7.1 Overview
Corporate and unincorporated joint venture entities (“joint ventures”) are a
common form of business enterprise. For several reasons, investors (“venturers”)1 establish joint ventures rather than undertaking business activities on their
own. Venturers may use joint ventures to enter new markets, finance major projects
that are beyond each venturer’s financial capabilities, or share expertise or risks.
Joint ventures also allow venturers to partially exit a business or enterprise as an
alternative to a complete disposition. Joint ventures can take a variety of forms,
including corporations, partnerships, and LLCs.
Generally, a venturer accounts for its investment in a joint venture
the same way it would for any other equity method investment under ASC 323. However,
determining whether a legal entity is, in fact, a joint venture is necessary because
such a determination may affect the financial statements of the joint venture upon
the venture’s initial formation. For instance, if an entity is a joint venture, the
venture may measure the initial net assets received at historical cost or at fair
value, depending on facts and circumstances. In other circumstances, if an investor
determines that a legal entity does not meet the definition of a joint venture, the
failed joint venture may be required to account for its initial formation as a
business combination in accordance with ASC 805.
There is diversity in practice in the identification of whether an enterprise is
a joint venture owing to a lack of prescriptive guidance in U.S. GAAP beyond the
term’s definition in the ASC master glossary, which originated in APB Opinion 18 in
1971. In practice, “joint venture” is commonly used for ventures that do not meet
the definition of a joint venture in accordance with U.S. GAAP because:
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Many use the phrase generously in the titles of legal/organizational documents.
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Some use the phrase to describe all investments with only two investors.
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Others mischaracterize investments as joint ventures because of the lack of comprehensive guidance related to what constitutes a joint venture.
Consequently, many investments that are called joint ventures do not meet the accounting definition of a joint venture.
In August 2023, the FASB issued ASU 2023-05, which is effective for joint
ventures formed on or after January 1, 2025. The ASU addresses the accounting by a
joint venture for the contribution of nonmonetary assets upon the joint venture
formation. However, the ASU does not amend the definition of a joint venture or
corporate joint venture for GAAP purposes. For more information, see Appendix D of Deloitte’s
Roadmap Business
Combinations.
Footnotes
1
In this Roadmap, the term “venturer” is used to refer to the
members of or investors in a legal entity that meets the definition of a
joint venture. If a legal entity does not meet, or if it is unknown whether
it meets, the definition of a joint venture, the terms “member” and
“investor” are used interchangeably.