The acquisition of the sublicense by Nature’s Beverage to distribute Herbal T does not meet the definition of a business. The given case presents a business transaction between Coffee Co. and Nature’s Beverage to distribute Herbal T through an acquisition of the sublicense by the latter. A new definition of business needs to include three major elements which are inputs, processes, and outputs. According to FASB Accounting Standards Update No. 2017-01, point 805-10-55-3A: “A business is 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.” Paragraph 805-10-55-4 states: “A business consists of inputs and processes applied to those inputs that have the ability to contribute to the creation of outputs.” Thus, a business must have inputs, a substantive process, and outputs.
In accordance with paragraph 805-10-55-5E, the conclusion is that the main substance of these contracts is rooted in the fact that they only provide acquisition of inputs, which means that there is no clear, organized workforce. Therefore, there is no clear substantive process that would utilize inputs and generate outputs, where the latter is manifested in the distribution in South America. Input is defined as “any economic resource that creates or has the ability to contribute to the creation of outputs when one or more processes are applied to it.” The sublicense acquisition can be considered as different identifiable intangible assets since it includes distribution rights and customer contracts, which makes the given case lack proper inputs.
Firstly, the case does not involve an organized workforce defined by paragraph 805-10-55-5E (a) or (b) of FASB Accounting Standards Update No. 2017-01. Secondly, there is no acquisition of processes in accordance with paragraphs 805-10-55-5E (c) or (d). The case lacks a substantive process and a proper input but has an output. Thus, the acquisition of the sublicense by Nature’s Beverage to distribute Herbal T does not meet the definition of a business.
In other words, the sublicense contract between Coffee Co. and Nature’s Beverage lacks essential details for determining it as a business. The relationships between the enterprises do not imply the involvement of new employees, which would be responsible for the agreed operations. Instead, the task for Nature’s Beverage is limited to the participation of employees and the use of available distribution capabilities. It is clear that its presence in South America might require hiring new personnel in the long run, but this measure is not secured by the current contract. The absence of the acquisition of processes means following the already established procedures without introducing innovative approaches. Since Herbal T is a popular product in the country of operation, the described efforts are merely its promotion rather than the creation of something new. As for the input, it also indicates no changes in the practices of the companies but the delegation of tasks from one actor to another.