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Once it has been determined that a joint venture should not be consolidated pursuant to ASC 810, an investment in a joint venture is generally accounted for under the equity method of accounting pursuant to ASC 323.
When an investor contributes a business, or a group of assets that represents a business, to a joint venture, the investment is generally recorded at fair value, as described in EM 6.3.1.1. Similarly, when an investor contributes nonfinancial assets that do not represent a business to a joint venture, the investment is generally recorded at fair value, as discussed in EM 6.3.1.2.
In some cases, an investor may elect the fair value option to account for its investment in a joint venture, or it may meet the requirements for proportionate consolidation, which are both discussed in EM 6.3.2.

6.3.1 Investor accounting for an investment in a JV at formation

ASC 323 provides guidance regarding the initial measurement of an investment in a joint venture as follows.

ASC 323-10-30-2

Except as provided in the following sentence, an investor shall measure an investment in common stock of an investee (including a joint venture) initially at cost in accordance with the guidance in Section 805-50-30. An investor shall initially measure, at fair value, the following:
  1. A retained investment in the common stock of an investee (including a joint venture) in a deconsolidation transaction in accordance with paragraphs 810-10-40-3A through 40-5.
  2. An investment in the common stock of an investee (including a joint venture) recognized upon the derecognition of a distinct nonfinancial asset or distinct in substance nonfinancial asset in accordance with Subtopic 610-20.

6.3.1.1 Contribution of a business

ASC 805 defines a business as follows.

Definition from ASC 805-10-55-3A

A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.

See BCG 1 and ASC 805-10 for further information on what constitutes a business.
When an investor contributes a subsidiary or group of assets that constitute a business to a joint venture, the investor should apply the deconsolidation and derecognition guidance in ASC 810-10-40 and record any consideration received for its contribution at fair value (including its interest in the joint venture). This generally results in a gain or loss on the contribution.

Excerpt from ASC 810-10-40-5

A parent shall account for the deconsolidation of a subsidiary or derecognition of a group of assets specified in paragraph 810-10-40-3A by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

  1. The aggregate of all of the following:
    1. The fair value of any consideration received.
    2. The fair value of any retained noncontrolling investment in the former subsidiary or group of assets at the date the subsidiary is deconsolidated or the group of assets is derecognized.
    3. The carrying amount of any noncontrolling interest in the former subsidiary at the date the subsidiary is deconsolidated.
  2. The carrying amount of the former subsidiary’s assets and liabilities or the carrying amount of the group of assets. 

This guidance does not apply if the investor’s contribution is a conveyance of oil and gas mineral rights. An investor would apply the guidance in ASC 932 to account for these types of contributions to the joint venture.
Example EM 6-7 illustrates the accounting considerations when an investor contributes a business to a joint venture. See BCG 5.5 for examples of the accounting by an investor upon deconsolidation of a business.
EXAMPLE EM 6-7
Investor accounting for a contribution of a business to a joint venture
Company A has three reporting units, X, Y, and Z. Business B is one of several businesses within Company A’s reporting unit X. Company A previously assigned goodwill from a prior acquisition to reporting unit X. Company A has entered into an agreement with an unrelated third party to form a 50:50 joint venture, Newco, and will contribute Business B to Newco. Assume Newco meets the definition of a joint venture, does not qualify as a variable interest entity under ASC 810-10, and will be accounted for as an equity investment in the financial statements of Company A under ASC 323.
How should Company A account for its investment in Newco?
Analysis
The guidance in ASC 810-10 should be followed when a subsidiary that is a business is transferred to a joint venture. Therefore, Company A should realize a gain or loss following the guidance in ASC 810-10-40-5. The carrying amount of Business B should include an allocation of reporting unit X’s goodwill following the guidance in ASC 350-20-35-51 as the contribution of a business to a joint venture is analogous to other disposals (e.g., a sale, abandonment, spin-off).
The gain/loss would consist of two parts, the realized gain/loss on the effective sale of the 50% interest in Business B to the unrelated third party, and the unrealized gain/loss from the remeasurement to fair value of the 50% noncontrolling investment effectively retained in Business B.

6.3.1.2 Contribution of assets that do not represent a business

An investor may contribute a subsidiary (or group of assets) that is a nonfinancial asset or in substance nonfinancial asset and not a business to a joint venture. In these cases, the investor should record its joint venture investment in accordance with ASC 610-20 (provided other guidance is not applicable, e.g., ASC 860, ASC 932). See PPE 6.2 for guidance on the derecognition of nonfinancial assets and in substance nonfinancial assets.

6.3.1.3 Contribution of services to a noncustomer

A gain should not be recognized on receipt of an interest in a joint venture if some or all of the investor’s interest was received for future services to be rendered, as this implies continuing involvement through a future obligation.

6.3.1.4 Differences in accounting

An investor and investee may apply different accounting principles (e.g., US GAAP, IFRS) and different accounting policies (e.g., LIFO or FIFO method of inventory costing) in the preparation of their financial statements. A public company investor may have an equity method investment in a private company investee that has elected a private company accounting alternative. Further, an investor and an investee might adopt new accounting standards in different periods. See EM 4.3.4 for a discussion of these topics.

6.3.2 Other investor accounting methods

In some cases, an investor may elect the fair value option to account for its investment in a joint venture, or it may meet the requirements for proportionate consolidation. See EM 1.4.5 and EM 1.4.6 for a discussion of the fair value option and the proportionate consolidation method, respectively.

