FASB has issued an Accounting Standards Update (ASU) intended to (1) provide investors and other allocators of capital with more decision-useful information in a joint venture’s separate financial statements and (2) reduce diversity in practice in this area of financial reporting.
The ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary. While joint ventures are defined in the Master Glossary, there has been no specific guidance in the Codification that applies to the formation accounting by a joint venture in its separate financial statements, specifically the joint venture’s recognition and initial measurement of net assets, including businesses contributed to it. Stakeholders noted that the lack of guidance has resulted in diversity in practice in how contributions to a joint venture upon formation are accounted for by the joint venture.
The amendments in the ASU provide decision-useful information to a joint venture’s investors and reduce diversity in practice by requiring that a joint venture apply a new basis of accounting upon formation. As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance).
The amendments in the ASU are effective prospectively for all joint ventures with a formation date on or after Jan. 1, 2025, and early adoption is permitted.
Additionally, a joint venture that was formed before the effective date of the ASU may elect to apply the amendments retrospectively if it has sufficient information.