What is a Business?
The accounting definition of a business can be found in ASC 805. ASC 805-10-20 defines as business as, “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 addition to this definition, ASC 805-10-55-4 through 9 provide implementation guidance that is helpful in determining what constitutes a business.
It Was a Business, Now it’s Not?
ASC 805 changed the definition of a business for this scope exception. Prior to ASC 805, the definition was provided by ASC 810-10-55-19 through 15. An entity determined to be a business under the previous definition did not need to reassess simply because the definition changed. However, if a redetermination event has occurred requiring redetermination of the entity as a VIE, then the new ASC 805 definition must be applied. This may result in a entity previously exempted from the VIE model as a business no longer qualifying for that scope exception.
Additionally, the conditions necessary to qualify for this scope exception (ASC 810-10-15-17(d)) must be evaluated as of each reporting date. If all of the conditions are not met, then the business scope exception is no longer available.
Is It a Business?
The evaluation of whether an entity is a business or not can get messy.The definition of a business in ASC 805 is principles based and therefore open to interpretation and judgment. The definition is provided above. ASC 805-10-55-4 provides further guidance by declaring that, “A business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set to qualify as a business.” This last element is important when evaluating a development stage entity which will likely have no outputs for an extended period of time. In the case of a development stage entity, ASC 805-10-55-7 provides other factors that should be considered.
Even if the entity is deemed to be a business, there are additional conditions that must be met. These are set forth ASC 810-10-15-17(d) and will be evaluated individually in subsequent questions.