5. Add Subtopic 805-60, with a link to transition paragraph 805-60-65-1, as follows:
[For ease of readability, the new Subtopic is not underlined.]
Business Combinations—Joint Venture Formations
Overview and Background
General
805-60-05-1 This Subtopic provides guidance on the accounting and reporting for the formation of a joint venture or a corporate joint venture (collectively, joint ventures) in a joint venture’s separate financial statements.
805-60-05-2 Paragraph 805-60-25-2 requires that a joint venture account for its formation by applying a new basis of accounting. In accounting for the formation of a joint venture, none of the assets and/or businesses contributed to the joint venture are viewed as having survived the combination as independent entities. Rather, the formation is viewed as the transfer of the net assets to a new entity that assumes {add glossary link to 3 rddefinition}control{add glossary link to 3 rddefinition} over them. The history of that new reporting entity begins with the joint venture formation. A joint venture establishes a new basis of accounting upon formation by applying aspects of the acquisition method for business combinations, with adaptations that are unique to joint ventures as described in this Subtopic. Accounting for a joint venture formation includes the following steps:
- Determining the formation date
- Recognizing and measuring the identifiable assets, the liabilities, and any noncontrolling interest in the net assets recognized by the joint venture
- Recognizing and measuring goodwill, if any, using the {add glossary link to 2 nd definition}fair value{add glossary link to 2 nd definition} of the joint venture as a whole immediately following formation.
Scope and Scope Exceptions
General
> Overall Guidance
805-60-15-1 This Subtopic has its own discrete scope, which is separate and distinct from the pervasive scope for this Topic as outlined in Section 805-10-15.
> Entities
805-60-15-2 The guidance in this Subtopic applies to the financial statements of joint venture and corporate joint venture entities (collectively, joint ventures) as defined in Section 805-60-20.
> Transactions
805-60-15-3 The guidance in this Subtopic applies to the formation of joint ventures.
805-60-15-4 The guidance in this Subtopic does not apply to any of the following:
- Transactions between a joint venture and its owners other than the formation of a joint venture
- Formations of entities determined to be not-for-profit entities in accordance with Topic 958
- Combinations between entities, businesses, or nonprofit activities under common control (see paragraph 805-50-15-6 for examples)
- Entities in the construction or extractive industries that may be proportionately consolidated by any of their investor-venturers in accordance with paragraph 810-10-45-14
- Collaborative arrangements within the scope of Topic 808, except for any part of the arrangement that is conducted in a separate legal entity that meets the definition of a joint venture.
Glossary
Acquiree
The business or businesses that the acquirer obtains control of in a business combination. This term also includes a nonprofit activity or business that a not-for-profit acquirer obtains control of in an acquisition by a not-for-profit entity.
Acquirer
The entity that obtains control of the acquiree. However, in a business combination in which a variable interest entity (VIE) is acquired, the primary beneficiary of that entity always is the acquirer.
Acquisition by a Not-for-Profit Entity
A transaction or other event in which a not-for-profit acquirer obtains control of one or more nonprofit activities or businesses and initially recognizes their assets and liabilities in the acquirer’s financial statements. When applicable guidance in Topic 805 is applied by a not-for-profit entity, the term business combination has the same meaning as this term has for a for-profit entity. Likewise, a reference to business combinations in guidance that links to Topic 805 has the same meaning as a reference to acquisitions by not-for-profit entities.
Acquisition Date
The date on which the acquirer obtains control of the acquiree.
Business
Paragraphs 805-10-55-3A through 55-6 and 805-10-55-8 through 55-9 define what is considered a business.
Business Combination
A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. See also Acquisition by a Not-for-Profit Entity.
Control (third definition)
The same as the meaning of controlling financial interest in paragraph 810-10-15-8.
Corporate Joint Venture
A corporation owned and operated by a small group of entities (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a corporate joint venture frequently is to share risks and rewards in developing a new market, product or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A corporate joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a corporate joint venture. The ownership of a corporate joint venture seldom changes, and its stock is usually not traded publicly. A noncontrolling interest held by public ownership, however, does not preclude a corporation from being a corporate joint venture.
Equity Interests
Used broadly to mean ownership interests of investor-owned entities; owner, member, or participant interests of mutual entities; and owner or member interests in the net assets of not-for-profit entities.
