Joint ventures are popular structures for creating alliances and gaining entry to or expanding business operations in various domestic and foreign markets. In some cases, arrangements may be referred to as joint ventures even though they do not meet the accounting definition of a joint venture. In other cases, an entity may be a variable interest entity (VIE) (see CG 2) and one investor, or another enterprise with a variable interest in the entity, may be the primary beneficiary required to consolidate the entity, in which case it does not meet the joint control requirements for joint venture accounting. Because joint ventures may be accounted for differently than other similarly-structured transactions and joint arrangements, it is important to properly distinguish arrangements that meet the accounting definition of a joint venture.
In connection with the accounting for joint ventures, two of the most significant and difficult issues are (1) the investor’s/venturer’s accounting for the formation of the joint venture (specifically, determining the gain or loss to recognize at formation for the contribution of noncash assets to the joint venture) and (2) accounting by the joint venture for the receipt of noncash assets at formation.
This chapter discusses (1) the accounting definition of a joint venture and (2) the accounting for the initial investment at formation by the investor and the joint venture. After formation of a joint venture, an investor generally applies the equity method of accounting for its investment, and the joint venture applies the relevant GAAP standards for its transactions just as any other operating entity would.
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 is addressed in EM 6.4.
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