The accounting for intercorporate investments, which is (the) equity method and consolidation, assumes that (the) acquirer firm purchases a target business firm. If the target firm is not a business, (the) acquirer firm accounts for the investment using accounting for asset acquisitions. Let me please give you the formal definition of a business. First, we define a business as an integrated set of activities and assets that are 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. First, we further clarify the definition of business as follows. A business consists of inputs, and processes apply to those inputs that have the ability to contribute to the creation of outputs. In other words, a business has three main components: inputs, processes, and outputs. There is a two-step test to understand whether an acquisition is a business. In the first step, we ask, "Is substantially all fair value of gross assets acquired concentrated in a single identifiable asset or a group of similar identifiable assets?" If the answer is yes, then this is an asset acquisition, not a business acquisition. In the second step, we ask, "Were the input and substantive process that significantly contribute to the ability to create output acquired?" If the answer is yes, then this is a business acquisition and therefore, we can use accounting for intercorporate investments. Let me please give you an example. ABC acquires, renovates, leases, sells, and manages real estate properties. ABC acquires 10 single-family homes and 10 in-place leases. Each single-family home includes the land, building, and property improvements. Each home has a different floor plan, square footage, lot, and interior design. No employees or other assets are required. The question is whether the acquisition of ABC qualifies as a business. The answer is no, because the nature of the assets acquired is the same, just single-family homes. In other words, this acquisition fails the first step of the business test. Here is another example. Assume the same facts as in example one, except that ABC also acquires an office park with 6 10-story office buildings, leased to maximum occupancy. ABC also acquires the vendor contracts for outsourced cleaning, security, and maintenance. Sellers, employees that perform leasing, tenant management, and financing are not included in the set. The question is whether the acquisition of ABC now qualifies as a business? The answer is again, no, because sellers, employees that perform leasing, tenant management, and financing are not included in the purchase. In other words, this acquisition fails the second step of (the) business test. In Example 3, we are given the following information. Assume the same facts as in Example 2, except that this set includes employees responsible for leasing, tenant management and managing and supervising (of) all operational processes. The question is still whether the acquisition of ABC qualifies as a business? The answer is yes, because ABC purchased assets with different natures and the associated substantive processes. In other words, this acquisition satisfies both steps of the business test.