Fair Value (second definition)
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Financial Asset
Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following:
- Receive cash or another financial instrument from a second entity
- Exchange other financial instruments on potentially favorable terms with the second entity.
Formation Date
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.
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination, acquired in an acquisition by a not-for-profit entity, or recognized by a joint venture upon formation that are not individually identified and separately recognized. For ease of reference, this term also includes the immediate charge recognized by not-for-profit entities in accordance with paragraph 958-805-25-29.
Identifiable
An asset is identifiable if it meets either of the following criteria:
- It is separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability, regardless of whether the entity intends to do so.
- It arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.
Intangible Assets
Assets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)
Joint Venture
An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.
Legal Entity
Any legal structure used to conduct activities or to hold assets. Some examples of such structures are corporations, partnerships, limited liability companies, grantor trusts, and other trusts.
Market Participants
Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:
- They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms
- They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary
- They are able to enter into a transaction for the asset or liability
- They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.
Noncontrolling Interest
The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest.
Nonprofit Activity
An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing benefits, other than goods or services at a profit or profit equivalent, as a fulfillment of an entity’s purpose or mission (for example, goods or services to beneficiaries, customers, or members). As with a not-for-profit entity, a nonprofit activity possesses characteristics that distinguish it from a business or a for-profit business entity.
Not-for-Profit Entity
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
- Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
- Operating purposes other than to provide goods or services at a profit
- Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
- All investor-owned entities
- Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
Orderly Transaction
A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).
Owners
Used broadly to include holders of ownership interests (equity interests) of investor-owned entities, mutual entities, or not-for-profit entities. Owners include shareholders, partners, proprietors, or members or participants of mutual entities. Owners also include owner and member interests in the net assets of not-for-profit entities.
Private Company
An entity other than a public business entity, a not-for-profit entity, or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting.
Public Business Entity
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.
- It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
- It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
- It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
- It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Related Parties
Related parties include:
- Affiliates of the entity
- Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity
- Trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management
- Principal owners of the entity and members of their immediate families
- Management of the entity and members of their immediate families
- Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests
- Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Security (second definition)
A share, participation, or other interest in property or in an entity of the issuer or an obligation of the issuer that has all of the following characteristics:
- It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
- It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment.
- It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
Variable Interest Entity
A legal entity subject to consolidation according to the provisions of the Variable Interest Entities Subsections of Subtopic 810-10.
Recognition
General
805-60-25-1 An entity shall determine whether a transaction or an event is a joint venture formation by applying the definition of joint venture (or corporate joint venture) and the guidance in paragraph 805-60-25-3 on its formation date. If the transaction or event is not a joint venture formation, the reporting entity shall account for the transaction or event in accordance with other generally accepted accounting principles (GAAP).
805-60-25-2 Accounting for joint venture formations as described in this Subtopic requires that a joint venture establish upon formation a new basis of accounting for its assets and liabilities in accordance with Subtopic 805-20 on identifiable assets and liabilities, and any noncontrolling interest. A joint venture shall recognize goodwill, if any, in accordance with paragraph 805-60-25-13. Unlike the acquisition method, accounting for the formation of a joint venture does not include the identification of an acquirer. This Section includes the following requirements:
- Determining the formation date
- Determining whether multiple arrangements should be accounted for as a single formation transaction
- Determining what is part of the joint venture formation
- Accounting for the formation of a joint venture, as applicable:
- New basis of accounting
- Private company accounting alternatives
- Goodwill
- Measurement period
- Transfers of financial assets.
> Determining the Formation Date
805-60-25-3 The joint venture formation date is the date on which an entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date. A joint venture’s formation date is the measurement date for the formation transaction. A joint venture shall determine a single formation date and account for its formation as of that date. A joint venture shall consider the pertinent facts and circumstances in identifying its formation date. All contributions received, or that are receivable, as of the formation date, including consideration of the guidance in paragraphs 805-60-25-4 through 25-5 on multiple arrangements that should be accounted for as a single formation transaction, constitute the joint venture formation transaction.
> Determining Whether Multiple Arrangements Should Be Accounted for as a Single Formation Transaction
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:
- The multiple arrangements are entered into at the same time or in contemplation of one another.
- The multiple arrangements form a single transaction designed to achieve an overall commercial effect.
- The occurrence of one arrangement is dependent on the occurrence of at least one other arrangement.
