Why Is the FASB Issuing This Accounting Standards Update (ASU)?
On August 23, 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture Formations (subtopic 805-60): Recognition and Initial Measurement to address how a joint venture initially recognizes and measures contributions received at its formation date. The amendments in this ASU are intended to reduce diversity in practice and provide decision-useful information to a joint venture’s investors through the joint venture’s financial statements. Previously, generally accepted accounting principles (GAAP) did not specifically address how a joint venture should recognize and initially measure assets contributed and liabilities assumed at the formation date, which has led to differences in the manner that joint ventures have been accounted for at the formation date. Some joint ventures initially measured their net assets at fair value, while others initially measured their net assets at the venturers’ carrying amounts.
What Are the Main Provisions?
The ASU requires that a joint venture apply a new basis of accounting upon formation to recognize and initially measure its assets and liabilities at fair value (with the exceptions to fair value measurement that are consistent with the business combinations guidance).
The amendments in the ASU apply the following key adaptations from business combinations guidance (Topic 805) upon formation:
- A joint venture is the formation of a new entity without an accounting acquirer.
- A joint venture measures its identifiable net assets and goodwill, if any, at the formation date.
- Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 percent of the joint venture’s equity.
- A joint venture provides relevant disclosures.
Who Is Affected by the Amendments in This ASU?
All joint ventures, including commercial joint ventures, with formation dates on or after January 1, 2025.
The definition of joint venture was unchanged by this ASU and is defined as:
Joint Venture – 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.
When Will the Amendments Be Effective and What Are the Transition Requirements?
The amendments in this ASU are effective prospectively for all joint ventures, including commercial joint ventures, with a formation date on or after January 1, 2025. A joint venture that was formed prior to January 1, 2025 may elect to apply the amendments retrospectively if it has sufficient information. Early adoption is permitted in any period where financial statements have not yet been issued, either prospectively or retrospectively.
Read full ASU article here.