On October 27, 2022, FASB issued a proposal seeking feedback on clarifying changes to recognition and initial measurement for joint ventures (JV). To reduce diversity in practice and provide decision-useful information to investors, a JV would be required to apply a new basis of accounting. At formation, a newly formed JV would initially measure its assets and liabilities at fair value. The proposal does not change the JV definition, the accounting by an equity method investor for its investment in a JV, or the accounting by a JV for contributions received after its formation. Comments are requested by December 27, 2022.
Current accounting rules do not provide specific authoritative guidance on how a JV, at its formation, should recognize and initially measure assets contributed and liabilities assumed. Current guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, issued in 1973, explicitly provides that transactions between a corporate JV and its owners are outside the scope of Accounting Standards Codification (ASC) 845, Nonmonetary Transactions. Statement 141 excludes JV formation from the scope of ASC 805, Business Combinations. In the absence of specific guidance, practice has been influenced by various sources, including speeches given by the SEC staff that, not surprisingly, have given rise to diversity in practice. Some JVs initially measure their net assets at fair value at the formation date, while other joint ventures account for their net assets at the venturers’ carrying amounts.
The change would affect the accounting for contributions received upon formation by entities that meet the JV or a corporate JV definition.
The changes would not apply to:
- Transactions between a JV and its owners other than the formation of a JV
- Formations of entities determined to be not-for-profit entities under ASC 958, Not-for-Profit Entities
- Combinations between entities, businesses, or nonprofit activities under common control
- Entities in the construction or extractive industries that may be proportionately consolidated by their investor-venturers
- Collaborative arrangements within the scope of ASC 808
A JV, upon formation, would apply a new basis of accounting that would result in the joint venture entity initially measuring its identifiable assets and liabilities in accordance with the business combinations guidance in ASC 805-10. A newly formed JV would initially measure its assets and liabilities at fair value. This approach is consistent with other new basis of accounting models in GAAP, such as fresh start reporting under ASC 852, Reorganizations. It is consistent with the accounting outcome that would result from treating the JV entity as the acquirer of a business within the scope of Subtopic 805-10, Business Combinations—Overall.
- Formation date is defined as the date an entity initially meets the JV definition, which may not always be the legal entity formation date.
- A JV would measure its identifiable net assets and goodwill, if any, at the formation date.
- Initial measurement of the JV’s total net assets would be equal to the fair value of 100% of a JV’s outstanding equity interests. A JV must measure its total net assets upon formation as the fair value of the JV entity as a whole, which would equal the fair value of 100% of a JV’s outstanding equity interests immediately following formation (including any noncontrolling interest in the net assets recognized by the JV).
- A JV would be prohibited from applying the measurement period guidance in Subtopic 805-10 to the amounts recognized upon formation.
- Disclosures should help a financial statement user understand the nature and financial effect of the JV formation in the period in which the formation date occurs. These are different than the requirements for business combinations.
- The formation date
- A description of the purpose for which the JV was formed, e.g., to share risks and rewards in developing a new market, product, or technology; combine complementary technological knowledge; or to pool resources in developing production or other facilities
- The formation-date fair value of the JV as a whole
- A description of the assets and liabilities recognized by the JV at the formation date
- The amounts recognized by the JV for each major class of assets and liabilities as a result of accounting for its formation, either presented on the face of financial statements or disclosed in the financial statement notes
- A qualitative description of the factors that make up any goodwill recognized, such as expected synergies from combining operations of the contributed assets or businesses, intangible assets that do not qualify for separate recognition, or other factors
Effective Date & Transition
The effective date will be determined after FASB reviews comment letter feedback. JVs formed after the effective date would apply the proposed guidance prospectively to their formation transactions. JVs formed before the effective date would have an option to elect to apply the guidance retrospectively.
For more information, visit forvis.com.