The FASB issued ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60), with the dual objective of (1) providing decision-useful information to the users of a joint venture’s financial statements, and (2) reducing diversity in practice with regard to how a joint venture or corporate joint venture (collectively referred to as a JV) accounts for the contributions it receives from its venturers upon formation. The amendments do not affect the definition of a joint venture or corporate joint venture. Entities should perform a careful analysis to determine if the definitions are met.
Although U.S. GAAP previously stipulated that transactions between a JV and its owners are outside the scope of both ASC 845 and ASC 805, it lacked specific accounting guidance on how a JV, upon formation, should recognize and initially measure assets contributed and liabilities assumed, resulting in diversity in practice. Specifically, some JVs initially measured their contributed net assets at fair value at the formation date, while others initially measured their contributed net assets at the venturers’ precontribution carrying amounts.
In response, the FASB is requiring JVs, upon formation, to apply a new basis of accounting—similar to fresh start or push down accounting under ASC 805 —and to recognize contributed net assets generally at fair value as of the JV’s formation date. To accomplish this, the amendments in ASU 2023-05 require a JV to apply the guidance applicable to an acquirer in a business combination in ASC 805, with several important adaptations specifically for JV formations:
Additionally, many of the exceptions in ASC 805 that do not require the acquirer in a business combination to measure acquired assets and assumed liabilities at fair value now apply to the JV in its financial statements at the formation date.
The amendments outline the following steps for a JV to follow when accounting for its contributed net assets at formation: