9.4 Initial Measurement for the Joint Venture
ASC 805-60
30-1 A
joint venture shall measure its identifiable assets and
liabilities, and any noncontrolling interest, recognized at
the formation date in accordance with Subtopic 805-20.
30-2 A
joint venture shall apply the guidance in this paragraph to
measure goodwill, when applicable. A joint venture shall
recognize goodwill, if any, upon formation, measured as the
excess of (a) over (b):
- The formation-date fair value of the joint venture as a whole. The formation-date fair value of the joint venture as a whole shall equal the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).
- The net of the formation-date amounts of the identifiable assets and liabilities recognized by the joint venture and measured in accordance with Subtopic 805-20.
30-3
Upon formation, a joint venture shall recognize the amount
of its identifiable net assets recognized in excess of the
fair value of the joint venture as a whole, if any, as an
adjustment to additional paid-in capital (or other similar
equity account, such as members’ equity).
9.4.1 Identifiable Assets and Liabilities, Noncontrolling Interests, and Goodwill
Joint ventures are required to measure identifiable assets and liabilities and
any noncontrolling interests in accordance with ASC 805-20. That guidance
defines the recognition and measurement principles for an acquirer in a
traditional business combination and further requires that such items be
measured at their acquisition-date fair values. Therefore, on the formation date
(see Section 9.3.1), the joint venture’s
measurement of its total net assets would be “equal [to] the fair value of 100
percent of [its] equity” in accordance with ASC 805-60-30-2(a).
ASC 805-20 also provides certain fair value measurement exceptions for items such
as income taxes, employee benefits, indemnification assets, reacquired rights,
and share-based payment awards. (For a full detailed list, see Chapter 4 of Deloitte’s Roadmap Business Combinations.)
Since ASC 805-60 requires a joint venture to apply the recognition and
measurement principles under ASC 805-20, the same exceptions should be applied
to joint venture formation measurement in the absence of specific measurement
guidance.
9.4.1.1 Goodwill
Goodwill recognized by the joint venture and accounted for in accordance with
ASC 805-60 is conceptually similar to goodwill recognized by the accounting
acquirer in accordance with ASC 805-30; the primary difference in
recognition is related to the lack of consideration exchanged in a joint
venture formation. This is because venturers receive net asset contributions
(which may be nonmonetary) while the acquirer in a business combination
transfers consideration in exchange for net assets assumed. Accordingly,
goodwill is recognized upon the formation of a joint venture when the
formation-date fair value of the joint venture’s equity as a whole (net
assets, including any noncontrolling interest) is greater than the value of
the identifiable assets and liabilities measured in accordance with ASC
805-20.
As stated previously, ASU 2023-05 applies to both joint ventures that meet
the definition of a business and those that do not. While the ASU does not
preclude a joint venture from recognizing goodwill if it does not meet the
definition of a business, the FASB states in paragraph BC48 of the ASU that
“it will be unusual that an entity simultaneously (a) meets the definition
of a joint venture, (b) has [goodwill], and (c) is not a business.” Further,
the Board expects that before recognizing goodwill, the joint venture will
ensure that it has “correctly identified all of the contributed identifiable
net assets and that all available information as of the formation date has
been considered when measuring those identifiable net assets and the joint
venture as a whole.”
Negative goodwill (i.e., a bargain purchase gain) is recognized when the fair
value of the joint venture’s equity as a whole (net assets, including any
noncontrolling interest) is less than the value of the identifiable assets
and liabilities measured in accordance with ASC 805-20. As indicated in ASC
805-60-30-3, any negative goodwill should be recorded “as an adjustment to
additional paid-in capital (or other similar equity account, such as
members’ equity).” This treatment is a similar to the accounting for a
bargain purchase gain on an acquiree’s financial statements in a business
combination under ASC 805-50-30-11. It is expected to be very rare that
negative goodwill will be present in a joint venture formation. Paragraph
BC48 of ASU 2023-05 indicates that before recording goodwill or negative
goodwill, a joint venture should ensure that it has “correctly identified
all of the contributed identifiable net assets and that all available
information as of the formation date has been considered when measuring
those identifiable net assets and the joint venture as a whole.” See
Section 5.2 of Deloitte’s Roadmap
Business Combinations
for further discussion of situations that may lead to a bargain purchase
gain (or in the case of a joint venture, negative goodwill).
