Existing accounting rules don’t provide guidance on how newly formed joint ventures should record contributed assets and assumed liabilities that, as a result, have caused diversity in practice. For example, joint ventures might be recording contributed net assets at either the venturers’ carrying amounts or their fair values at the formation date.
In August 2023, the FASB tackled this gap in joint venture guidance by issuing ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The ASU adds a new Subtopic, FASB ASC 805-60, Business Combinations—Joint Venture Formations.
The FASB ASC indicates that a joint venture represents an entity that is a separate and specific business or project owned or operated by a small number of businesses or venturers for the mutual benefit of the group members. Joint ventures often develop a new technology, product, or market; pool resources for the development of other facilities or production; or combine complementary technological knowledge. Also, a joint venture will normally provide an arrangement where the joint venturers will participate in the joint venture’s overall management, either directly or indirectly.
The new ASU applies to contributions received upon the formation of a joint venture. Existing joint ventures are provided the option to apply the ASU guidance on a retrospective basis.
The ASU requires new joint ventures to apply a new basis of accounting. Such joint ventures are required to initially measure assets and liabilities at fair value. Stakeholders supported this approach since they viewed the formation of the joint venture as a change in control of the contributed assets. Stakeholders also believed that fair value was more relevant than the venturers’ carrying amounts. In addition, the use of fair value is generally consistent with other GAAP new basis accounting models, as well as the accounting result which would occur if the joint venture was treated as the acquirer of a business under FASB ASC 805-10, Business Combinations—Overall.
Under the ASU, however, the following adaptions are made from the business combinations guidance:
- The joint venture represents the formation of a new entity without an accounting acquirer. Therefore, no accounting acquirer is identified.
- Identifiable net assets and any goodwill are measured at the formation date. The joint venture formation date represents the date which the entity meets the definition of a joint venture.
- The initial measurement of the total net assets of the joint venture equals the fair value of all of the joint venture’s equity. The fair value of the joint venture, as a whole, equals the fair value of 100% of the equity at formation including any recognized noncontrolling interest in the net assets.
- Joint venture disclosures. Joint venture disclosures differ from what is required for business combinations. (See discussion that follows.)
The amendments in the ASU also allow the joint venture to follow the measurement period guidance in FASB ASC 805-10 when the initial accounting for the joint venture is incomplete by the end of the period in which the formation occurs.
Furthermore, private companies can elect to follow the accounting alternative for the recognition of identifiable assets as set forth in FASB ASC 805-20-25-30 to 25-33.
In the period the joint venture is formed, the following disclosures are required:
- Information enabling users of the financial statements to understand the financial impact and nature of the joint venture formation.
- Description of the purpose of the joint venture.
- Formation date.
- Description and amounts of the assets and liabilities recognized.
- A qualitative description of the factors that comprise goodwill recognized.
- The amounts recognized at formation by the joint venture for each major class of assets and liabilities.
- Certain information when the initial accounting for a joint venture is incomplete.
The ASU is effective prospectively for joint venture formations dated on or after January 1, 2025.
Also, the amendments of the ASU provide an election for joint ventures formed before January 1, 2025, to apply the guidance retrospectively if sufficient information is available.
Early adoption is allowed in any interim or annual period where the financial statements haven’t yet been issued (or made available for issuance), either prospectively or retrospectively.
| Practical Consideration: Remember that the FASB provides the full content of all ASUs issued on their website at www.fasb.org. |
