Changes in accounting for joint ventures
Jeffrey A. Ford
by Jeffrey A. Ford
In August 2023, the Financial Accounting Standards Board (FASB) in the United States issued accounting standards update ASU 2023-05 to reduce diversity in practice and to provide more useful information in a joint venture’s separate financial statements related to contributions made to the joint venture upon formation. A joint venture is defined 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 main provisions
As US generally accepted accounting principles (GAAP) did not provide guidance on how joint ventures should recognise and initially measure the assets contributed and liabilities assumed upon formation there was much diversity in practice. ASU 2023-05 requires that, upon formation, a joint venture apply a new basis of accounting and, thus, should initially measure its assets and liabilities at fair value (with certain exceptions to fair value as prescribed by the business combinations guidance). This ASU also requires that, upon formation, a joint venture apply the following key adaptations from the business combination guidance:
A joint venture is the formation of a new entity without an accounting acquirer. The formation is the creation of a new reporting entity with none of the net assets or businesses contributed being viewed as having survived the combination as an independent entity (no identified accounting acquirer).
A joint venture measures identifiable net assets and goodwill, if any, at the formation date. The formation date is the date when the entity initially meets the definition of a joint venture.
Initial measurement of a joint venture’s total net assets is equal to the fair value of 100% of the joint venture’s equity. The fair value of the joint venture as a whole upon formation must equal the fair value of the total net assets contributed.
A joint venture provides relevant disclosures. Formation disclosures differ from the requirements for business combinations.
Effective DatesThese amendments are effective prospectively for all joint ventures formed after 01 January 2025. Joint ventures formed earlier may apply the provisions retrospectively so long as sufficient information is available.
Jeffrey A. Ford is a Founding & Managing Partner at Grossman Yanak & Ford LLP. He has over 30 years of experience, focused in audit and assurance, M&A transactions, and technology consulting. Jeff has served on a variety of ownership groups including public and private companies, private equity groups and international investors. Contact Jeff.
Grossman Yanak & Ford LLP is a full-service CPA firm, headquartered in Pittsburgh, Pennsylvania. Their accounting and consulting service offerings include audit and assurance, tax advisory and compliance, business valuation and litigation support, business advisory/ management consulting, and ERP solutions.
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