Chapter 9 — Accounting by the Joint Venture After Adopting ASU 2023-05

9.3 The Formation of a Joint Venture — New Basis of Accounting

ASC 805-60

05-2 Paragraph 805-60-25-2 requires that a joint venture account for its formation by applying a new basis of accounting. In accounting for the formation of a joint venture, none of the assets and/or businesses contributed to the joint venture are viewed as having survived the combination as independent entities. Rather, the formation is viewed as the transfer of the net assets to a new entity that assumes control over them. The history of that new reporting entity begins with the joint venture formation. A joint venture establishes a new basis of accounting upon formation by applying aspects of the acquisition method for business combinations, with adaptations that are unique to joint ventures as described in this Subtopic. Accounting for a joint venture formation includes the following steps:

Determining the formation date
Recognizing and measuring the identifiable assets, the liabilities, and any noncontrolling interest in the net assets recognized by the joint venture
Recognizing and measuring goodwill, if any, using the fair value of the joint venture as a whole immediately following formation.

25-2 Accounting for joint venture formations as described in this Subtopic requires that a joint venture establish upon formation a new basis of accounting for its assets and liabilities in accordance with Subtopic 805-20 on identifiable assets and liabilities, and any noncontrolling interest. A joint venture shall recognize goodwill, if any, in accordance with paragraph 805-60-25-13. Unlike the acquisition method, accounting for the formation of a joint venture does not include the identification of an acquirer. This Section includes the following requirements:

Determining the formation date
Determining whether multiple arrangements should be accounted for as a single formation transaction
Determining what is part of the joint venture formation
Accounting for the formation of a joint venture, as applicable:
1. New basis of accounting
2. Private company accounting alternatives
3. Goodwill
4. Measurement period
5. Transfers of financial assets.

25-3 The joint venture formation date is the date on which an entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date. A joint venture’s formation date is the measurement date for the formation transaction. A joint venture shall determine a single formation date and account for its formation as of that date. A joint venture shall consider the pertinent facts and circumstances in identifying its formation date. All contributions received, or that are receivable, as of the formation date, including consideration of the guidance in paragraphs 805-60-25-4 through 25-5 on multiple arrangements that should be accounted for as a single formation transaction, constitute the joint venture formation transaction.

25-4 Multiple arrangements may establish the formation of a joint venture and constitute the joint venture formation transaction. Circumstances sometimes indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the multiple arrangements as a single transaction that establishes the formation, a joint venture shall consider the terms and conditions of the arrangements and their economic effects. Any of the following may indicate that the joint venture should account for the multiple arrangements as a single transaction that established the formation of the joint venture:

The multiple arrangements are entered into at the same time or in contemplation of one another.
The multiple arrangements form a single transaction designed to achieve an overall commercial effect.
The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
One arrangement considered on its own is not economically justified, but the multiple arrangements are economically justified when considered together.

25-5 If multiple arrangements are accounted for as a single transaction in accordance with paragraph 805-60-25-4, then the formation date shall be the measurement date for all arrangements that form part of the single formation transaction. A joint venture shall recognize identifiable assets and liabilities that are part of that single transaction when they satisfy the recognition criteria described in paragraph 805-60-25-2.

9.3.1 The Formation Date

A newly formed joint venture is required to account for its net assets and any noncontrolling interests by using a new basis of accounting as of its formation date. Under ASU 2023-05, which adds the definition of formation date to the ASC master glossary, the formation date of a joint venture is not necessarily the date on which the legal entity was formed; rather, it is defined as “the date on which an entity initially meets the definition of a joint venture.” Accordingly, entities may need to apply judgment and consider the definitions of joint venture and corporate joint venture, as discussed in Chapter 7, when determining the date on which the joint venture meets the requirements in the definition.

In addition, when creating a joint venture, the venturers may make multiple financial contributions or contribute nonfinancial assets through a series of transactions. Each subsequent transaction should be evaluated to determine whether it is a stand-alone post-formation transaction or is part of a single arrangement in which contributions are made to form the joint venture. ASU 2023-05 clarifies that if “multiple arrangements are accounted for as a single transaction that establishes the formation of a joint venture, the formation date is the measurement date for all arrangements that form part of the single formation transaction.” An entity should refer to the factors in ASC 805-60-25-4 (which are consistent with the factors in ASC 810-10-40-6) and will need to use judgment when evaluating whether multiple arrangements should be accounted for as a single transaction in the determination of a joint venture’s formation date.

Example 9-1

On January 1, 20X7, two venturers form an LLP by each contributing $100. During the first year, the joint venture’s sole transaction involves entering into an office space lease, which was deemed insignificant in relation to the planned business activities of the joint venture. On January 1, 20X8 (the contribution date), each venturer contributes its existing business to the joint venture, and the venturers jointly commence the development of a new product. The estimated fair value of each of the contributed businesses is $100 million.

Although the legal formation date of the LLP was January 1, 20X7, the venturers used the LLP to facilitate the formation of a joint venture, which began fulfilling the joint venture’s purpose of developing a new product one year later. In other words, the date the venturers contribute existing businesses to jointly commence the development of a new product is the date on which the LLP meets the definition of a corporate joint venture in accordance with the ASC master glossary. This is because it is the date on which the venture begins fulfilling its purpose and, therefore, it is also the formation date in accordance with ASC 805-60-25-3. As a result, the joint venture should consider January 1, 20X8, as the formation date and determine the fair value of all net assets contributed as of this date by using a new basis of accounting.

Example 9-2

Company A and Company Z enter into an agreement on January 1, 20X6, to develop a new pharmaceutical drug together. On that date, each venturer contributes $500,000 in cash to fund the venture. Company A contributes a business on February 1, 20X6, and Z contributes a business on March 31, 20X6; the total cost basis is $1 million. The contributions of the businesses allow the joint venture to begin pursuing its purpose of developing a new drug.

While the legal formation date was January 1, 20X6, when the agreement was signed, the venturers planned to contribute several different types of assets, including businesses, as contemplated on the date of the agreement. Each of these contributions was necessary for the joint venture to pursue its purpose, and each contribution was made in contemplation of the other. Accordingly, the joint venture determines that (1) these multiple arrangements should be accounted for as a single formation transaction and (2) the formation date is March 31, 20X6, since it represents the date when all initial contributions required for the joint venture to start fulfilling its purpose were included in the joint venture.

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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.