Chapter 8 — Accounting by the Joint Venture Before Adopting ASU 2023-05

8.3 Measurement for Initial Contribution of Nonmonetary Assets That Do Not Meet the Definition of a Business

8.3 Measurement of Initial Contribution of Nonmonetary Assets That Do Not Meet the Definition of a Business

ASC 323-10

30-2 Except as provided in the following sentence, an investor shall measure an investment in the common stock of an investee (including a joint venture) initially at cost in accordance with the guidance in Section 805-50-30. An investor shall initially measure, at fair value, the following:

A retained investment in the common stock of an investee (including a joint venture) in a deconsolidation transaction in accordance with paragraphs 810-10-40-3A through 40-5
An investment in the common stock of an investee (including a joint venture) recognized upon the derecognition of a distinct nonfinancial asset or distinct in substance nonfinancial asset in accordance with Subtopic 610-20.

ASC 845-10 — SEC Materials — SEC Staff Guidance

SAB Topic 5.G, Transfers of Nonmonetary Assets by Promoters or Shareholders

S99-1 The following is the text of SAB Topic 5.G, Transfers of Nonmonetary Assets by Promoters or Shareholders.

Facts: Nonmonetary assets are exchanged by promoters or shareholders for all or part of a company’s common stock just prior to or contemporaneously with a first-time public offering.

Question: Since FASB ASC paragraph 845-10-15-4 (Nonmonetary Transactions Topic) states that the guidance in this Topic is not applicable to transactions involving the acquisition of nonmonetary assets or services on issuance of the capital stock of an enterprise, what value should be ascribed to the acquired assets by the company?

Interpretive Response: The staff believes that transfers of nonmonetary assets to a company by its promoters or shareholders in exchange for stock prior to or at the time of the company’s initial public offering normally should be recorded at the transferors’ historical cost basis determined under GAAP.

The staff will not always require that predecessor cost be used to value nonmonetary assets received from an enterprise’s promoters or shareholders. However, deviations from this policy have been rare applying generally to situations where the fair value of either the stock issuedFN1 or assets acquired is objectively measurable and the transferor’s stock ownership following the transaction was not so significant that the transferor had retained a substantial indirect interest in the assets as a result of stock ownership in the company.

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FN1 Estimating the fair value of the common stock issued, however, is not appropriate when the stock is closely held and/or seldom or ever traded.

ASC 810-10

40-5 If a parent deconsolidates a subsidiary or derecognizes a group of assets through a nonreciprocal transfer to owners, such as a spinoff, the accounting guidance in Subtopic 845-10 applies. Otherwise, a parent shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in paragraph 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

The aggregate of all of the following:
1. The fair value of any consideration received
2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or the group of assets is derecognized
3. The carrying amount of any noncontrolling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the noncontrolling interest) at the date the subsidiary is deconsolidated.
The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets.

ASC 970-323

Contribution of Real Estate

30-3 An investor that contributes real estate to the capital of a real estate venture generally should record its investment in the venture at fair value when the real estate is derecognized, regardless of whether the other investors contribute cash, property, or services. The transaction shall be accounted for in accordance with the guidance in paragraphs 360-10-40-3A through 40-3C. Some transactions are sales of an ownership interest that result in an entity being an investor in a real estate venture. An example of such a transaction includes one in which investor A contributes real estate with a fair value of $2,000 to a venture and investor B contributes cash in the amount of $1,000. The real estate is not considered a business or nonprofit activity and, therefore, is within the scope of Subtopic 610-20 on gains and losses from the derecognition of nonfinancial assets. Investor A immediately withdraws the cash contributed by investor B and, following such contributions and withdrawals, each investor has a 50 percent interest in the venture (the only asset of which is the real estate). Assuming investor A does not have a controlling financial interest in the venture, investor A applies the guidance in paragraphs 610-20-25-5 and 610-20-25-7. When investor A meets the criteria to derecognize the property, investor A measures its retained ownership interest at fair value consistent with the guidance in paragraph 610-20-32-4 and includes that amount in the consideration used in calculating the gain or loss on derecognition of the property.