- One arrangement considered on its own is not economically justified, but the multiple arrangements are economically justified when considered together.
805-60-25-5 If multiple arrangements are accounted for as a single transaction in accordance with paragraph 805-60-25-4, then the formation date shall be the measurement date for all arrangements that form part of the single formation transaction. A joint venture shall recognize identifiable assets and liabilities that are part of that single transaction when they satisfy the recognition criteria described in paragraph 805-60-25-2.
> Determining What Is Part of the Joint Venture Formation
805-60-25-6 A joint venture and its owners (the venturers) may enter into an arrangement upon formation that is separate from the formation of the joint venture. For example, a joint venture may enter into an arrangement with a venturer to compensate the venturer or others (such as employees of the venturers) for future services. A joint venture shall apply the guidance in paragraphs 805-10-55-24 through 55-26 when determining whether a transaction involving payments to be made by the joint venture to the venturers or others is separate from or part of a joint venture formation. A joint venture shall identify any amounts that are separate from the formation of the joint venture and shall recognize the identifiable assets and liabilities that are determined to be part of the joint venture formation. Separate transactions shall be accounted for in accordance with other relevant GAAP.
805-60-25-7 A joint venture shall not apply by analogy the guidance in paragraphs 805-10-55-20 through 55-23 (for a transaction that in effect settles preexisting relationships between the acquirer and the acquiree) or paragraph 805-10-25-23 (for acquisition-related costs and transactions that reimburse the acquiree or its former owners for paying the acquirer’s acquisition-related costs).
805-60-25-8 If, upon formation, a joint venture issues share-based payment awards to replace awards held by grantees of the contributed entities, then the joint venture shall apply the guidance in paragraphs 805-30-30-9 through 30-13 to allocate the fair-value-based measure of replacement share-based payment awards between preformation vesting and postformation compensation cost. Paragraphs 805-60-55-2 through 55-14 provide illustrations of the accounting for the issuance of replacement share-based payment awards in a joint venture formation.
805-60-25-9 For the purposes of applying the business combinations guidance on arrangements that include contingent payments to employees or selling shareholders and replacement share-based payment awards referenced in paragraphs 805-60-25-6 through 25-8:
- The joint venture shall be viewed as analogous to the acquirer in a business combination.
- The venturers shall be viewed as analogous to the selling shareholders.
- The recognized businesses and/or assets shall be viewed as analogous to an acquiree.
> Accounting for the Formation of a Joint Venture
• > New Basis of Accounting
805-60-25-10 At the formation date, a joint venture shall account for its formation by establishing a new basis of accounting for its identifiable assets and liabilities, and any noncontrolling interest, in accordance with Subtopic 805-20.
805-60-25-11 A joint venture shall account for its formation in accordance with this Subtopic regardless of whether the assets or group of assets recognized by the joint venture constitute a business in accordance with Subtopic 805-10.
• > Private Company Accounting Alternatives
805-60-25-12 A joint venture that is a private company may elect to apply the accounting alternative for the recognition of identifiable intangible assets described in paragraphs 805-20-25-30 through 25-33. In accordance with paragraph 805-20-15-4, a joint venture that elects to apply this accounting alternative must adopt the accounting alternative for amortizing goodwill in the Accounting Alternatives Subsections of Subtopic 350-20.
• > Goodwill
805-60-25-13 In accounting for its formation, a joint venture shall recognize goodwill as of the formation date, when applicable. The presence of more than an insignificant amount of goodwill is expected to be unusual if, at formation, the assets or group of assets recognized by the joint venture do not constitute a business in accordance with Subtopic 805-10. Paragraph 805-60-30-2 describes how a joint venture should measure goodwill upon its formation.
• > Measurement Period
805-60-25-14 If the initial accounting for a joint venture formation is incomplete by the end of the reporting period in which the formation date occurs, the joint venture may apply the measurement period guidance in paragraphs 805-10-25-13 through 25-19 for the items for which the accounting is incomplete. Joint ventures that apply the measurement period guidance shall disclose the information described in paragraph 805-60-50-3.
• > Transfers of Financial Assets
805-60-25-15 If a venturer transfers financial assets that are within the scope of Subtopic 860-10 to the joint venture upon formation, then the joint venture shall determine whether the transfer results in the recognition of the transferred financial assets by the joint venture by applying the guidance in Subtopic 860-10.
