FASB Authorizes Staff to Draft Final Standard on Joint Venture Formations
Overview
At its April 5, 2023, meeting, the FASB discussed feedback from constituents on
its proposed ASU1 on joint venture formations, which would establish a new basis of
accounting for most entities that meet the definition in ASC 3232 of a joint venture. The Board authorized the FASB staff to draft a final
ASU that would (1) require a joint venture to initially measure its assets and
liabilities at fair value upon the formation date3 and (2) permit the joint venture to apply measurement-period guidance in
accordance with ASC 805.
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 such contributions by using
the respective carrying amounts of the venturer while others recognize them at
fair value. The new guidance would address this diversity in practice by
establishing requirements for the recognition and initial measurement of a joint
venture’s net assets and liabilities on the formation date. The FASB anticipates
that this guidance would increase the consistency in accounting for newly formed
joint ventures as well as enhance the usefulness of a joint venture’s financial
reporting to investors.
Main Provisions
The Board reaffirmed the following provisions from the proposed ASU:
- 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 established upon the formation date.
- The joint venture would measure the net assets and liabilities 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 and liabilities of the joint venture would be recognized as goodwill.
- Upon the formation date, a joint venture’s measurement of its net assets and liabilities would be “equal to the fair value of 100 percent of [its] outstanding equity interests.”
In response to feedback, the FASB revisited the proposed ASU’s measurement
guidance and decided that a joint venture may establish a measurement period
when identifying and measuring the net assets and liabilities received by the
joint venture. The Board’s decision is consistent with the measurement-period
guidance in ASC 805 related to business combinations.
A joint venture would also 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.”
In addition, the FASB notes in the proposed ASU that its guidance on requiring
the application of a new basis of accounting is “consistent with other new basis
of accounting models in GAAP,” such as fresh-start reporting under ASC 852.
Connecting the Dots
The new guidance would not change the definition of a joint venture under
ASC 323 and the ASC master glossary, which is as follows:
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 new guidance 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.”
Effective Dates and Transition
Effective Dates
The new guidance would be effective for all joint ventures within the
standard’s scope that are formed on or after January 1, 2025. Early adoption
would be permitted.
Transition
At the April 5 meeting, the FASB affirmed its decision that 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 if they
have “sufficient information available to do so.”
Next Steps
The final ASU is expected to be issued at the end of the third quarter of 2023.
The FASB staff will continue to assess and present to the Board any additional
issues identified during the drafting period.
Contacts
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Andrew Winters
Partner
Deloitte &
Touche LLP
+1 203 761
3355
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Kristi Marks
Senior Manager
Deloitte &
Touche LLP
+1 816 881
5137
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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 ASC 805-60-25-3 of the proposed ASU, the formation date would be
“the date on which an entity initially meets the definition of a joint
venture.” Thus, the formation date may not necessarily be the formation
date of the legal entity.