Expand
The guidance in this section applies only to entities that meet the accounting definition of a joint venture as discussed in EM 6.2. Generally, the most significant accounting issue the joint venture will need to address is the amount at which to record contributions received from its investors.
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 that are further discussed in EM 6.4.1.3.
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. The new guidance applies to the initial formation of a joint venture or corporate joint venture. It does not address accounting by the joint venture for transactions after the formation transaction.
Additionally, the new guidance does not apply to formations of joint ventures that are determined to be not-for-profit entities or entities that may be proportionally consolidated under certain specialized industry guidance (see EM 1.4.6). In addition, collaboration agreements are excluded from the scope of the new guidance unless there is a part of the collaboration that is conducted in a separate legal entity that meets the definition of a joint venture. In that case, the joint venture should apply the new guidance in its standalone financial statements.
Accounting by the investor is not impacted by the new guidance. As noted in EM 6.3.1, an investor is required to initially recognize its initial investment in the joint venture at fair value as of the date the entity losses control of those net assets as defined under ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets, or ASC 810, Consolidation, depending on whether a group of assets or a business is contributed. This treatment will not change under the new guidance. However, since the investors’ accounting is based on a fair value model, it is expected that the new guidance eliminates or reduces many of the current basis differences between the joint venture’s financial statements (if the joint venture had recorded the contributions at carryover basis) and the reported investment by the investors, thus reducing complexity. For further discussion of accounting by the investor, refer to EM 6.3. For initial and subsequent accounting of basis differences, refer to EM 3.3 and EM 4.3, respectively.
For accounting prior to the adoption of ASU 2023-05, refer to EM 6.4A.1.

6.4.1 Initial contributions to the joint venture (after adoption of ASU 2023-05)

The formation of a joint venture results in the creation of a new reporting entity, and none of the assets or businesses contributed survive as an independent entity or as the historical operations of the entity. Accordingly, unlike in a business combination, the formation of a joint venture does not result in the identification of an accounting acquirer or a determination that one party gained control over another party. Therefore, a newly formed joint venture should apply a new basis of accounting to all its contributed net assets, which results in the joint venture initially measuring its contributed net assets under ASC 805-20, Business Combinations—Identifiable Assets and Liabilities, and any Noncontrolling Interest, with certain exceptions highlighted in EM 6.4.1.3.

6.4.1.1 Recognition and measurement of the net assets contributed to the joint venture

A joint venture is required to measure the net assets contributed as of the formation date. ASC 805-60 defines formation date as follows.

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.

The formation date is meant to function similar to the acquisition date in a business combination; it is the relevant date at which the joint venture must measure all the contributed assets and liabilities that are determined to be part of the formation transaction. Determination of the formation date may be straightforward when only one arrangement comprises the formation transaction or all contributions are made at the same date. However, defining the formation date may require significant judgment when assets or liabilities are not all contributed at the same time or when multiple arrangements constitute the joint venture formation transaction.
To determine whether to account for multiple arrangements as a single transaction that establish the joint venture formation, the entity should consider the guidance in 805-60-24-4, which is consistent with the guidance in ASC 810-10 for combining multiple transactions for the sale or derecognition of a business.

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:

  1. The multiple arrangements are entered into at the same time or in contemplation of one another.
  2. The multiple arrangements form a single transaction designed to achieve an overall commercial effect.
  3. The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
  4. One arrangement considered on its own is not economically justified, but the multiple arrangements are economically justified when considered together.

All of the contributed net assets determined to be part of the formation should be measured as of the formation date. With the limited exceptions described in EM 6.4.1.3, the net assets should be recognized in accordance with the guidance in ASC 805-20. Therefore, most assets and liabilities are recognized at their fair values. However, similar to acquisition accounting, certain assets and liabilities, such as contract assets and contract liabilities, certain contingencies, pension and postretirement benefits, leases, and income taxes are recognized at amounts other than fair value. See further discussion of the measurement basis of acquired assets and assumed liabilities in BCG 2.5.
When the investor contributes financial assets to the joint venture, accounting by the joint venture will depend on whether or not the investor accounts for the derecognition of those financial assets under ASC 860, Transfers and Servicing. If the investor applies the accounting guidance within ASC 860, the joint venture should similarly determine if the transfer results in the recognition of the transferred financial assets by applying the guidance in ASC 860. This does not include scenarios in which an investor contributes a business (or group of assets) that contains financial assets if they are considered “in substance nonfinancial assets” under ASC 610-20. In this scenario, the investor would account for the disposition of all assets, including the financial assets, under ASC 810 or ASC 610-20, and therefore, the joint venture would similarly not apply ASC 860 when assessing how to record the financial assets in its financial statements.
A joint venture should measure its total net assets as the fair value of the joint venture entity as a whole immediately following formation. This includes any noncontrolling interest in the net assets recognized by the joint venture. Total net assets do not include the fair value of any contingent consideration or replacement share awards, as described in EM 6.4.1.2. As a result, total net assets do not simply reflect the sum of the individual groups of net assets contributed by each investor.
If the initial accounting for a joint venture formation is incomplete by the end of the reporting period, joint venture entities can apply the measurement period guidance in ASC 805, which allows entities up to one year after the formation date to obtain information necessary to identify and measure the total net assets of the joint venture, assets acquired, liabilities assumed, and any noncontrolling interest. During the measurement period, the joint venture may adjust the provisional amounts recognized for new information about facts and circumstances that existed as of the formation date.