Initial Measurement
General
> Identifiable Assets and Liabilities, and Any Noncontrolling Interest
805-60-30-1 A joint venture shall measure its identifiable assets and liabilities, and any noncontrolling interest, recognized at the formation date in accordance with Subtopic 805-20.
> Goodwill
805-60-30-2 A joint venture shall apply the guidance in this paragraph to measure goodwill, when applicable. A joint venture shall recognize goodwill, if any, upon formation, measured as the excess of (a) over (b):
- The formation-date {add glossary link to 2 nddefinition}fair value{add glossary link to 2 nddefinition} of the joint venture as a whole. The formation-date fair value of the joint venture as a whole shall equal the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).
- The net of the formation-date amounts of the identifiable assets and liabilities recognized by the joint venture and measured in accordance with Subtopic 805-20.
805-60-30-3 Upon formation, a joint venture shall recognize the amount of its identifiable net assets recognized in excess of the fair value of the joint venture as a whole, if any, as an adjustment to additional paid-in capital (or other similar equity account, such as members’ equity).
> Instruments, Contracts, and Share-Based Payment Awards Classified as Equity
805-60-30-4 The amount of any separately recognized equity-classified instruments or contracts issued by a joint venture as part of the formation transaction, other than equity-classified replacement share-based payment awards (see paragraph 805-60-30-5), shall be accounted for as a reallocation of additional paid-in capital (or other similar equity account, such as members’ equity) and shall not affect the total amount of equity or goodwill recognized by the joint venture upon formation.
805-60-30-5 A joint venture shall initially measure equity-classified replacement share-based payment awards at the fair-value-based measurement method described in Topic 718 on stock compensation. The fair-value-based amount allocated to preformation vesting (in accordance with paragraph 805-60-25-8) of any replacement share-based payments classified as equity shall be recognized as a reallocation of additional paid-in capital (or other similar equity account, such as members’ equity) and shall not affect the total amount of equity or goodwill recognized by the joint venture upon formation.
> Liability-Classified and Asset-Classified Contingent Payments and Replacement Share-Based Payment Awards
805-60-30-6 A joint venture shall initially measure any contingent payment arrangements between the joint venture and its venturers that are classified as liabilities (or assets), other than replacement share-based payment awards, in accordance with paragraph 805-60-30-1. A joint venture shall not account for those arrangements generated as a result of the joint venture formation as contingent consideration or as an assumed contingent consideration arrangement.
805-60-30-7 A joint venture shall initially measure liability-classified replacement share-based payment awards using the fair-value-based measurement method described in Topic 718 on stock compensation (consistent with the requirements in paragraphs 805-60-25-8 and 805-60-30-1).
Subsequent Measurement
General
805-60-35-1 A joint venture shall subsequently measure and account for the assets and liabilities recognized upon formation in accordance with the requirements for acquirers of a business in Sections 805-10-35, 805-20-35, and 805-30-35, and other generally accepted accounting principles (GAAP), as applicable.
805-60-35-2 A joint venture that is a private company may elect to apply the accounting alternatives for the subsequent measurement of goodwill described in paragraphs 350-20-35-62 through 35-82.
Other Presentation Matters
General
> Disclosure of Formation Date Balance Sheet
805-60-45-1 To satisfy the requirements in paragraph 805-60-50-2(e), a joint venture may, in lieu of disclosure in the notes to financial statements, present a statement of financial position as of the formation date that reflects the amounts recognized by the joint venture for each major class of assets and liabilities as a result of its formation.
Disclosure
General
805-60-50-1 A joint venture shall disclose information that enables users of its financial statements to understand the nature and financial effect of the joint venture formation in the period in which the formation date occurs.
805-60-50-2 In the period of formation, a joint venture shall disclose the following:
- The formation date
- A description of the purpose for which the joint venture was formed (for example, to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities)
- The formation-date {add glossary link to 2 nddefinition}fair value{add glossary link to 2 nddefinition} of the joint venture as a whole
- A description of the assets and liabilities recognized by the joint venture at the formation date
- The amounts recognized by the joint venture for each major class of assets and liabilities as a result of accounting for its formation, either presented on the face of financial statements or disclosed in the notes to financial statements (see paragraph 805-60-45-1)
- A qualitative description of the factors that make up any goodwill recognized, such as expected synergies from combining operations of the contributed assets or businesses, intangible assets that do not qualify for separate recognition, or other factors.
