D.1 Overview

Under ASU 2023-05, an entity that qualifies as either a joint venture or a corporate joint venture, as defined in the ASC master glossary, is required to apply a new basis of accounting upon the formation of the joint venture (see Chapter 7 of Deloitte’s Roadmap Equity Method Investments and Joint Ventures for a discussion of the identification of a joint venture or a corporate joint venture). Specifically, the ASU stipulates that a joint venture or a corporate joint venture (collectively, “joint ventures”) must initially measure its assets and liabilities at fair value on the formation date. The amendments in the ASU are effective prospectively for all joint ventures formed on or after January 1, 2025, with early adoption “permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively.” Joint ventures that were formed before January 1, 2025, can “elect to apply the amendments retrospectively if [they have] sufficient information.”

This chapter discusses the amendments in ASU 2023-05 and provides guidance on adopting the standard. The amendments in ASU 2023-05 apply to the formation of a joint venture regardless of whether the venture meets the definition of a business in ASC 805-10. Under the ASU:

• The formation of a joint venture results in the “creation of a new reporting entity,” and no accounting acquirer is identified under ASC 805. Accordingly, a new basis of accounting is established on the formation date. Paragraph BC23 of the ASU notes that this treatment is “generally consistent with other new basis of accounting models in GAAP, such as fresh-start reporting” under ASC 852.
• A joint venture measures the net assets and liabilities on the formation date, which the ASU defines as “the date on which an entity initially meets the definition of a joint venture.” Thus, the formation date is not necessarily the date on which the legal entity was formed (e.g., the assets of the joint venture may be contributed by one or both of the parties to the joint venture on a later date).
• A joint venture may establish a measurement period in a manner consistent with the measurement-period guidance in ASC 805-10 for business combinations when it identifies and measures the net assets received.
• The excess of the fair value of a joint venture as a whole over the net assets of the joint venture is recognized as goodwill. On the formation date, the joint venture’s measurement of its total net assets would be “equal to the fair value of 100 percent of [its] equity.” Although the ASU does not preclude a joint venture from recognizing goodwill if it does not meet the definition of a business, paragraph BC48 of the ASU notes, in a manner consistent with the guidance in ASC 805-10-55-9, that “the Board does not expect that an entity that meets the definition of a joint venture will have more than an insignificant amount of goodwill if it does not already meet the definition of a business.”
• In situations in which the net assets of a joint venture exceed its fair value as a whole, the joint venture is required to recognize any “negative goodwill” as an adjustment to equity.
• The treatment of IPR&D contributed to a joint venture upon formation is aligned with the treatment of IPR&D acquired in a business combination. Therefore, the joint venture accounts for IPR&D as capitalized indefinite-lived intangible assets regardless of whether the R&D asset has an alternative future use.