Generally accepted accounting principles (GAAP) did not historically provide specific guidance on how to account for the formation of a joint venture. In response to diversity in practice, earlier this year FASB issued ASU 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. Below is what you need to know if you are accounting for a new or corporate joint venture.
The definition of a joint venture remains unchanged. A joint venture is defined as “an entity owned and operated by a small group of businesses … as a separate and specific business or project for the mutual benefit of the members of the group.” Typically, the group of businesses are active participants in the joint venture’s management, ownership seldom changes and equity interests are not publicly traded.
In addition, the ASU does not change the definition of a corporate joint venture, which is a “corporation owned and operated by a small group of entities as a separate and specific business or project for the mutual benefit of the members of the group.”
The ASU deems the formation of a joint venture as one resulting in the “creation of a new reporting entity.” Accordingly, the ASU requires a joint venture to apply a new basis of accounting upon formation, which is the “date on which an entity initially meets the definition of a joint venture.” This might differ from the date on which the legal entity was formed if parties contribute assets to the joint venture at a later date.
The joint venture will recognize and initially measure its assets and liabilities at fair value, with any excess recognized as goodwill. If net assets of a joint venture exceed the fair value of the joint venture as a whole, negative goodwill would be recorded as an adjustment to equity.
ASU 2023-05 is effective for all joint ventures with a formation date on or after January 1, 2025. In addition, a joint venture formed before this date may elect to apply the amendments retrospectively. Early adoption is permitted.
Contact Marie Brilmyer at mbrilmyer@cohenco.com or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.