6.4.1.2 Determining what is part of the joint venture formation

A joint venture and its investors may enter into multiple arrangements at or around the same time as the formation. For example, the joint venture may enter into a service contract with an investor to pay the investor for future services to be performed. To determine what is part of formation, the joint venture should follow the guidance for assessing what is part of a business combination in ASC 805-10-55-24 through ASC 805-10-55-26. This includes evaluating why the payments are included in the arrangement, which party initiated them, and when the parties entered into the arrangement. See BCG 2.7 for additional information.
As the formation of a joint venture is the formation of an entirely new entity, the joint venture should not apply or analogize to the guidance related to pre-existing relationships in a business combination. Additionally, a joint venture is prohibited from applying the guidance in ASC 805 related to accounting for acquisition-related costs and transactions that reimburse the acquiree for paying the acquirer’s acquisition-related costs.
When share-based payment awards are issued at formation to replace awards held by grantees of the contributed entities, the joint venture should allocate the fair value of the awards at the formation date between pre-formation vesting and post formation compensation cost, similar to the accounting for share-based payment awards in a business combination, which is further described in BCG 3. However, instead of the portion of the fair value of the awards attributed to pre-formation vesting being accounted for as additional purchase price as it is in a business combination, this amount is accounted for as a reallocation of additional paid-in capital (or other similar equity account, such as members’ equity) and does not impact the total amount of equity or goodwill recognized by the joint venture upon its formation. Similar to acquisition accounting, the joint venture should record the portion of the fair value of the awards attributable to post formation service as compensation cost over the applicable service period.

6.4.1.3 Recognition of goodwill and in process research and development (IPR&D)

Regardless of whether the contributions received by the joint venture upon formation represent a business or an asset group, accounting for goodwill and IPR&D largely follows the accounting model for business combinations.
  • Goodwill should be recognized when the fair value of the joint venture entity as a whole exceeds the amount of identifiable net assets recognized.
  • Negative goodwill should be recognized as an adjustment to equity, not as a bargain purchase gain as in a business combination.

Recognition of goodwill is not limited to joint venture entities that meet the definition of a business.
As it relates to IPR&D, all intangible research and development assets contributed to a joint venture at formation should be capitalized as indefinite-lived intangible assets, consistent with the accounting model for business combinations.
A joint venture that is a private company may apply the accounting alternatives related to the recognition of certain intangible assets and amortization and impairment of goodwill. Refer to BCG 4.7 and BCG 9.11, respectively.
Figure EM 6-1 compares accounting for joint venture formations under ASC 805-60 and accounting for business combinations or asset acquisitions under ASC 805-20 and ASC 805-50, respectively. The figure is intended to summarize certain key areas, not address all accounting similarities or differences.
Figure EM 6-1
Comparison of joint venture formations, business combinations and asset acquisitions.
Topic
Business combination
(ASC 805-20) and/or asset acquisition
(ASC 805-50)
JV formation
(ASC 805-60)
Initial measurement
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.
Assets and liabilities are measured at formation date fair value, with the same limited exceptions as business combinations.
Goodwill
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.
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.
Bargain purchase gain
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.
No bargain purchase gains are recognized. Negative goodwill is recognized as an adjustment to equity of the JV.
In process research and development (IPR&D)
IPR&D is capitalized as an indefinite-lived intangible asset in a business combination.
IPR&D is expensed in an asset acquisition.
IPR&D is capitalized as an indefinite-lived intangible asset, regardless of whether the assets contributed represent a business or an asset group.
Contingent consideration
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.
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.
Share-based payment awards
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.
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.
Acquisition-related costs
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.
Not specifically addressed, other than that JVs cannot apply the guidance for business combinations or asset acquisitions
Reimbursement of acquisition-related costs
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.
Not specifically addressed, other than that JVs cannot apply the guidance for business combinations
Pre-existing relationships
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.
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.
Measurement period adjustments
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.
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

6.4.2 Tax basis differences

Noncash assets contributed to a joint venture that are recorded at fair value by the joint venture may have a lower tax basis that carries over from the investor to the venture. In these situations, the different bases of the assets for book vs. tax purposes would be a temporary difference for which deferred taxes should be recorded by the joint venture at the date of contribution, if the joint venture is a taxable entity. See TX 11 for further information.

6.4.3 Conforming accounting policies

At its inception, the joint venture establishes its own accounting policies. Typically, these are selected from those of the investors. Adoption of these accounting policies is not considered a change in the joint venture’s accounting policies under ASC 250-10 and Regulation S-X Rule 10-01; rather, it represents the initial selection by the joint venture of its own accounting policies.

6.4.4 Joint venture's investment in a venturer

A joint venture (investee) may hold an equity investment in one of its venturers (investors). See EM 4.3.5 for a discussion of the acceptable accounting methods in this scenario.
Expand Expand
Resize
Tools
Rcl

Welcome to Viewpoint, the new platform that replaces Inform. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory.

signin option menu option suggested option contentmouse option displaycontent option contentpage option relatedlink option prevandafter option trending option searchicon option search option feedback option end slide