The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, in August 2023. 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 Accounting Standards Codification (ASC) 845, Nonmonetary Transactions, and the accounting for the formation of a joint venture is outside the scope of ASC 805, Business Combinations. Although there is a definition for “joint venture” in FASB’s 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, ASU 2023-05 requires a newly formed joint venture to apply a new basis of accounting for its identifiable assets and liabilities and any noncontrolling interest. 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 with certain exceptions that are consistent with those in ASC 805.
This white paper covers the requirements of ASU 2023-05, including the scope, steps required to apply the guidance, disclosures, and the transition method and effective date. Additionally, the white paper briefly highlights how to apply the existing joint venture definition and the accounting at formation by the venturers.