There is no currently prescribed guidance under U.S. GAAP on the accounting by the joint venture when receiving contributions of assets that do not meet the definition of a business. While the SEC staff has indicated that there may be more circumstances in which the recording of the contribution of a business at fair value is appropriate, the staff has not provided recent remarks or guidance for contributions of assets that do not meet the definition of a business. Therefore, the above codified guidance written for the venturer’s accounting is frequently referenced by analogy to support the accounting by the joint venture itself. In the absence of guidance from the FASB or SEC, these various analogies have been used to justify the recognition and measurement methods shown in the table below for contributions received by the joint venture. The table below is followed by a detailed explanation of each method.

Basis of Presentation	Applicability
Historical cost	Acceptable for joint ventures formed before January 1, 2025.
Fair value (full step-up)	If a venture would like to apply fair value measurement, the entity should early adopt ASU 2023-05.
Partial step-up	As a result of ASU 2017-05, we believe that partial step-up would be prohibited.

Historical cost — Proponents of historical cost measurement believe that joint ventures should record contributions of nonmonetary assets that do not meet the definition of a business at historical cost. They observe that in the formation of the joint venture, the venturers who contributed the nonmonetary assets control (albeit jointly) the joint venture. Because the venturer has joint control over the joint venture and thus has not completely surrendered control over the contributed asset(s), a new basis of measurement is not appropriate.
Proponents of this view also look to the guidance in ASC 805-50 on common-control transactions. Although joint venture formation is not technically within the scope of the guidance on common-control transactions since the venturers, by definition, jointly control the joint venture, proponents of this view believe that joint venture formation transactions are similar to common-control transactions. Specifically, proponents of this view believe that under the guidance in ASC 805-50, because there is no change in control, there is no change in the basis of the net assets. ASC 805-50 prescribes that in a common-control transaction, the net assets are recorded by the receiving entity at the carrying amounts of the entity that is transferring the net assets. Proponents of this view believe that the accounting for the joint venture should mirror the guidance in ASC 805-50.
Some proponents of historical cost measurement have also analogized to SAB Topic 5.G (codified in ASC 845-10-S99-1) in analyzing joint venture formation transactions. That guidance states that the nonmonetary assets are normally recorded at a historical cost basis (i.e., carrying amounts).
Fair value (full step-up) — Proponents of fair value (full step-up) measurement believe that nonmonetary assets received from venturers that do not meet the definition of a business should be recorded at fair value by the joint venture. They believe that the initial measurement of nonmonetary assets received by the joint venture upon its formation should be treated no differently than any initial measurement of nonmonetary assets by an entity when received from a third party in a reciprocal exchange.
As discussed in Section 8.2.2, in accordance with ASC 810-10-40-5, retained interests in a business that is deconsolidated are initially measured at fair value. In part to align the accounting for the measurement upon derecognition of assets and businesses, the FASB issued ASU 2017-05, which also requires retained interests in a previously consolidated subsidiary that does not meet the definition of a business to be initially measured at fair value. Even though the guidance is for investors, proponents of the view that joint ventures should record contributions of nonmonetary assets that do not meet the definition of a business at fair value analogize to the guidance in ASC 323-10-30-2(b). In accordance with the proponents of fair value accounting for businesses contributed to a joint venture, they advocate that this is a reason to record the venturers’ contribution at fair value, so that there is no basis difference between the venturers’ investments and the joint venture’s financial statements.

After the issuance of ASU 2023-05, fair value (full step-up) will be the required basis of presentation. See Chapter 9 for a discussion of the FASB’s basis for conclusions regarding this approach.
Partial step-up — Some believe that the substance of some transactions in which monetary assets are withdrawn may be a partial sale of nonmonetary assets that do not meet the definition of a business and therefore that the joint venture should partially step up the contributed assets. As a result of ASU 2017-05, we believe that this approach is prohibited.

8.3.1 Summary of Views on Measurement of Initial Contribution of Nonmonetary Assets That Do Not Meet the Definition of a Business

We believe that before the adoption of ASU 2023-05, it remains acceptable for a joint venture to recognize nonmonetary assets contributed to it at the venturer’s historical cost basis when the nonmonetary assets do not meet the definition of a business. As observed above, there are some who believe that fair value recognition is also acceptable. If an entity determines that fair value recognition is appropriate, we believe that the entity should early adopt the ASU.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.