Businesses planning to form a joint venture, which is defined as “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,” should be aware of changes issued by the FASB in August 2023.
ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement provides new accounting guidance for joint ventures. This change is intended improve consistency in accounting for newly formed joint ventures and to provide more useful information in a joint venture’s separate financial statements related to contributions made to the joint venture upon formation.
The Main Provisions
As U.S. GAAP did not provide guidance on how joint ventures should recognize and initially measure the assets contributed and liabilities assumed upon formation, there was much diversity in practice. ASU 2023-05 requires that, upon formation, the joint venture apply a new basis of accounting and, thus, should initially measure its assets and liabilities at fair value (with certain exceptions to fair value as prescribed by the business combinations guidance).
This ASU requires that, upon formation, a joint venture apply the following key adaptations from the business combination guidance:
- A joint venture is the formation of a new entity without an accounting acquirer. The formation is the creation of a new reporting entity with none of the net assets or businesses contributed being viewed as having survived the combination as an independent entity (no identified accounting acquirer).
- A joint venture measures identifiable net assets and goodwill, if any, at the formation date. The formation date is the date when the entity initially meets the definition of a joint venture.
- Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 percent of the joint venture’s equity. The fair value of the joint venture as a whole upon formation must equal the fair value of the total net assets contributed.
- A joint venture provides relevant disclosures. Formation disclosures differ from the requirements for business combinations.
Required Disclosures
To help a user of a joint venture’s financial statements understand the nature and financial effect of the joint venture formation in the period in which the formation date occurs, the ASU requires a new joint venture to disclose the following information, among other things:
- 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
Effective Dates
These amendments are effective prospectively for all joint ventures formed after January 1, 2025. Joint ventures formed earlier may apply the provisions retrospectively so long as sufficient information is available.
If you have questions or need assistance related to these new rules or other accounting issues, contact GYF at 412-338-9300.
