Joint ventures are popular structures for creating alliances and gaining entry to or expanding business operations in various domestic and foreign markets. Joint ventures may be accounted for differently than other similarly structured transactions and joint arrangements. Therefore, it is important to properly distinguish arrangements that meet the accounting definition of a joint venture. Also, because of the lack of definitive, authoritative accounting literature addressing joint venture agreements, and the potentially conflicting accounting guidance often referred to by analogy (e.g., ASC 805
, Business Combinations
, ASC 718
, Compensation—Stock Compensation
, ASC 845
, Nonmonetary Transactions
, ASC 970
, Real Estate
), accounting for joint ventures requires analysis and judgment. Furthermore, 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, a joint venture 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 joint venture, in which case it does not meet the joint control requirements for joint venture accounting.
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, whether a gain or loss can be recognized 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 the definition of a joint venture and the accounting for the initial investment at formation by the investor and the joint venture. Subsequent to the formation of a joint venture, there is not a specific accounting model for either the investor or the joint venture. Instead, 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.
Note about ongoing standard setting
The FASB has an active project that may affect the accounting by a joint venture for the receipt of noncash assets at formation. Financial statement preparers and other users of this publication are therefore encouraged to monitor the status of the project and, if finalized, evaluate the effective date of the new guidance and the implications on the accounting by the joint venture.