6.3.3 Restructuring and impairment charges

When joint ventures are created by contributing assets and/or businesses from existing entities, certain restructuring and impairment charges are often anticipated. For example, there may be plans to close certain operating plants or reduce personnel. Such restructurings and impairments are typically an integral part of the negotiations between the venture partners. See PPE 5 for a discussion of impairment under ASC 360-10 and ASC 420, Exit or Disposal Cost Obligations.
Question EM 6-5 discusses the accounting by an investor that contributes a facility (e.g., a plant) expected to be shut down at or shortly after formation of the joint venture.
Question EM 6-5

If an investor contributes a plant that is expected to be shut down at or shortly after formation of the joint venture, should expenses associated with shutting down the plant be recognized by the investor?
PwC response
Determining whether the investor or joint venture should bear the cost of restructuring activities related to assets being contributed to a joint venture that are initiated in anticipation of the formation of the joint venture and in agreement with the other joint venture partner requires significant judgment. An assessment should be made to determine whether the restructuring costs are more appropriately the responsibility of the investor or the joint venture.
An impairment of assets that would otherwise be required under US GAAP cannot be avoided by contributing the assets to a joint venture. This would apply, for example, to lower of cost and net realizable value write-downs for inventory or impairments of long-lived assets.
If after formation, the joint venture decides to restructure operations of the contributed plant and such restructuring was not contemplated in the joint venture formation, the restructuring costs should be recognized in the accounts of the joint venture.

6.3.4 Start-up and organization costs

Costs incurred by an investor directly related to the organization of a joint venture should be expensed as incurred in accordance with ASC 720-15-25-1, as they are considered akin to start-up costs incurred in the formation of a new entity.

6.3.5 Cumulative translation adjustment accounts

An investor may decide to contribute a portion or all of its foreign operations that constitute a business to a joint venture. This would result in the investor deconsolidating a portion or all of its foreign operations. In these cases, the investor needs to determine whether its investment in the joint venture results in a deconsolidation event within a foreign entity or a deconsolidation event of a foreign entity, as described in ASC 830-10. If it is deemed a deconsolidation event within a foreign entity, the investor would not release any of its cumulative translation adjustments (“CTA”) into earnings unless such deconsolidation event represents a complete or substantially complete liquidation of the foreign entity. In contrast, if it is deemed a deconsolidation event of a foreign entity, the investor would release all of its CTAs related to the derecognized foreign entity, even when a noncontrolling investment is retained. See FX 8 for additional information regarding this determination.

6.3.6 Tax basis differences

Sometimes an investor may recognize its investment in a joint venture at fair value, while for tax purposes its investment in the joint venture was not deemed to be a taxable transaction. This would result in a difference in the book and tax basis of the investment. See TX 11 for further details regarding the impact to the investor when tax basis differences exist.

6.3.7 Dissolution of a joint venture

When a joint venture is terminated by its investors, the net assets of the joint venture may be distributed to the investors or sold to a third party. Example EM 6-8 illustrates the accounting by an investor for the receipt of the net assets of the joint venture upon its termination.
EXAMPLE EM 6-8
Accounting for an investor’s receipt of a distribution of net assets constituting a business from its joint venture
During 20X2, Company A and Company B established a joint venture, Newco, through the contribution of nonmonetary assets. Book values of the nonmonetary assets were equal to fair values at the time of the contribution. Since Company A and Company B have joint control over Newco and Newco meets the definition of an accounting joint venture, each investor accounts for its investment under the equity method of accounting.
During 20X4, the investors decide to end their joint venture in Newco and proceed with a plan to distribute the net assets of the venture to the investors in proportion to their 50:50 ownership interest. Newco distributes its assets such that each investor receives 50% of the total asset value. Each group of net assets received by the two investors constitutes a business as defined by ASC 805-10-20.
What is the accounting for the liquidating distribution of the net assets of Newco to the investors of Newco upon its termination?
Analysis
Each investor effectively owned a 50% noncontrolling equity interest in each business prior to the dissolution. In the dissolution, each investor would exchange its 50% equity investment in one of the businesses for a controlling financial interest in the other business. Therefore, given that each investor would obtain control of a business, the investor’s accounting is within the scope of ASC 805 and ASC 810-10, and should be accounted for using the guidance for a business combination achieved in stages. In this scenario, a gain (or loss) would be recognized on both the interest sold (which represents a business) and the remeasurement of the previously held equity interest effectively retained (which also represents a business). The transaction would be accounted for by Company A as follows.
At the time of the transaction, assume Newco’s net assets have a fair value of $400 million and a book value of $300 million attributable evenly between the two businesses. As a result, Company A effectively sells its 50% in a business (with a fair value of $200 million and book value of $150 million), and acquires control of a business by purchasing the 50% interest in the other business (also with a fair value of $200 million and book value of $150 million) for which Company A had a previously held equity interest. Company A would record its basis in the acquired business based on the consideration transferred of $200 million (fair value of business sold) and record the assets acquired and liabilities assumed, including the remeasurement of its previously held equity interest. Company A would recognize a total gain of $50 million on the transaction as follows.
Dr. Net assets of business acquired
$200 million
Cr. Investment in Newco
$150 million
Cr. Gain on previously held equity interest
$  25 million
Cr. Gain on sale of business to Company B
$  25 million
If the equity investment in Newco was exchanged for net assets that did not constitute a business, the transaction would not fall within the scope of ASC 805.
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