805-60-50-3 If the initial accounting for a joint venture formation is incomplete (see paragraph 805-60-25-14) for particular assets, liabilities, noncontrolling interests, or the formation-date fair value of the joint venture as a whole and the amounts recognized in the financial statements for the joint venture formation thus have been determined only provisionally, the joint venture shall disclose the following information:
- The reasons why the initial accounting is incomplete
- The assets, liabilities, noncontrolling interests, or the formation-date fair value of the joint venture as a whole for which the initial accounting is incomplete
- The nature and amount of any measurement period adjustments recognized during the reporting period, including separately the amount of adjustment to current-period income statement line items relating to the income effects that would have been recognized in previous periods if the adjustment to provisional amounts was recognized as of the formation date.
Implementation Guidance and Illustrations
General
805-60-55-1 This Section is an integral part of the requirements of this Subtopic. This Section provides illustrations that address the general application of accounting requirements for joint venture formations.
> Illustrations
• > Example 1: Joint Venture Replacement Share-Based Payment Employee Awards
805-60-55-2 On January 1, 20X0, a newly formed corporation with no assets or liabilities, New Venture, receives contributions of a controlling financial interest in Business A (90 percent voting interest) from Venturer 1 and Business B (100 percent voting interest) from Venturer 2 and, in exchange, issues 50 common shares to each Venturer 1 and Venturer 2. Assume that New Venture has no other classes of equity or any other equity instruments outstanding before receiving the contributions. It is determined that New Venture first met the definition of a joint venture on January 1, 20X0. New Venture determines January 1, 20X0, to be its formation date.
805-60-55-3 In accordance with paragraph 805-60-30-2, but before consideration of any liabilities for share-based payments, New Venture determines that the {add glossary link to 2nddefinition}fair value{add glossary link to 2nddefinition} of the joint venture as a whole is $100 million including a noncontrolling interest (10 percent voting interest) in Business A that is owned by an outside entity. It also determines, in accordance with paragraph 805-60-30-2, that the formation-date fair value of the identifiable assets is $120 million, the fair value of the liabilities is $40 million, and the fair value of the noncontrolling interest in Business A is $5 million.
805-60-55-4 Upon formation, New Venture exchanges replacement awards that require one year of postformation vesting for share-based payment awards of Business A for which employees had not yet rendered all of the required services as of the formation date. The fair-value-based measure of both awards (the original awards and the replacement awards) is $20 million at the formation date. When originally granted, the awards of the contributed business had a requisite service period of four years. As of the formation date, the contributed business’s employees had rendered two years’ service, and they would have been required to render two additional years of service after the formation date for their awards to vest. Accordingly, only a portion of the contributed business’s awards is attributable to preformation vesting.
805-60-55-5 The replacement awards require only one year of postformation vesting. Because employees have already rendered two years of service, the total requisite service period is three years. For simplicity, assume that New Venture estimates that there will be no forfeitures of the replacement share-based payment awards. The portion attributable to preformation vesting equals the fair-value-based measure of the contributed business’s award ($20 million) multiplied by the ratio of the preformation vesting period (2 years) to the greater of the total service period (3 years) and the original service period of the contributed business’s award (4 years). Thus, $10 million ($20 million × 2 ÷ 4 years) is attributable to preformation vesting and, therefore, New Venture’s additional paid-in capital upon formation. The remaining $10 million is attributable to postformation vesting and therefore recognized as compensation cost in New Venture’s postformation financial statements in accordance with Topic 718 on stock compensation.
805-60-55-6 New Venture applies the guidance in Topic 718 to determine whether the share-based payments should be classified as liabilities or equity.
• • > Case A: Joint Venture Replacement Share-Based Payment Employee Awards Are Liability Classified
805-60-55-7 If New Venture determines that the replacement share-based payment awards are classified as liabilities, then total liabilities will equal $50 million ($40 million + $10 million). For simplicity, when taking the share-based payment liabilities into account, the fair value of New Venture as a whole is $90 million ($100 million – $10 million).
805-60-55-8 New Venture calculates goodwill as follows (in millions), consistent with the guidance in paragraph 805-60-30-2. The formation-date fair value of the joint venture as a whole is equal to the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).
