ACCOUNTING STANDARDS UPDATE 2023-05—BUSINESS COMBINATIONS—JOINT VENTURE FORMATIONS (SUBTOPIC 805-60): RECOGNITION AND INITIAL MEASUREMENT

Overview

On August 23, 2023, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that addresses the accounting for contributions made to a joint venture, upon its formation, in a joint venture’s separate financial statements.

The objectives of the amendments are to (1) provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements and (2) reduce diversity in practice in this area of financial reporting.

The ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification® Master Glossary. While joint ventures are defined in the Master Glossary, generally accepted accounting principles (GAAP) do not provide specific authoritative guidance on how a joint venture, upon formation, should recognize and initially measure assets contributed and liabilities assumed (including the assets and liabilities of businesses contributed). Rather, GAAP explicitly provides that transactions between a corporate joint venture and its owners are outside the scope of Topic 845, Nonmonetary Transactions, and that the formation of a joint venture is outside the scope of Topic 805, Business Combinations. In the absence of specific guidance, practice has been influenced by various sources. As a result, there is diversity in practice in how a joint venture accounts for the contributions it receives upon formation—some joint ventures initially measure their net assets at fair value at the formation date, while other joint ventures initially measure their net assets at the venturers’ carrying amounts.

To reduce diversity in practice and provide decision-useful information to a joint venture’s investors, the Board decided to require that a joint venture apply a new basis of accounting upon formation. By applying a new basis of accounting, a joint venture, upon formation, will recognize and initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance).

The amendments in this Update do not amend the definition of a joint venture (or a corporate joint venture), the accounting by an equity method investor for its investment in a joint venture, or the accounting by a joint venture for contributions received after its formation.

Transition and Effective Dates

The amendments in this Update are effective prospectively for all joint venture formations with a formation date on or after January 1, 2025, and early adoption is permitted.

Additionally, a joint venture that was formed before the effective date of the amendments in this Update may elect to apply the amendments retrospectively if it has sufficient information.

Additional Information

• Download the Accounting Standards Update
• Read the Press Release introducing the ASU

Post-Issuance Activities

None.

Have A Question?

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¹Private Entities are entities that are not (a) public business entities, (b) not-for-profit bond obligors, and (c) employee benefits plans that file or furnish financial statements with or to the U.S. Securities and Exchange Commission.