The assessment of whether a set is capable of being conducted and managed as a business should not be performed based on entity-specific facts and circumstances; rather, it should be based on a market participant view. Therefore, neither how the seller previously managed the set, nor how the buyer intends to manage the acquired set is relevant to the analysis.
Even though individual processes that are used to create outputs may be insignificant on their own, entities should consider if they could be substantive in the aggregate. Furthermore, while processes are usually documented, they do not need to be. For example, this could be the case with an organized workforce. An organized workforce could be an input, a process, or both. For example, a consulting firm might include employees (inputs) that utilize their intellectual capacity (a process) to generate outputs. However, an organized workforce is not in itself a business.

1.2.2.1 Definition of a business: outputs not present

When a set does not have outputs, in order to demonstrate an input and substantive process that together significantly contribute to the ability to create outputs, the set will need to include: (1) employees that form an organized workforce and (2) an input that the workforce could develop or convert into outputs. When a set does not have outputs, the workforce needs to be actively contributing to the development of outputs. Without employees, there are inherent limitations on the processes that can be performed to create outputs. ASC 805-10-55-5D clarifies how to determine if a set is a business when outputs are not present.

ASC 805-10-55-5D

When a set does not have outputs (for example, an early stage company that has not generated revenues), the set will have both an input and a substantive process that together significantly contribute to the ability to create outputs only if it includes employees that form an organized workforce and an input that the workforce could develop or convert into output. The organized workforce must have the necessary skills, knowledge, or experience to perform an acquired process (or group of processes) that when applied to another acquired input or inputs is critical to the ability to develop or convert that acquired input or inputs into outputs. An entity should consider the following in evaluating whether the acquired workforce is performing a substantive process:
  1. A process (or group of processes) is not critical if, for example, it is considered ancillary or minor in the context of all the processes required to create outputs.
  2. Inputs that employees who form an organized workforce could develop (or are developing) or convert into outputs could include the following:
    1. Intellectual property that could be used to develop a good or service
    2. Resources that could be developed to create outputs
    3. Access to necessary materials or rights that enable the creation of future outputs
Examples of inputs that could be developed include technology, mineral interests, real estate and in-process research and development.

An organized workforce must have the necessary skills, knowledge, or experience to perform an acquired process that when applied to another input, is critical to the ability to develop or convert the acquired input into outputs. An acquired workforce consisting of a small number of people (e.g., scientists working on a research and development project) may satisfy these requirements. Judgment will be required to determine whether the process performed by the organized workforce is critical to the ability to convert another acquired input into outputs. To make this judgment, the likelihood of producing an output if the acquired process was not present should be evaluated.
An organized workforce must consist of employees. That is, an organized workforce accessible through a contractual arrangement is not considered substantive enough to actually contribute to the development of outputs when outputs are not otherwise present in an acquired set. While the guidance does not include a formal definition of an employee, we believe it would be reasonable to use the definition of an employee included in the FASB guidance on stock compensation (ASC 718). Therefore, an employee would be someone who will have an employer-employee relationship with the acquirer based on common law as a result of the acquisition.
The guidance requires that the inputs be substantive and have the ability to create or contribute to the creation of outputs when one or more processes are applied to it. Ancillary assets, those that do not contribute to producing outputs, would not be considered inputs for purposes of determining whether the set has inputs.
In certain circumstances, outputs may be limited. In this situation, judgment is required when determining whether to evaluate the set as a set with outputs or a set without outputs. However, we generally believe that a set with limited outputs should be evaluated as a set without outputs.

1.2.2.2 Definition of a business: outputs present

A set will have outputs when there is a continuation of revenue before and after the transaction. However, the continuation of revenues does not on its own indicate that both an input and a substantive process have been acquired. When determining whether a process has been acquired, the presence of contractual arrangements that provide for the continuation of revenues, such as customer contracts, customer lists, and leases, would not be indicative of an acquired process and should be excluded from the analysis.
ASC 805-10-55-5E includes four examples of substantive processes, which when applied to an acquired input, significantly contribute to the ability to create outputs.

ASC 805-10-55-5E

When the set has outputs (that is, there is a continuation of revenue before and after the transaction), the set will have both an input and a substantive process that together significantly contribute to the ability to create outputs when any of the following are present:
  1. Employees that form an organized workforce that has the necessary skills, knowledge, or experience to perform an acquired process (or group of processes) that when applied to an acquired input or inputs is critical to the ability to continue producing outputs. A process (or group of processes) is not critical if, for example, it is considered ancillary or minor in the context of all of the processes required to continue producing outputs.
  2. An acquired contract that provides access to an organized workforce that has the necessary skills, knowledge, or experience to perform an acquired process (or group of processes) that when applied to an acquired input or inputs is critical to the ability to continue producing outputs. An entity should assess the substance of an acquired contract and whether it has effectively acquired an organized workforce that performs a substantive process (for example, considering the duration and the renewal terms of the contract).
  3. The acquired process (or group of processes) when applied to an acquired input or inputs significantly contributes to the ability to continue producing outputs and cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs.
  4. The acquired process (or group of processes) when applied to an acquired input or inputs significantly contributes to the ability to continue producing outputs and is considered unique or scarce.