Fair value of New Venture as a whole (including $5 noncontrolling interest)
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Less: Net fair value of identifiable assets and liabilities recognized ($120 assets − $50 liabilities)
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Goodwill recognized by New Venture at formation date
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805-60-55-9 New Venture calculates additional paid-in capital as follows (in millions).
Net assets recognized by New Venture, excluding share-based payment liabilities ($120 identifiable assets – $40 liabilities + $20 goodwill)
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Less: The fair value of noncontrolling interest in business contributed to New Venture
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Less: The fair value of preformation vesting replacement share-based payments classified as a liability
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Additional paid-in capital recognized by New Venture at the formation date
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805-60-55-10 New Venture records the following entry at the formation date (in millions).
Identifiable assets recognized
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Share-based payment liability (preformation vesting)
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Additional paid-in capital
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• • > Case B: Joint Venture Replacement Share-Based Payment Employee Awards Are Equity Classified
805-60-55-11 If New Venture determines that the replacement share-based payment awards are classified as equity, then total liabilities will equal $40 million and the fair value of New Venture as a whole is $100 million.
805-60-55-12 New Venture calculates goodwill as follows (in millions), consistent with the guidance in paragraph 805-60-30-2. The formation-date fair value of the joint venture as a whole is equal to the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).
Fair value of New Venture as a whole (including $5 noncontrolling interest)
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Less: Net fair value of identifiable assets and liabilities recognized ($120 assets − $40 liabilities)
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Goodwill recognized by New Venture at formation date
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805-60-55-13 New Venture calculates additional paid-in capital, excluding additional paid-in capital attributable to share-based payments, as follows (in millions).
Net assets recognized by New Venture, excluding share-based payment liabilities ($120 identifiable assets – $40 liabilities + $20 goodwill)
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Less: The fair value of noncontrolling interest in business contributed to New Venture
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Less: The fair value of preformation vesting replacement share-based payments classified as equity
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Additional paid-in capital recognized by New Venture at the formation date (excluding additional paid-in capital attributable to preformation vesting share-based payments)
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805-60-55-14 New Venture records the following entry at the formation date (in millions).
Identifiable assets recognized
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Additional paid-in capital—share-based payments (preformation vesting)
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Additional paid-in capital
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Transition and Open Effective Date Information
General
> Transition Related to Accounting Standards Update No. 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement
805-60-65-1 The following represents the transition and effective date information related to Accounting Standards Update No. 2023-05, Business Combinations—Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement:
Effective date and early adoption
a. All joint ventures with a formation date on or after January 1, 2025, shall apply the pending content that links to this paragraph. A joint venture with a formation date that occurs before the effective date need not apply the pending content that links to this paragraph to its formation transaction but has the option to apply the transition method described in (d) through (f).
b. Early adoption of the pending content that links to this paragraph is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance). A joint venture that elects to early adopt may apply the pending content that links to this paragraph either prospectively or retrospectively.
Transition method and initial application date
c. A joint venture with a formation date that occurs on or after the initial application date described in (e) shall apply the pending content that links to this paragraph prospectively to its formation transaction.
d. A joint venture with a formation date that occurs before the initial application date shall have the option to apply the pending content that links to this paragraph retrospectively, as if the joint venture had applied the pending content that links to this paragraph to its formation transaction, if the joint venture has sufficient information. A joint venture that elects to apply the pending content that links to this paragraph retrospectively shall:
1. Recognize the cumulative effect of initially applying the pending content that links to this paragraph as an adjustment to the opening balance of retained earnings (or other appropriate components of equity in the statement of financial position) at the initial application date.
2. Apply any relevant guidance other than in this Subtopic (for example, for measuring identifiable assets, liabilities, and any noncontrolling interest in accordance with Subtopic 805-20) as it existed at the formation date. See (f) for guidance on the initial application date when applying the pending content that links to this paragraph retrospectively.
e. The initial application date is the date that an entity first applies the pending content that links to this paragraph.
f. If applying the pending content that links to this paragraph retrospectively in accordance with (d), the initial application date shall be the beginning of the earliest comparative period presented.
Transition disclosures
g. An entity applying the pending content that links to this paragraph retrospectively in accordance with (d) shall provide the transition disclosures required by paragraphs 250-10-50-1 through 50-3 in the period that includes the initial application date.