FASB Proposes New Guidance on Joint Venture Formations
Overview
On October 27, 2022, the FASB issued a proposed ASU1 that would establish a new basis of accounting for most entities that meet
the definition of a corporate joint venture in ASC 3232 or a joint venture in the ASC master glossary. Upon the formation date,3 the joint venture’s assets and liabilities would be initially measured at
fair value. Comments on the proposed ASU are due by December 27, 2022.
Background
Currently there is no specific guidance in U.S. GAAP on the accounting for the
initial measurement of assets and liabilities contributed to a joint venture at
formation. As a result, some joint ventures measure the net assets contributed
at formation by using the respective carrying amounts of the venturer while
others recognize such net assets at fair value. The proposed amendments would
address this diversity in practice by establishing guidance on the recognition
and initial measurement of a joint venture’s net assets on the formation date.
The FASB anticipates that such guidance would increase the level of consistency
between newly formed joint ventures as well as enhance the usefulness of a joint
venture’s financial reporting to investors.
Main Provisions of the Proposed ASU
Under the proposed ASU:
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The formation of a joint venture would result in the “creation of a new reporting entity,” and no accounting acquirer would be identified under ASC 805. Accordingly, a new basis of accounting would be required upon the formation date.
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The joint venture would measure the net assets on the formation date (i.e., when it initially meets the definition of a joint venture). The excess of the fair value of the joint venture as a whole over the net assets of the joint venture would be recognized as goodwill.
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Upon the formation date, a joint venture’s measurement of its net assets would be “equal to the fair value of 100 percent of [its] outstanding equity interests.”
The new guidance would prohibit an entity from using a measurement period when
identifying and measuring the net assets, which is a departure from the
measurement-period guidance in ASC 805 related to business combinations.
Further, to help financial statements users understand the impact of the joint
venture formation, the joint venture would be required to disclose the formation
date, a qualitative description of the joint venture’s purpose, the fair value
of the joint venture on the formation date, the “amounts recognized by the joint
venture for each major class of assets and liabilities,” and a “description of
the factors that make up any goodwill recognized.”
The FASB notes that the approach taken under the proposed guidance would be
“consistent with other new basis of accounting models in GAAP,” such as that
used in ASC 852, which addresses reorganizations and provides guidance on
fresh-start accounting.
Connecting the Dots
The proposed ASU would not change the definition of a
corporate joint venture in ASC 323, which is as follows:
A corporation owned and operated by a small group of entities
(the joint venturers) as a separate and specific business or
project for the mutual benefit of the members of the group. A
government may also be a member of the group. The purpose of a
corporate joint venture frequently is to share risks and rewards
in developing a new market, product or technology; to combine
complementary technological knowledge; or to pool resources in
developing production or other facilities. A corporate joint
venture also usually provides an arrangement under which each
joint venturer may participate, directly or indirectly, in the
overall management of the joint venture. Joint venturers thus
have an interest or relationship other than as passive
investors. An entity that is a subsidiary of one of the joint
venturers is not a corporate joint venture. The ownership of a
corporate joint venture seldom changes, and its stock is usually
not traded publicly. A noncontrolling interest held by public
ownership, however, does not preclude a corporation from being a
corporate joint venture.
Likewise, the proposal would not change the definition of a joint venture
in the ASC master glossary:
An entity owned and operated by a small group of
businesses (the joint venturers) as a separate and specific
business or project for the mutual benefit of the members of the
group. A government may also be a member of the group. The
purpose of a joint venture frequently is to share risks and
rewards in developing a new market, product, or technology; to
combine complementary technological knowledge; or to pool
resources in developing production or other facilities. A joint
venture also usually provides an arrangement under which each
joint venturer may participate, directly or indirectly, in the
overall management of the joint venture. Joint venturers thus
have an interest or relationship other than as passive
investors. An entity that is a subsidiary of one of the joint
venturers is not a joint venture. The ownership of a joint
venture seldom changes, and its equity interests usually are not
traded publicly. A minority public ownership, however, does not
preclude an entity from being a joint venture. As distinguished
from a corporate joint venture, a joint venture is not limited
to corporate entities.
The proposed amendments would not apply to collaborative arrangements under ASC
808, not-for-profit entities, or entities within the “construction or extractive
industries that may be proportionately consolidated by their
investor-venturers.”
Proposed Effective Dates and Transition
Effective Dates
After considering stakeholder feedback on the proposed ASU, the FASB plans to
establish an effective date for the amendments and determine whether to
permit early application.
Transition
New joint ventures formed as of or after the effective date would be required
to apply the guidance prospectively. Joint ventures formed before the
effective date would be permitted to apply the proposed guidance
retrospectively.
Footnotes
1
FASB Proposed Accounting Standards Update (ASU),
Business Combinations — Joint Venture Formations (Subtopic
805-60): Recognition and Initial Measurement.
2
For titles of FASB Accounting Standards
Codification (ASC) references, see Deloitte’s “Titles of Topics and
Subtopics in the FASB Accounting Standards
Codification.”
3
Under the proposed ASU, the formation date would be the
“date on which an entity initially meets the definition of a joint
venture.” Thus, as indicated in proposed ASC 805-60-25-3, the formation
date may not necessarily be the formation date of the legal entity.