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13.2 Definition of a business
Publication date: 28 Feb 2022
us IFRS & US GAAP guide
Determining whether the acquisition method applies to a transaction begins with understanding whether the transaction involves the acquisition of one or more businesses. The definition of a business affects whether an acquisition is within the scope of the business combination standards. While the definition of a business is largely converged, there are differences between the standards, including with regard to the screen (concentration) test and how an organized workforce is considered.
It is critical to determine whether an integrated set of activities and assets is a business because the accounting treatment for a business combination differs from the accounting for an asset acquisition under US GAAP and IFRS. See PPE 2.7 and PwC Manual of Accounting 29.247.3 for additional information on the accounting for asset acquisitions versus business combinations.
US GAAP | IFRS |
The screen test is required under US GAAP. 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. If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset (or a group of similar identifiable assets), the assets acquired would not represent a business. This provision provides gating criteria that, if met, eliminates the need for further assessment.
| The IFRS equivalent to the mandatory US GAAP screen test (i.e., the concentration test) is optional under IFRS. An entity can choose to apply or bypass the concentration test on an acquisition by acquisition basis under IFRS.
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A business includes, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The framework to evaluate when an input and substantive process is present includes different criteria to consider depending on whether the set has outputs. The framework includes more stringent criteria for sets without outputs to be considered businesses. 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.
The definition of outputs is consistent with ASC 606, Revenue from Contracts with Customers (i.e., the ability to generate goods or services provided to customers). Outputs are the result of inputs and processes applied to those inputs that provide goods or services to customers, other revenue, or investment income (e.g., dividends, interest).
Under US GAAP, the presence of more than an insignificant amount of goodwill may be an indicator that a substantive process has been acquired. However, the presence of economic goodwill is not determinative as to whether the acquired activities constitute a business.
| 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 depending on whether the set has outputs or does not have outputs. When a set does not have outputs, the set will need to include (1) an organized workforce and (2) an input that the workforce could develop or convert into outputs. However, under IFRS an organized workforce can be comprised of an acquired outsourcing contract while US GAAP only considers an organized workforce that is comprised of employees.
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