The Financial Accounting Standards Board (FASB) has issued final Accounting Standards Update (ASU) 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The ASU was issued to address the current diversity in practice when accounting for joint venture formations in the separate financial statements of the joint venture. Currently, transactions between a corporate joint venture and its owners are outside the scope of Topic 845, Nonmonetary Transactions, and the accounting for the formation of a joint venture is outside the scope of Topic 805, Business Combinations. Although there is a definition for “joint venture” in FASB’s Accounting Standards Codification (ASC) Master Glossary, the lack of guidance on the initial measurement of assets contributed and liabilities assumed in a newly formed joint venture has led to diversity in practice.
To reduce the diversity in practice and improve the usefulness of information provided to a joint venture’s investors, the ASU requires a newly formed joint venture to apply a new basis of accounting for its identifiable assets and liabilities and any non-controlling interest (NCI). Therefore, in accordance with the new guidance, a joint venture will initially measure its assets and liabilities at fair value at the date of formation, which is broadly consistent with the accounting outcome that would result from treating the joint venture as the acquirer in a business combination.
The new guidance does not change the accounting by an equity method investor for its investment in the joint venture or the accounting for contributions received by a joint venture after its formation. Additionally, the scope of new guidance does not include the accounting for a joint venture that is proportionately consolidated by one or more of the venturers, the accounting for formations of entities determined to be not-for-profit entities in accordance with Topic 958, Not-for-Profit Entities, or collaborative arrangements within the scope of Topic 808, Collaborative Arrangements, unless any part of the arrangement is conducted in a separate legal entity that meets the definition of a joint venture.
What are the new requirements?
Under the new guidance, an entity will undertake the following steps in accounting for a joint venture formation:
- Determine the formation date – This is the date on which an entity initially meets the definition of “joint venture” in the ASC Master Glossary. The formation date represents the measurement date for all transactions that comprise the formation of the joint venture.
- Recognize and measure any identifiable assets, liabilities, and any noncontrolling interest in accordance with Subtopic 805-20, Business Combinations ― Identifiable Assets and Liabilities, and Any Noncontrolling Interest – The recognition and measurement of the identifiable net assets at formation includes certain exceptions that are consistent with business combinations guidance and can be adjusted by applying the measurement period guidance in Subtopic 805-10 should all information not be available at that date. Additionally, joint ventures that are private companies can elect the private company alternatives available for goodwill and certain intangibles.
- Recognize and measure the goodwill, if any, utilizing the fair value of the joint venture as a whole immediately after formation – Goodwill is measured as the excess of (1) the fair value of 100% of the joint venture’s equity immediately following formation (including any NCI) less the fair value of net identifiable assets at the formation date measured in the immediately preceding step.
Disclosures, effective date, and transition
The ASU requires a joint venture to disclose information about the nature and financial effect of the joint venture formation in the period in which the formation date occurs, including information about:
- The formation date
- A description of the purpose for the which the joint venture was formed
- The formation-date fair value of the joint venture as a whole
- A description of the assets and liabilities recognized at the formation date
- The amounts recognized for each major class of assets and liabilities (either presented on the face of the financial statements or disclosed in the notes)
- A qualitative description of the factors that make up any goodwill recognized
The ASU is effective for joint ventures with formation dates occurring on or after January 1, 2025. Early adoption of the new standard is permitted in any interim or annual period. The required application method for the standard is prospective. Full retrospective application is available for any joint ventures formed before January 1, 2025, that voluntarily decide to adopt the guidance, subject to the availability of sufficient information to do so.
RSM commentary
The definition of “joint venture” in the ASC Master Glossary was not amended by the new ASU. Companies will need to continue to carefully assess whether the legal entity structure formed, even if described or referred to as a joint venture, meets the criteria to be accounted for within the scope of the new guidance. Under the new guidance, this assessment becomes even more critical because a company not only has to determine whether the legal entity meets the definition of a “joint venture,” it also must determine the date at which the legal entity initially met the definition. That date will dictate the single formation date at which all contributions from the venturers to form the entity should be recognized and measured.
In practice, formations of joint ventures often comprise multiple contributions over a period of time. Companies should review the factors provided in the ASU to assist in (1) determining the formation date and (2) distinguishing between contributions that are part of the formation and those that are not. It should not be assumed that the formation date under the new guidance is the legal entity formation date or the date that the venturers contributed their respective assets (i.e., the measurement date for the venturer’s accounting purposes).