9.4.2 Measurement Period
As contemplated in ASC 805-60-25-14, it is expected that there
will be scenarios in which “the initial accounting for a joint venture formation
is incomplete by the end of the reporting period in which the formation date
occurs.” In such instances, the joint venture may use the measurement period
guidance that exists for the accounting acquirer in business combinations. The
measurement period allows a joint venture to record a provisional amount for
items in which the accounting is incomplete. A provisional amount would reflect
the entity’s best estimate of the fair value (or other measurement required by
ASC 805) of the asset or liability on the basis of the information available.
Section 6.1 of
Deloitte’s Roadmap Business
Combinations includes further consideration of the
measurement period under ASC 805-10.
Note that if the initial accounting for a joint venture formation is incomplete,
joint ventures are required to provide further disclosures under ASC
805-60-50-3. These disclosure requirements are discussed in Section 9.6.
9.4.3 Other Initial Measurement Matters
9.4.3.1 Identifying Transactions Outside the Joint Venture Formation
ASC 805-60
25-6 A joint venture and its
owners (the venturers) may enter into an arrangement
upon formation that is separate from the formation
of the joint venture. For example, a joint venture
may enter into an arrangement with a venturer to
compensate the venturer or others (such as employees
of the venturers) for future services. A joint
venture shall apply the guidance in paragraphs
805-10-55-24 through 55-26 when determining whether
a transaction involving payments to be made by the
joint venture to the venturers or others is separate
from or part of a joint venture formation. A joint
venture shall identify any amounts that are separate
from the formation of the joint venture and shall
recognize the identifiable assets and liabilities
that are determined to be part of the joint venture
formation. Separate transactions shall be accounted
for in accordance with other relevant GAAP.
25-7 A joint venture shall
not apply by analogy the guidance in paragraphs
805-10-55-20 through 55-23 (for a transaction that
in effect settles preexisting relationships between
the acquirer and the acquiree) or paragraph
805-10-25-23 (for acquisition-related costs and
transactions that reimburse the acquiree or its
former owners for paying the acquirer’s
acquisition-related costs).
25-8 If, upon formation, a
joint venture issues share-based payment awards to
replace awards held by grantees of the contributed
entities, then the joint venture shall apply the
guidance in paragraphs 805-30-30-9 through 30-13 to
allocate the fair-value-based measure of replacement
share-based payment awards between preformation
vesting and postformation compensation cost.
Paragraphs 805-60-55-2 through 55-14 provide
illustrations of the accounting for the issuance of
replacement share-based payment awards in a joint
venture formation.
25-9 For the purposes of
applying the business combinations guidance on
arrangements that include contingent payments to
employees or selling shareholders and replacement
share-based payment awards referenced in paragraphs
805-60-25-6 through 25-8:
- The joint venture shall be viewed as analogous to the acquirer in a business combination.
- The venturers shall be viewed as analogous to the selling shareholders.
- The recognized businesses and/or assets shall be viewed as analogous to an acquiree.
Entities will need to use judgment to determine whether
certain arrangements between the venturers and the newly formed joint
venture are part of the joint venture formation or if they are separate
transactions. To aid in the determination of whether certain arrangements
should be accounted for separately from or as part of a joint venture
formation, the Board provided guidance in ASC 805-60-25-6 through 25-9.
Paragraph BC54 of ASU 2023-05 notes that “there are several scenarios in
which the joint venture may be required to provide payment to its venturers
contingent either upon the provision of goods or services to the joint
venture or upon the outcome of a future event.” For those types of
arrangements, a joint venture should apply the guidance in ASC 805-10-55-24
through 55-26 when determining whether the transaction is separate from or
part of the joint venture formation.
However, as noted in ASC 805-60-25-7, the accounting for joint ventures and
business combinations will differ with respect to settling preexisting
relationships and acquisition-related costs. As previously mentioned, a
joint venture’s history begins as of the formation date; therefore, a joint
venture cannot be a party to a relationship that predates its existence or
formation. Likewise, in a joint venture formation, there is no formal
accounting acquirer and, therefore, it is not appropriate to apply the
guidance in ASC 805-10 on the accounting for acquisition-related costs.
