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8.3 Joint venture versus collaborative arrangement
Publication date: 31 Jul 2023 (updated 30 Sep 2023)
us Consolidation guide
When an investor is evaluating whether it has entered into a joint venture arrangement, the investor should consider whether the arrangement is instead a collaborative arrangement. A collaboration arrangement is a series of contracts that cause entities to share economic risks and rewards, as defined in ASC 808.
Definition from ASC 808-10-20
Collaborative arrangement: A contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties that meet both of the following requirements: (a) they are active participants in the activity and (b) they are exposed to significant risks and rewards dependent on the commercial success of the activity.
Entities may enter into arrangements to participate in a joint operating activity to develop and commercialize intellectual property (i.e., the development and commercialization of a new drug, software, computer hardware, or a motion picture). Collaborative arrangements in the scope of ASC 808 are usually executed through contracts, and are typically not conducted through a separate legal entity created by the sponsors specifically to perform the joint operating activity.
When a collaborative arrangement is conducted through a separate legal entity, the sponsors should evaluate whether joint venture accounting applies, as discussed in EM 6. In arrangements conducted through a separate legal entity, the sponsors would likely apply the equity method, as discussed in EM 1 to EM 4.
Sponsors are specifically prohibited from applying the equity method of accounting to collaborative arrangements in which a separate legal entity does not exist as per ASC 808-10-15-4. See RR 2.4.1 for additional information on collaborative arrangements.
New guidance
In August 2023, the FASB issued ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. The new guidance requires a joint venture to apply a new basis of accounting for all contributions received upon its formation. This accounting will largely be consistent with ASC 805, Business Combinations, with some specific exceptions (refer to EM 6.4.1). While ASU 2023-05 does not apply to collaborative arrangements in the scope of ASC 808, it does apply to parts of a collaborative arrangement that are conducted in a separate legal entity that meets the definition of a joint venture. The new guidance should be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025. For joint venture entities formed before the effective date, an election can be made to apply the new guidance retrospectively if sufficient information is available to do so. Early adoption is permitted.
8.3.1 Research and development arrangements
Companies may enter into unique arrangements, such as R&D-focused partnerships, strategic alliances, and collaborations to fund research and development activities. When those arrangements do not involve a separate legal entity, but are structured through contractual arrangements whereby the entities actively participate in the research and development of a product and share the financial risks and rewards of the R&D efforts, the arrangement may qualify for accounting as a collaborative arrangement in accordance with ASC 808. The demand for new sources of capital has led many companies to explore innovative R&D funding arrangements. Often partners or investors may be financial or passive investors. If these investors are not actively participating in the R&D efforts, the investment would not be in scope of ASC 808 and the investors should assess whether the arrangement is within the scope of ASC 730-20, Research and Development Arrangements, or ASC 470-10-25, Sales of Future Revenues.
Arrangements between pharmaceutical companies (“Pharma”) and financial investors have become more prevalent in recent years. These arrangements tend to utilize one of the following strategies:
- Direct R&D Funding: This strategy is predicated on a financial investor providing direct funding to Pharma for specified R&D projects in return for future payments (e.g., milestone payments, royalties on sales) contingent upon successful completion of the R&D.
- Newco R&D Funding: This strategy involves a third party investor establishing a new entity to perform the R&D, which may be outsourced back to Pharma or to an unaffiliated contract research organization, often with a predetermined exit (e.g., providing Pharma a call option or contingent forward purchase) only upon successful completion of the R&D.
A company that actively participates in a direct R&D funding arrangement should look to ASC 808 to determine whether it has entered into a collaboration arrangement. The company may then need to consider accounting guidance per ASC 606, Revenue from Contracts with Customers, ASC 730, Research and Development, or ASC 470, Debt.
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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