In January 2017 the Financial Accounting Standards Board (FASB) issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business. Why is this important for the real estate industry? This guidance provides clarity that is key to determining whether an acquisition of real estate should be accounted for as an acquisition of an asset or a business, and may significantly impact the conclusion reached.
 
Under ASU 2017-01, if substantially all the fair value of the gross assets acquired are from a single identifiable asset or similar identifiable assets, then the set is not considered a business and, therefore, will not be impacted by ASC 805. Single identifiable assets include any individual asset or group of assets that could be recognized and measured as a single asset in a business combination. For purposes of evaluating, a single identifiable asset is a tangible asset that is attached to and cannot be physically removed from another tangible asset without incurring significant costs. Single identifiable assets would also include in-place leases and above- or below-market-value lease intangibles.  
 
If an acquisition does not meet the single identifiable asset exception, the entity would need to evaluate if a set of activities and assets are present to be considered a business. To meet the definition of a business, there must be, at minimum, an input and a substantive process that together significantly contribute to the ability to create an output.
 
ASU 2017-01 provides examples specific to real estate that should be helpful in making this assessment.
 
This amendment is effective for annual periods beginning after December 15, 2017, for public companies and after December 15, 2018, for all other companies. Early adoption is permitted for any transactions occurring before the issuance or effective date, if the financial statements have not been issued or made available for issuance.

Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.