Costs incurred by the venturers should be expensed as incurred and, as
discussed in Section 8.4.4, any
start-up costs incurred by the joint venture should also be expensed as
incurred under ASC 720-15-25-1.
9.4.3.2 Share-Based Payment Awards
ASC 805-60
Instruments, Contracts, and Share-Based Payment
Awards Classified as Equity
30-4 The amount
of any separately recognized equity-classified
instruments or contracts issued by a joint venture
as part of the formation transaction, other than
equity-classified replacement share-based payment
awards (see paragraph 805-60-30-5), shall be
accounted for as a reallocation of additional
paid-in capital (or other similar equity account,
such as members’ equity) and shall not affect the
total amount of equity or goodwill recognized by the
joint venture upon formation.
30-5 A joint
venture shall initially measure equity-classified
replacement share-based payment awards at the
fair-value-based measurement method described in
Topic 718 on stock compensation. The
fair-value-based amount allocated to preformation
vesting (in accordance with paragraph 805-60-25-8)
of any replacement share-based payments classified
as equity shall be recognized as a reallocation of
additional paid-in capital (or other similar equity
account, such as members’ equity) and shall not
affect the total amount of equity or goodwill
recognized by the joint venture upon formation.
Liability-Classified and Asset-Classified
Contingent Payments and Replacement Share-Based
Payment Awards
30-6 A joint
venture shall initially measure any contingent
payment arrangements between the joint venture and
its venturers that are classified as liabilities (or
assets), other than replacement share-based payment
awards, in accordance with paragraph 805-60-30-1. A
joint venture shall not account for those
arrangements generated as a result of the joint
venture formation as contingent consideration or as
an assumed contingent consideration arrangement.
30-7 A joint
venture shall initially measure liability-classified
replacement share-based payment awards using the
fair-value-based measurement method described in
Topic 718 on stock compensation (consistent with the
requirements in paragraphs 805-60-25-8 and
805-60-30-1).
A joint venture that issues equity-classified instruments or contracts as
part of its formation should account for these instruments as a reallocation
of equity rather than a change in the total amount of equity or goodwill
that is recognized by the joint venture upon formation. This does not
include share-based payment awards that are issued to replace awards held by
the grantees of the contributed entities. Such share-based payment awards
should be measured at fair value in accordance with ASC 718, and the fair
value is allocated between preformation vesting and postformation
compensation cost on the basis of the guidance in ASC 805-30-30-9 through
30-13. The amount allocated to preformation vesting should be treated as a
reallocation of equity rather than a change to total equity or goodwill.
Note that a joint venture will apply the guidance in ASC 718 to determine
whether the share-based payments should be classified as liabilities or
equity.
ASC 805-60 provides an illustrative example of the accounting for replacement
share-based payment awards, which is reproduced below.
ASC 805-60
Example 1: Joint Venture
Replacement Share-Based Payment Employee
Awards
55-2 On January 1, 20X0, a
newly formed corporation with no assets or
liabilities, New Venture, receives contributions of
a controlling financial interest in Business A (90
percent voting interest) from Venturer 1 and
Business B (100 percent voting interest) from
Venturer 2 and, in exchange, issues 50 common shares
to each Venturer 1 and Venturer 2. Assume that New
Venture has no other classes of equity or any other
equity instruments outstanding before receiving the
contributions. It is determined that New Venture
first met the definition of a joint venture on
January 1, 20X0. New Venture determines January 1,
20X0, to be its formation date.
55-3 In accordance with
paragraph 805-60-30-2, but before consideration of
any liabilities for share-based payments, New
Venture determines that the fair value of the joint
venture as a whole is $100 million including a
noncontrolling interest (10 percent voting interest)
in Business A that is owned by an outside entity. It
also determines, in accordance with paragraph
805-60-30-2, that the formation-date fair value of
the identifiable assets is $120 million, the fair
value of the liabilities is $40 million, and the
fair value of the noncontrolling interest in
Business A is $5 million.