It is not uncommon for various processes to be performed by third parties through contractual arrangements (e.g., asset managers). However, just because the set includes access to a workforce does not necessarily mean that the workforce is substantive. Similar to the framework for when outputs are not present, an entity will need to consider if the workforce accessed through a contractual arrangement is critical to continue producing outputs. For instance, the duration and renewal terms of a contract may be an indication of how critical the functions performed are.
An organized workforce can be an indicator of a substantive process. However, when outputs are present, an organized workforce is not required for the set to be considered a business. A substantive process can exist without an organized workforce (e.g., if the set includes an automated process through acquired technology or infrastructure). See Example BCG 1-3 for an example of an acquisition of brands, Example BCG 1-4 and Example BCG 1-5 for examples of an acquisition of a license agreement, and Example BCG 1-6 for an example of an acquisition of office buildings.
EXAMPLE BCG 1-3
Acquisition of brands
Company X is a global beverage manufacturer. Company X sells the worldwide rights of its oat milk brand, including all related intellectual property, to Company Y. Company Y also acquires (1) existing customer contracts, and (2) an at-market supply contract with the manufacturer of the oat milk, but it does not acquire any employees.
Has Company Y acquired a business or a group of assets?
Analysis
The set is not a business. Since the set includes outputs through the continuation of revenues with customers, Company Y would evaluate whether there is an acquired substantive process. Revenue contracts with customers are excluded from the analysis. The set does not include an organized workforce and the oat milk production process was not acquired by Company Y; therefore, no substantive processes were acquired. Although it is likely that economic goodwill exists as a result of revenue derived from future customers, the goodwill will be reflected in the fair value of the assets acquired.
EXAMPLE BCG 1-4
Acquisition of a license agreement
Pharma Co. is a clinical-stage biopharmaceutical company that has an advanced drug in Phase 2 of clinical trials. Company A enters into a license agreement with Pharma Co. for the exclusive global license to the drug’s intellectual property, including R&D, manufacturing, and commercialization. No employees or other assets are acquired with the license agreement. The drug being licensed is not yet generating revenues. Company A also enters into two limited-time period arrangements at market rates, including a supply arrangement for product materials and an outsourced service arrangement (for development and clinical trials).
Is the arrangement the acquisition of a business?
Analysis
No. The acquired group is not a business. Pharma Co. would conclude that the license agreement would be accounted for as a single asset in a business combination. As a result, the set would meet the screen and would not be a business combination. Even if the set was assessed under the more detailed framework, since no employees were acquired and there is no continuation of revenue, the set does not contain outputs or a substantive process.
EXAMPLE BCG 1-5
Acquisition of a license agreement
Pharma Co. is a clinical-stage biopharmaceutical company that has an advanced drug in Phase 2 of clinical trials. Company A enters into a license agreement with Pharma Co. for the exclusive global license to the drug’s intellectual property, including R&D, manufacturing, and commercialization. The drug being licensed is not yet generating revenues. The set also includes experienced management and scientists as well as a corporate headquarters building, including a research lab with equipment necessary to develop the drug. Company A also enters into two limited-time period arrangements at market rates, including a supply arrangement for product materials and an outsourced service arrangement (for development and clinical trials).
Is the arrangement the acquisition of a business?
Analysis
Yes. The acquired group is a business. The identifiable assets in the set include the license agreement as well as the headquarters building, research lab, and equipment. As a result, the set does not meet the screen and the framework must be assessed.
Although the set does not have outputs, the acquirer would likely conclude that the workforce has the necessary skills, knowledge, and experience to continue or expand existing R&D activities. The experienced management and scientists represent an organized workforce that when applied to the acquired inputs (IPR&D) significantly contribute to the ability to create outputs.
EXAMPLE BCG 1-6
Acquisition of office buildings
Company A manages a portfolio of office buildings. Company A has a contract with a property management company. The executives of Company A are responsible for key strategic decisions, including identifying new properties to acquire. The property managers perform the primary duties related to tenant and lease management and property-level accounting. Company A has 25 domestic properties across five different states and each office building is diversified in terms of design construction.
Company B acquires Company A. At closing, the former executives of Company A become senior executives of Company B. None of the other employees of Company A join Company B. Additionally, Company B does not acquire the contract with the property management company.
Has Company B acquired a business?
Analysis
Yes. The acquired group is a business. The office buildings are not considered similar as the risks are significantly different (e.g., different geography, design) and may produce different cash flows throughout the period. As a result, the set does not meet the screen and the framework would need to be assessed.
Employees that form an organized workforce for property management services were not obtained since the property management contract was not acquired. However, the former executives are critical employees (due to the executive nature of their positions), which together with the continuation of revenue, indicates that the set includes a substantive process and is a business.

1.2.3 The presence of goodwill in an acquisition

ASC 805-10-55-9 addresses the presence of goodwill and whether a business exists when it is present.

Excerpt from ASC 805-10-55-9

The presence of more than an insignificant amount of goodwill may be an indicator that the acquired process is substantive and, therefore, the acquired set is a business. However, a business need not have goodwill.

A business may exist when goodwill is present in the acquired group. Evidence to the contrary would need to be considered. Therefore, the presence of goodwill in the acquired group could imply that the acquired group is a business, and any inputs or processes that may be missing are unlikely to prevent the acquired group from providing a return to its investors. An acquirer should consider whether all of the tangible and intangible assets in the acquired group have been specifically identified, recognized, and correctly valued before determining whether goodwill is present.
The lack of goodwill in an acquired group does not create a presumption that the acquired group is not a business. An acquired group may constitute a business without any goodwill being present (e.g., a bargain purchase as discussed in BCG 2.6.2).
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