New Rules for Joint Venture Formations in the Works

On September 14, 2022, the Financial Accounting Standards Board (FASB) unanimously voted to issue a proposal that would create new requirements for joint ventures. Here are the key details of the proposal.

Need for change

There are no rules for the initial recognition and measurement of contributions to a joint venture under existing U.S. Generally Accepted Accounting Principles (GAAP). This has created accounting differences among entities, confusing those who have to use the financial reporting information to make investment decisions.

Overall, the proposal to modify the accounting rules for joint ventures aims to:

  • Reduce accounting differences among entities,
  • Improve the usefulness and relevance of the information provided to a joint venture’s financial statement users upon formation, and
  • Eliminate or reduce basis differences of joint ventures’ financial statements when compared with the reported investment by venturers.

Companies may incur one-time costs “to identify and measure the net assets contributed upon formation” and recurring costs “to comply with the subsequent measurement requirements for certain assets including intangible assets and goodwill.”

Fair value measurement

The proposal would require that a joint venture, upon formation, account for contributions as though the joint venture was the acquirer of a business within the scope of Accounting Standards Codification (ASC) Subtopic 805-10, Business Combinations — Overall. The acquirer of a business would be required to recognize and measure the identifiable assets acquired and liabilities assumed at fair value (with certain exceptions), under Subtopic 805-20, Business Combinations — Identifiable Assets and Liabilities, and Any Noncontrolling Interest.

The FASB also voted to:

  • Describe the formation date as the point in time at which an entity initially meets the definition of a joint venture.
  • Address how a joint venture would account for certain contingent payments to one or more of the joint venturers that are determined to be part of the formation. In this context, the joint venture as a whole would represent the fair value of 100% of the joint venture’s equity upon formation.
  • State that any contingent payments due to the joint venturers that are deemed to be part of the formation and classified within assets and liabilities would follow the guidance in Subtopic 805-20 for initial measurement, recognition and subsequent measurement, rather than Subtopic 805-30 for contingent consideration. The recognition and initial measurement of contingent payments wouldn’t affect the total goodwill recognized in a joint venture.

In addition, FASB members agreed that references to a measurement period that already exist in Subtopic 805-20, such as for assets and liabilities arising from contingencies, should be applied by a newly formed joint venture as though the measurement period begins and ends on the formation date.

Stay tuned

This proposal strives to bring consistency to financial reporting for joint ventures at formation. FASB discussions indicate that the changes would likely affect only a limited number of transactions and entities and would have no significant consequential effects on other accounting topics. Once the proposal is published, it will be subject to a 60-day public comment period. Contact your CPA for the latest developments on this topic.

 

Sidebar: FASB considers last-minute changes to the lease accounting rules

The Financial Accounting Standards Board (FASB) issued updated lease guidance in 2016 that requires organizations to report the full magnitude of their long-term lease obligations on their balance sheets. It went into effect for public entities in 2019, and it’s currently scheduled to take effect in 2022 for private entities. However, some private entities have struggled to implement the changes — in large part, because they enter into informal, unwritten agreements when renting equipment or space from related parties.

On September 21, 2022, the FASB voted by 4 to 3 to propose changes to the accounting rules for leasehold improvements in intercompany leases. The changes would affect both public and private companies. Separately, the FASB agreed to also propose simpler rules for private organizations for determining whether a lease exists for arrangements between entities under common control.

Previously, the FASB deferred the new lease rules two times for private entities and modified the standard five times. Companies will get 45 days to submit comments on the latest proposal.