55-4 Upon formation, New
Venture exchanges replacement awards that require
one year of postformation vesting for share-based
payment awards of Business A for which employees had
not yet rendered all of the required services as of
the formation date. The fair-value-based measure of
both awards (the original awards and the replacement
awards) is $20 million at the formation date. When
originally granted, the awards of the contributed
business had a requisite service period of four
years. As of the formation date, the contributed
business’s employees had rendered two years’
service, and they would have been required to render
two additional years of service after the formation
date for their awards to vest. Accordingly, only a
portion of the contributed business’s awards is
attributable to preformation vesting.
55-5 The replacement awards
require only one year of postformation vesting.
Because employees have already rendered two years of
service, the total requisite service period is three
years. For simplicity, assume that New Venture
estimates that there will be no forfeitures of the
replacement share-based payment awards. The portion
attributable to preformation vesting equals the
fair-value-based measure of the contributed
business’s award ($20 million) multiplied by the
ratio of the preformation vesting period (2 years)
to the greater of the total service period (3 years)
and the original service period of the contributed
business’s award (4 years). Thus, $10 million ($20
million × 2 ÷ 4 years) is attributable to
preformation vesting and, therefore, New Venture’s
additional paid-in capital upon formation. The
remaining $10 million is attributable to
postformation vesting and therefore recognized as
compensation cost in New Venture’s postformation
financial statements in accordance with Topic 718 on
stock compensation.
55-6 New Venture applies the
guidance in Topic 718 to determine whether the
share-based payments should be classified as
liabilities or equity.
Case A: Joint Venture Replacement
Share-Based Payment Employee Awards Are Liability
Classified
55-7 If New Venture
determines that the replacement share-based payment
awards are classified as liabilities, then total
liabilities will equal $50 million ($40 million +
$10 million). For simplicity, when taking the
share-based payment liabilities into account, the
fair value of New Venture as a whole is $90 million
($100 million – $10 million).
55-8 New Venture calculates
goodwill as follows (in millions), consistent with
the guidance in paragraph 805-60-30-2. The
formation-date fair value of the joint venture as a
whole is equal to the fair value of 100 percent of
the joint venture’s equity (net assets) immediately
following formation (including any noncontrolling
interest in the net assets recognized by the joint
venture).
55-9 New Venture calculates
additional paid-in capital as follows (in
millions).
55-10 New Venture records the
following entry at the formation date (in
millions).
Case B: Joint Venture Replacement
Share-Based Payment Employee Awards Are Equity
Classified
55-11 If New Venture
determines that the replacement share-based payment
awards are classified as equity, then total
liabilities will equal $40 million and the fair
value of New Venture as a whole is $100 million.
55-12 New Venture calculates
goodwill as follows (in millions), consistent with
the guidance in paragraph 805-60-30-2. The
formation-date fair value of the joint venture as a
whole is equal to the fair value of 100 percent of
the joint venture’s equity (net assets) immediately
following formation (including any noncontrolling
interest in the net assets recognized by the joint
venture).
55-13 New Venture calculates
additional paid-in capital, excluding additional
paid-in capital attributable to share-based
payments, as follows (in millions).
55-14 New Venture records the
following entry at the formation date (in
millions).
9.4.3.3 Contingent Payment Arrangements
A joint venture formation may involve an arrangement that is similar to a
contingent consideration arrangement entered into as part of a business
combination. For example, upon formation, a joint venture might promise to
make payments or issue additional equity interests to a venturer that are
contingent upon the performance of the assets or businesses contributed by
that venturer. Since a joint venture’s total net assets are measured on the
basis of the joint venture as a whole upon formation — and not based upon
consideration transferred — it may be difficult to identify contingent
consideration arrangements as defined in a business combination. ASC
805-60-30-6 requires that a joint venture measure any contingent payment
arrangements as an asset or liability in accordance with ASC 805-20. Thus,
the joint venture would account for a contingent payment arrangement as a
typical contingent asset or liability rather than applying the guidance in
ASC 805-30 that is specific to contingent consideration recognized in a
business combination.
9.4.3.4 In-Process Research and Development
IPR&D contributed to a joint venture as of the formation date must be
recognized by the joint venture as an indefinite-lived intangible asset
under ASC 350 regardless of whether the asset has an alternative future use.
As a result, IPR&D assets are accounted for in the same manner as if
they had been acquired in a business combination.