Accounting Standards Update: Accounting for Joint Venture Formations, 2023-05

The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Accounting Standards Codification (ASC), the primary source of Accounting Principles Generally Accepted in the United States (GAAP). The following ASU was recently issued.

ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement

The FASB has issued ASU 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. This ASU is intended to address diversity in practice regarding accounting and provide decision-useful information related to contributions made to joint ventures. Previously, GAAP did not provide specific authoritative guidance on how a joint venture should recognize and initially measure assets contributed and liabilities assumed upon formation in a joint venture’s separate financial statements.

Summary

Without specific authoritative guidance on the accounting for contributed assets and assumed liabilities of a joint venture upon formation, some preparers of the financial statements of joint ventures would initially measure net assets at fair value at the formation date, while others used the venturers’ carrying amounts as the basis for initial measurement. The FASB has amended GAAP to require a joint venture, upon formation, to initially measure its assets and liabilities at fair value, with some exceptions consistent with the guidance for business combinations.

The amendments indicate that joint ventures that are private companies may elect the accounting alternative for the recognition of identifiable intangible assets, which allows the joint venture to not recognize customer-related intangible assets and noncompetition agreements separately from goodwill. If the accounting alternative is elected, the joint venture will also need to adopt the accounting alternative for amortizing goodwill.

Certain differences between the joint venture guidance provided in ASU 2023-05 and the guidance provided in ASC 805-10, Business Combinations—Overall exist. These differences include:

• A joint venture is the formation of a new entity without an accounting acquirer. An accounting acquirer will therefore not be identified.
• A joint venture measures its identifiable net assets and goodwill, if any, at the formation date. The formation date is the date on which an entity initially meets the definition of a joint venture.
• The initial measurement of a joint venture’s total net assets is equal to the fair value of 100% of the joint venture’s equity, meaning the joint venture’s total net assets will be the same as the fair value of the joint venture as a whole upon formation.
• A joint venture provides relevant disclosures, which have some differences from those required for business combinations.

ASU 2023-05 also permits a joint venture to apply the measurement period guidance in ASC 805-10 if the initial accounting is incomplete by the end of the reporting period including the formation date.

The ASU does not amend the definition of a joint venture, the accounting by an investor for its investment in the joint venture, or the accounting by a joint venture for contributions received after the date of formation.

Preparers should note that the terms “joint venture” and “corporate joint ventures” are defined in the Master Glossary of the ASC and that the amendments should only be applied to arrangements that meet one of these definitions. In practice, the term “joint venture” may be used generally to describe some entities that do not meet the GAAP definition. Additionally, ASU 2023-05 does not apply to:

• the formation of not-for-profit entities,
• combinations between entities, businesses, or nonprofit activities under common control,
• entities in the construction or extractive industries that may be proportionately consolidated by any of their investor-venturers in accordance with ASC 810, Consolidation (specifically 810-10-45-14), and
• collaborative arrangements under ASC 808, Collaborative Arrangements, except for any part of the arrangement that is conducted in a separate legal entity that meets the definition of a joint venture.

Effective Date and Transition

ASU 2023-05 is effective prospectively for all joint ventures with formation dates on or after Jan. 1, 2025.

Existing joint ventures formed prior to Jan. 1, 2025 have the option to apply the amendments retrospectively if sufficient information exists.

Early adoption is permitted for financial statements that have not yet been issued or made available for issuance.

For questions on how to implement this new accounting standard, please contact your KSM advisor or complete this form.