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Definition from Master Glossary
The formation date of a joint venture is the date on which an entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date. The formation date is the measurement date for the formation transaction. 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.
Excerpt from 805-60-25-4
Multiple arrangements may establish the formation of a joint venture and constitute the joint venture formation transaction. Circumstances sometimes indicate that the multiple arrangements should be accounted for as a single transaction. In determining whether to account for the multiple arrangements as a single transaction that establishes the formation, a joint venture shall consider the terms and conditions of the arrangements and their economic effects. Any of the following may indicate that the joint venture should account for the multiple arrangements as a single transaction that established the formation of the joint venture:
Initial measurement
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In a business combination, assets and liabilities are measured at acquisition date fair value, with limited exceptions as described in BCG 2.5.
In an asset acquisition, assets acquired are measured under a cost accumulation model, with cost allocated to acquired assets on a relative fair value basis.
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Assets and liabilities are measured at formation date fair value, with the same limited exceptions as business combinations.
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Goodwill
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Goodwill is recognized in business combinations when the consideration paid is greater than the fair value of the net identifiable assets acquired.
Goodwill is not recognized in asset acquisitions.
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Goodwill is recognized when the total fair value of the JV exceeds the fair value of the net identifiable assets contributed. Goodwill is recognized regardless of whether the assets contributed represent a business or an asset group.
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Bargain purchase gain
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A bargain purchase gain is recognized in business combinations when the consideration paid is less than the fair value of the net assets acquired.
A bargain purchase gain is not recognized in asset acquisitions.
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No bargain purchase gains are recognized. Negative goodwill is recognized as an adjustment to equity of the JV.
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In process research and development (IPR&D)
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IPR&D is capitalized as an indefinite-lived intangible asset in a business combination.
IPR&D is expensed in an asset acquisition.
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IPR&D is capitalized as an indefinite-lived intangible asset, regardless of whether the assets contributed represent a business or an asset group.
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Contingent consideration
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In a business combination, contingent consideration is recognized at estimated acquisition date fair value as additional purchase price.
In an asset acquisition, contingent consideration that is not accounted for under other US GAAP (e.g., as a derivative) is generally recorded when probable and reasonably estimable. Any amount of contingent consideration recorded on the acquisition date is included in the initial cost of the assets acquired, and subsequent changes are generally recognized as an adjustment to the cost basis.
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Contingent consideration is accounted for as a liability (or asset) contributed at formation. It is not added to the total fair value of the JV.
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Share-based payment awards
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In a business combination, the fair value of the awards is allocated between pre-acquisition vesting and post-acquisition compensation cost.
- Amounts attributed to pre-acquisition vesting are accounted for as additional purchase price.
- Amounts attributable to post-acquisition services are recognized as compensation cost over the applicable service period
If an asset acquisition includes employees with share-based compensation awards that are replaced with awards of the acquirer, there may be diverse views as to whether a similar allocation should be made as in a business combination or if the full amount of the replacement awards would be considered new awards and be accounted for prospectively and recognized in the postcombination period.
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The fair value of the awards is allocated between pre-formation vesting and post-formation compensation cost.
- Amounts attributed to pre-formation vesting are accounted for as a reallocation of additional paid in capital (or other similar equity account such as members’ equity).
- Amounts attributed to post-formation service are recognized as compensation cost over the applicable service period.
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Acquisition-related costs
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Acquisition-related costs in a business combination should be expensed as incurred by the acquirer.
In an asset acquisition, acquisition-related costs are included in the cost of the acquired assets.
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Not specifically addressed, other than that JVs cannot apply the guidance for business combinations or asset acquisitions
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Reimbursement of acquisition-related costs
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In a business combination:
- Reimbursement of acquiree acquisition-related costs is accounted for by the acquirer as part of the consideration transferred.
- Reimbursement of acquirer acquisition costs paid for by the acquiree are accounted for by the acquirer as an expense.
In an asset acquisition, all acquisition-related costs are included in the cost of the acquired asset.
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Not specifically addressed, other than that JVs cannot apply the guidance for business combinations
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Pre-existing relationships
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In a business combination, if pre-existing relationships with the acquiree included favorable or unfavorable terms, the acquirer should recognize a gain or loss as an effective settlement.
There is no guidance outside of a business combination on the settlement of a pre-existing relationship. In an asset acquisition, settlement gains and losses are generally recognized in the income statement, consistent with the guidance for business combinations.
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Not specifically addressed, other than that JVs cannot apply the guidance for business combinations
As a new entity, a JV would not be viewed to have pre-existing relationships with the venturers.
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Measurement period adjustments
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In a business combination, may obtain final valuation information for acquired assets and assumed liabilities, and total consideration issued, not to exceed one year after the acquisition date.
In an asset acquisition, there is no concept of a measurement period.
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May obtain final valuation information for contributed assets and liabilities, and total formation-date fair value of the JV, not to exceed one year after the formation date
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PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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