8.4 Other Matters
8.4.1 Contribution of Nonmonetary Assets After Formation
Nonmonetary assets or businesses contributed to a joint venture in a separate and distinct transaction after the joint venture’s formation date are generally recorded at fair value. However, if the post-formation contribution is, in substance, an extension of the original formation of the joint venture, it may be appropriate to record it at historical cost when the initial formation transaction was accounted for at historical cost.
The existence of one or more of the following criteria may indicate that the subsequent contribution is an extension of the joint venture’s original formation and that it thus may be appropriate to record the subsequent contribution at historical cost (but only if the initial contribution was recorded at historical cost):
- The subsequent contribution is required under the original terms of the joint venture agreement.
- The venturers consider the subsequent contribution to be part of the original formation of the joint venture.
- The activities of the original joint venture (before the post-formation contribution) are considered insignificant or inconsequential.
- The time from the original formation to the post-formation contribution is relatively short.
The preceding list is not intended to be all-inclusive, and entities should carefully consider their facts and circumstances.
Example 8-1
On January 1, 20X7, two venturers form a limited liability partnership (LLP) by contributing $100 each. As of the formation date, the LLP is considered a joint venture in accordance with ASC 323. During the first year, the joint venture’s only transaction is to enter into an office space lease, an activity considered insignificant to the LLP’s planned business activities. On January 1, 20X8 (the contribution date), each venturer contributes an existing business to the joint venture. The estimated fair value of each of the contributed businesses is $100 million.
While the legal formation date of the joint venture was January 1, 20X7, the venturers used the LLP to facilitate the formation of a new joint venture one year later. In other words, the contribution date is, in substance, the formation date. As a result, the venturers should treat the contribution date as if it were the formation date and evaluate whether their contributions should be recognized at the venturers’ historical costs or at fair value (see Section 8.2.2) as of January 1, 20X8.
Example 8-2
Venturer X and Venturer Y each contribute a fully occupied commercial building to a newly formed entity that
meets the definition of a joint venture in accordance with ASC 323. Voting rights, as well as profits and losses,
are shared equally between X and Y. Several years later, Venturer Z, an unrelated party, contributes another
commercial building to the joint venture. When Z makes its contribution, the joint venture is restructured
so that X, Y, and Z share equally in profits and losses. All decisions regarding the joint venture require the
unanimous consent of all three owners. Venturer Z’s admission was not contemplated at the joint venture’s
formation. Therefore, the joint venture should account for the building contributed by Z at fair value.
8.4.2 Differences in Accounting Policies
Upon formation of a joint venture, the venture selects accounting policies.
Although a joint venture has the option of conforming its accounting policies to
those of the venturers, it is not required to do so. Should the joint venture
select accounting policies that are different from those of the venturers, it is
not a change in accounting principle under ASC 250. See Section 5.1.3 for further
discussion of differences in accounting policies between equity method investees
and investors.
8.4.3 Joint Venture’s Investment in the Stock of a Venturer
A joint venture may purchase the stock of one of its venturers for various reasons, including to
(1) provide share-based compensation to the joint venture’s employees, (2) hedge the cost and cash
requirements of stock appreciation rights, or (3) hold the stock as an investment.
We believe that the joint venture should follow the tentative conclusion reached by the EITF in Issue 98-2, which states:
[A]ssuming the joint venture partner has substantive operations apart from its investment in the joint venture, a joint venture should account for an investment in the stock of its joint venture partner as an asset in its separate financial statements. That asset should be accounted for using the equity method of accounting, with an elimination of the reciprocal ownership investments.
While no final consensus was reached by the EITF, we support its tentative conclusion in Issue 98-2 and believe that it should be applied by all joint ventures.
8.4.4 Start-Up Costs Incurred by the Joint Venture
ASC 720-15 — Glossary
Start-Up Activities
Defined broadly as those one-time activities related to any of the following:
- Opening a new facility
- Introducing a new product or service
- Conducting business in a new territory
- Conducting business with an entirely new class of customers (for example, a manufacturer who does all of its business with retailers attempts to sell merchandise directly to the public) or beneficiary
- Initiating a new process in an existing facility
- Commencing some new operation.
ASC 720-15
25-1 Costs of start-up activities, including organization costs, shall be expensed as incurred.
A joint venture may incur certain costs associated with start-up activities. The definition of “start-up activities” in ASC 720-15-20 is broad and may include the start-up activities of a joint venture. Because the purpose of a corporate joint venture in accordance with ASC 323-10-20 includes the development of a new market, product, technology, or production or other facilities (as discussed in Section 7.2), costs associated with these start-up activities should be expensed as incurred under ASC 720-15-25-1.