A client buys an apartment building, or a drug license, or a customer list with a few employees. The deal memo calls it an acquisition. The accounting depends on one prior question: did the client acquire a business or a group of assets? The answer changes whether goodwill exists, whether deal costs hit earnings and how the purchase price lands on the balance sheet.
This guide walks through the screen test that ASU 2017-01 added, the two accounting models, a side-by-side journal entry and the evidence an auditor should find in the file. For the full business combination mechanics, see /us/blog/asc-805-business-combinations-private-companies and /us/blog/asc-805-purchase-price-allocation-worked-journal-entries.
What is the screen test?
The screen is the first and cheapest step in deciding whether an acquired set is a business. It asks whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If the answer is yes, the set is not a business and the transaction is an asset acquisition. No further analysis of inputs, processes or outputs is needed.
Four mechanics matter in practice:
- No bright line. The standard does not define "substantially all" or give a percentage. When the result sits close to the line, the conclusion needs documented support.
- Combined assets. Tangible assets that are physically attached, such as land and a building, count as one asset for the screen. So do an in-place lease intangible and the related leased asset. They are still recorded separately.
- Similar assets. Assets are similar only when they share a nature and a risk profile. A tangible asset and an intangible asset are never similar for this purpose.
- Gross assets. The measure excludes cash and cash equivalents, deferred tax assets and goodwill arising from deferred tax liabilities. Liabilities are not netted. Consideration above the fair value of net assets is included.
What if the screen is not met?
The set is then assessed against the definition of a business: an integrated set of activities and assets that can be conducted and managed to provide a return. At a minimum the set needs an input and a substantive process that together significantly contribute to the ability to create outputs. A business need not include every input or process the seller used, if market participants are capable of acquiring it and continuing to produce outputs.
Without outputs, the set must include an organized workforce and an input the workforce could develop or convert into outputs. Contracted workers do not count. With outputs, meaning revenue continues before and after the transaction, customer contracts, customer lists and leases are not themselves acquired processes. A substantive process shows up as an organized workforce performing a critical process, or a process that cannot be replaced without significant cost, effort or delay.
More than an insignificant amount of goodwill may indicate that an acquired process is substantive, but a business need not have goodwill.
ASU 2017-01 applies prospectively. It was effective for public business entities for annual periods beginning after December 15, 2017. For all other entities it applied to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
How does the accounting differ?
| Item | Business combination | Asset acquisition |
|---|---|---|
| Model | Fair value of identifiable assets and liabilities | Cost accumulation, allocated by relative fair value |
| Goodwill | Excess of consideration over net fair value | None. Excess cost is allocated to the identifiable assets |
| Transaction costs | Expensed as incurred | Capitalized into the cost of the assets |
| Contingent consideration | Fair value at acquisition, remeasured through earnings until settled | Generally recorded when probable and reasonably estimable under ASC 450 and added to asset cost. A contingent payment that is a derivative is carried at fair value through earnings. Some entities record it only when the contingency resolves |
| Acquired IPR&D | Recognized at fair value as an indefinite-lived intangible | Expensed unless it has an alternative future use |
Asset acquisitions are covered by ASC 805-50. For contingent consideration in business combinations, see /us/blog/asc-805-contingent-consideration-earnouts.
Worked journal entries
An illustration with round numbers. A client pays $1,000,000 cash for an office building and its land, and pays $20,000 of legal and due diligence fees. Land fair value is $300,000 and building fair value is $700,000. The tenant leases are at market rates and no employees, systems or management contracts transfer.
Substantially all of the fair value sits in land and building, which are attached tangible assets and count as one asset. The screen is met. This is an asset acquisition.
Asset acquisition. Cost is $1,020,000, allocated by relative fair value (30 percent land, 70 percent building):
| Account | Debit | Credit |
|---|---|---|
| Land | 306,000 | |
| Building | 714,000 | |
| Cash | 1,020,000 |
Now change the facts. Suppose the same $1,000,000 buys a set with net identifiable assets at fair value of $900,000 and a working management team, and the screen is not met and the set is a business.
Business combination. Goodwill is the $100,000 excess, and deal costs are expensed:
| Account | Debit | Credit |
|---|---|---|
| Identifiable net assets, at fair value | 900,000 | |
| Goodwill | 100,000 | |
| Transaction costs expense | 20,000 | |
| Cash | 1,020,000 |
In an asset acquisition with the same $1,000,000 price and $900,000 of identifiable asset fair value, the extra $100,000 is not goodwill. It increases the cost allocated to the identifiable assets by relative fair value.
Audit angle
The classification is a judgment, and management owns it. The auditor tests whether the conclusion is documented and supported.
- Inspect the memo. Look for the screen computation with fair values by asset, the grouping logic for similar assets and the conclusion.
- Test the fair values. The screen depends on them. Agree them to appraisals or valuation reports, and use the work of a specialist where needed, see /us/standards/au-c-540.
- Test the process analysis. When the screen fails, look for evidence of the workforce, the process and the outputs: employee lists, transferred contracts, the purchase agreement.
- Recompute the entry. Check that deal costs are capitalized or expensed consistently with the conclusion, and that goodwill appears only in a business combination.
- Check contingent consideration. The initial and subsequent accounting follows the classification.
- Review the closing file. Agree the purchase agreement, funds flow and invoices to the entry.
Common misstatements: expensing legal fees on an asset purchase, recording goodwill on a land and building purchase, skipping the screen and calling every acquisition a business, and ignoring a close call where the screen result sits near the line.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- PwC Viewpoint, Business combinations guide, 1.2 Definition of a business: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/business_combination/business_combination__28_US/chapter_1_scope_US/12_definition_of_a_b_US.html
- PwC Viewpoint, PP&E and other assets guide, 2.1 Asset acquisitions chapter overview: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/property_plant_equip/property_plant_equip_US/Chapter-2--Asset-acquisitions-formerly-BCG-7/21-Asset-acquisitions--chapter-overview.html
- PwC Viewpoint, PP&E and other assets guide, 2.7 Contingent consideration arrangements and IPR&D in asset acquisitions: https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/property_plant_equip/property_plant_equip_US/Chapter-2--Asset-acquisitions-formerly-BCG-7/27-Contingent-consideration-arrangements-with-IPRD.html
- EisnerAmper, ASU 2017-01: FASB Clarifies Definition of a Business: https://eisneramper.com/business-definition-fasb-ta-blog-0617
- KPMG, Handbook: Asset acquisitions (cost model, transaction costs, contingent consideration, IPR&D): https://kpmg.com/us/en/frv/reference-library/2025/handbook-asset-acquisitions.html
- FASB, Accounting Standards Update 2017-01, Clarifying the Definition of a Business (screen, framework, effective dates): https://storage.fasb.org/ASU%202017-01.pdf
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