The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement.
The ASU is intended to reduce diversity by requiring a joint venture to apply a new basis of accounting upon formation.
Key Provisions
Historically there is a lack of authoritative guidance in generally accepted accounting principles (GAAP) that specifies how a joint venture should account for assets contributed and liabilities assumed upon formation, which has resulted in diversity in practice. Without specific guidance, joint ventures may measure net assets at the carrying amounts of the venturer that contributed the net assets, or in certain circumstances, at fair value.
The amended guidance adds Subtopic 805-60, Business Combinations—Joint Venture Formation, and requires a joint venture to apply a new basis of accounting upon formation. This means that at the formation date, a joint venture will recognize and initially measure assets contributed and liabilities assumed at fair value, with exceptions to fair value measurement that are consistent with the business combinations guidance.
The accounting by an equity method investor for its investment in a joint venture and the accounting by a joint venture for contributions received after its formation isn’t impacted by the amended guidance in ASU 2023-05.
Definition of a Joint Venture
The amended guidance doesn’t change the definition of a joint venture.
A joint venture is defined in part under the Master Glossary as “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.”
The amended guidance further clarifies that a joint venture is the formation of a new reporting entity—not necessarily the creation of a new legal entity—that consists of contributed assets and liabilities controlled by such reporting entity. There’s no identified accounting acquirer in a joint venture.
Formation Date
The ASU amends the Master Glossary to define the formation date as the date when an entity initially meets the definition of a joint venture. This date may not necessarily be the same as the legal entity formation date.
If multiple arrangements are accounted for as a single transaction that establishes the formation of a joint venture, the formation date is the measurement date for all arrangements that form part of the single formation transaction.
Initial Measurement
At the formation date, a joint venture is required to apply a new basis of accounting for its identifiable assets and liabilities, and any noncontrolling interest.
Goodwill is required to be recognized as the excess of the joint venture’s total net assets as compared to the identifiable net assets at the formation date. The amendments require a joint venture to measure its total net assets as the fair value of the joint venture as a whole, which would equal the fair value of 100% of the joint venture’s equity immediately following formation, including any noncontrolling interest in the net assets recognized by the joint venture.
The FASB expects the likelihood of negative goodwill to be low for a joint venture formation; however, if present at the time of formation, negative goodwill should be recognized as an adjustment to additional paid-in capital or other similar equity account.
Measurement Period Guidance
In accordance with the guidance in Subtopic 805-10, Business Combinations—Overall, an acquirer in a business combination should report provisional amounts in its financial statements when the initial accounting is incomplete as of the end of the reporting period in which the business combination occurred.
During the measurement period, the acquirer should adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date.
The measurement period ends when the acquirer receives all necessary information relating to the provisional amounts or learns that more information isn’t obtainable. However, the measurement period cannot exceed one year from the acquisition date.
The amendments in ASU 2023-05 permit a joint venture to apply the above measurement period guidance in Subtopic 805-10 if the initial accounting for a joint venture formation is incomplete by the end of the reporting period in which the formation occurs.
Disclosure
The amended guidance requires a joint venture to provide relevant disclosures that enable the users of its financial statements to understand the nature and financial effect of the joint venture formation in the period in which the formation date occurs.
The following disclosures should be provided in the period of formation:
- Formation date
- Description of purpose for which the joint venture was formed
- Formation-date fair value of the joint venture as a whole
- Description of assets and liabilities recognized by the joint venture at the formation date
- Amounts recognized by the joint venture for each major class of assets and liabilities as a result of accounting for its formation—either presented on the face of financial statements or disclosed in the notes to financial statements
- A qualitative description of the factors that make up any goodwill recognized
Additional disclosures are required when the initial accounting for a joint venture formation is incomplete and the joint venture applies the measurement period guidance.
Effective Dates
The amendments are effective prospectively for all joint ventures with a formation date on or after January 1, 2025.
Early adoption is permitted in any interim or annual period in which financial statements haven’t yet been issued—or made available for issuance—either prospectively or retrospectively.
Joint ventures formed prior to January 1, 2025, may elect to apply the amendments retrospectively, if they have sufficient information.
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