Objective:

The objectives of the Joint Venture Formations (formerly known as the Accounting by a Joint Venture for Nonmonetary Assets Contributed by Investors) project are to (1) reduce diversity in practice in the accounting for contributions made to a joint venture upon formation in a standalone joint venture’s financial statements and (2) provide useful financial reporting information to financial statement users.
 

Background:

The accounting by a joint venture, specifically the initial recognition and measurement of contributions made by venturers to a joint venture at formation, is not currently addressed in the Codification. Joint venture accounting is specifically not within the scope of both Topic 845, Nonmonetary Transactions, and Topic 805, Business Combinations. In the absence of authoritative guidance by the Board, practice has been influenced by several speeches given by the U.S. Securities and Exchange Commission (SEC) staff. That lack of authoritative guidance has been brought to the Board’s attention through several avenues over the last several years, both by the SEC staff and several practitioners that have requested that the Board clarify this issue through standard setting to improve practice and eliminate diversity.

At the September 18, 2019 Board meeting, the Board decided to add to its technical agenda a project on accounting by a joint venture for the initial measurement of contributions of nonmonetary assets made into the joint venture, and at the July 22, 2020 Board meeting, the Board decided to expand the scope of the project to include all contributions, irrespective of whether they are monetary or nonmonetary.

Exposure Draft(s):

On October 27, 2022, the Board issued proposed Accounting Standards Update, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The due date for comment letters was December 27, 2022.

• Download the proposed Accounting Standards Update.
• Read the comment letters on the proposed Accounting Standards Update.
• Read the comment letter summary on the proposed Accounting Standards Update.

• Read the press release on the proposed Update.

Decisions Reached at Last Meeting (April 5, 2023):

The Board redeliberated the proposed Accounting Standards Update, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement, and made the following decisions.

Formation Date

The Board affirmed its decision to define the formation date as the date on which an entity initially meets the definition of a joint venture (JV).

New Basis of Accounting

The Board affirmed its decision that a JV be required to recognize and initially measure its assets and liabilities at fair value using a new basis of accounting upon formation. In applying a new basis of accounting, the Board decided to affirm its decisions to require that a JV:

1. Account for its formation in accordance with business combinations guidance in Subtopic 805-20, Business Combinations—Identifiable Assets and Liabilities, and Any Noncontrolling Interest, and Subtopic 805-30, Business Combinations—Goodwill or Gain from Bargain Purchase, Including Consideration Transferred, regardless of whether the assets or group of assets recognized by the JV constitute a business in accordance with Subtopic 805-10, Business Combinations—Overall.
2. Recognize goodwill as of the formation date as the difference between the JV’s total net assets and its identifiable net assets, when applicable. Total net assets should be measured as the fair value of the JV as a whole, which is equal to the fair value of 100 percent of a JV’s equity immediately following formation (including any noncontrolling interest in the net assets recognized by the JV). In reaching this decision about goodwill, the Board expects it to be uncommon that an entity that meets the definition of a JV would have significant goodwill at formation if it did not meet the definition of a business.
3. Recognize any negative goodwill (measured as the amount of the identifiable net assets recognized by the JV in excess of the fair value of the JV as a whole) resulting from the formation transaction as an adjustment to equity.
4. Capitalize contributed tangible and intangible research and development assets regardless of whether (a) those assets have an alternative future use and (b) the JV meets the definition of a business in accordance with Subtopic 805-10.
5. Determine whether transfers of financial assets that are within the scope of Subtopic 860-10, Transfers and Servicing—Overall, should be recognized by the JV by applying the guidance in that Subtopic.

Additionally, the Board decided that a JV may apply the measurement period guidance in accordance with Subtopic 805-10 to the amounts recognized upon formation and, accordingly, require measurement period disclosures. Those disclosures would include the reasons why the initial accounting is incomplete and any adjustments made within the measurement period as a result of the initial accounting being incomplete.

Determining What Is Part of the JV Formation

The Board affirmed its decisions to require that a JV determine whether certain arrangements between the JV and the venturers are part of the JV formation or are separate transactions by applying the guidance in paragraphs 805-10-55-24 through 25-26, as well as affirmed its decisions to:

1. Prohibit analogy of the guidance for a transaction that in effect settles preexisting relationships between the acquirer and the acquiree (in paragraphs 805-10-55-20 through 55-23) and the guidance in paragraph 805-10-55-23 for acquisition-related costs and transactions that reimburse the acquiree or its former owners for paying the acquirer’s acquisition-related costs
2. Provide guidance for scenarios in which the JV replaces share-based payment awards
3. Require that any contingent arrangements deemed to be part of the JV formation and classified within assets or liabilities follow the guidance in Subtopic 805-20.

Scope of Amendments

The Board affirmed its decision that the scope of the amendments is the recognition and initial measurement upon formation of a JV. Accordingly, the Board affirmed its decision that the following will not be changed as part of the amendments:

1. Equity method of accounting applied by venturers under Topic 323, Investments—Equity Method and Joint Ventures
2. The definition of a JV in the Master Glossary.

The Board affirmed its decisions to provide a scope exception for:

1. All entities that may be proportionately consolidated by one or more of the venturers and not-for-profit entities
2. Collaborative arrangements within the scope of Topic 808, Collaborative Arrangements, with the exception of any part of a collaborative arrangement that is conducted in a separate legal entity that meets the definition of a JV.

Transition

The Board affirmed its decision that a JV formed after the effective date is required to apply the amendments prospectively. Additionally, the Board decided that a JV formed before the effective date can elect to apply the amendments retrospectively if it has sufficient information available to do so.

Effective Date

The Board decided that the amendments will be effective for all JV formations with a formation date on or after January 1, 2025. The Board also decided that early adoption is permitted.

Analysis of Costs and Benefits

The Board concluded that it has received sufficient information and analysis to make an informed decision on the expected costs and expected benefits of the amendments and that the expected benefits of those amendments would justify the expected costs.

Next Steps

The Board directed the staff to draft an Accounting Standards Update for vote by written ballot.

Tentative Board Decisions Reached to Date:

For decisions reached in redeliberations, see Decisions Reached at Last Meeting. For decisions reached in initial deliberations, see the proposed Accounting Standards Update.

The Board meeting minutes, handouts, and videos are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

The following are links to the minutes for each meeting.  To view Board meetings and handouts from the past 90 days, click here.
 

April 5, 2023*	Board Meeting—The Board completed redeliberations and directed the staff to draft the final Accounting Standards Update for vote by written ballot.
September 14, 2022	Board Meeting—The Board concluded its initial deliberations on the project and directed the staff to draft a proposed Accounting Standards Update for vote by written ballot.
October 13, 2021	Board Meeting—The Board continued its initial deliberations on the project.
August 4, 2021	Board Meeting—The Board continued its initial deliberations on the project.
February 17, 2021	Board Meeting—The Board continued its initial deliberations on the project.
July 22, 2020	Board Meeting—The Board continued its initial deliberations on the project.
January 22, 2020	Board Meeting—The Board began its initial deliberations on the project.
September 18, 2019	Board Meeting—The Board added the project to the technical agenda.

The Board will begin drafting a final Accounting Standards Update for vote by written ballot.

Aarika Friend
Senior Project Manager
afriend@fasb.org

Gary Sardo
Practice Fellow
gsardo@fasb.org

Corey Girard
Postgraduate Technical Assistant
cgirard@fasb.org

Charley Heyd
Postgraduate Technical Assistant
cheyd@fasb.org