The Financial Accounting Standards Board (FASB) issued a new standard on Wednesday that addresses the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements.
“The objectives of the amendments are to (1) provide decision-useful information to investors and other allocators of capital (collectively, investors) in a joint venture’s financial statements and (2) reduce diversity in practice,” the FASB said in the Accounting Standards Update (ASU).
The ASU applies to the formation of entities that meet the definition of a joint venture or a corporate joint venture as defined in the FASB Accounting Standards Codification (ASC) Master Glossary.
An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.
However, Generally Accepted Accounting Principles (GAAP) currently does not provide specific guidance on how a joint venture, upon formation, should recognize and initially measure assets contributed and liabilities assumed, including the assets and liabilities of businesses contributed, the FASB said. Instead, GAAP explicitly provides that transactions between a corporate joint venture and its owners are outside the scope of Topic 845, Nonmonetary Transactions, and that the formation of a joint venture is outside the scope of Topic 805, Business Combinations.
Stakeholders told the FASB that the lack of guidance has resulted in diversity in practice in how contributions to a joint venture upon formation are accounted for by the joint venture.
“In the absence of specific guidance, practice has been influenced by various sources, including speeches given by the U.S. Securities and Exchange Commission staff,” the FASB said. “As a result, there is diversity in practice in how a joint venture accounts for the contributions it receives upon formation—some joint ventures initially measure their net assets at fair value at the formation date, while other joint ventures initially measure their net assets at the venturers’ carrying amounts.”
The amendments in the ASU provide decision-useful information to a joint venture’s investors and reduce diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation, the FASB said. As a result, a newly formed joint venture would initially measure its assets and liabilities at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance.
The amendments in this ASU are effective prospectively for all joint ventures with a formation date on or after Jan. 1, 2025, and early adoption is permitted.
Additionally, a joint venture that was formed before the effective date of the ASU may elect to apply the amendments retrospectively if it has sufficient information, the FASB said.