Accounting for joint venture formation has never been formally addressed in the accounting literature.  As a result, the complexities of accounting for contributed assets and services and related issues have created diversity in practice.  Some joint ventures account for contributed assets at fair value while others have carried over the historical cost of the entities contributing the assets.

To address these issues, on October 27, 2022, the FASB issued a Proposed Accounting Standards Update titled “Business Combinations—Joint Venture Formations (Subtopic 805-60).”  The proposed ASU would require joint ventures as defined in the codification to apply the principles of business combination accounting to the formation process.  This would result in most assets and liabilities being measured at fair value, with certain exceptions that are consistent with existing exceptions in the business combination accounting guidance.  One important note, while the term “joint venture” is used to describe many types of entities, the definition of joint venture in the codification is narrow and would not include many entities colloquially referred to as joint ventures:

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.

While the proposed ASU would not apply to all entities referred to as joint ventures, for entities that meet this definition the proposed ASU would hopefully reduce diversity in practice.

The FASB asks that comments be submitted by December 27, 2022.

As always, your thoughts and comments are welcome!