Regulatory updates

The US Generally Accepted Accounting Principles (GAAP) do not provide any specific authoritative guidance on how a joint venture, upon formation, should recognise and initially measure assets contributed and liabilities assumed. As a result, there is diversity in practice with respect to accounting for the contributions a joint venture receives upon formation. Some joint ventures initially measure their net assets at fair value, while others measure them at the venturers’ carrying amounts.

In this regard, recently, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU): Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and initial measurement to address the aforementioned diversity in accounting. The amendments in the ASU address the accounting for contributions made to a joint venture, upon formation, in a joint venture’s separate financial statements.

As per the amendment, a joint venture, upon formation, would apply a new basis of accounting and recognise and initially measure its assets and liabilities at fair value. Further, the ASU requires that a joint venture, upon formation should apply the following key adaptations from the existing guidance on business combinations:

• A joint venture is the formation of a new entity without an accounting acquirer: The formation of a joint venture is the creation of a new reporting entity, and none of the assets and/or businesses contributed to the joint venture are viewed as an independent entity, i.e., an accounting acquirer would not be identified

• A joint venture measures its identifiable net assets and goodwill, if any, at the formation date: The joint venture formation date is the date on which an entity initially meets the definition of a joint venture

• Initial measurement of a joint venture’s total net assets is equal to the fair value of 100 per cent of the joint venture’s equity: The amendments require that a joint venture measures its total net assets upon formation, as the fair value of the joint venture as a whole, which equals the fair value of 100 per cent of its equity immediately following formation (including any non-controlling interest in the net assets recognised by the joint venture), and

• A joint venture provides relevant disclosures: The ASU clarifies that the joint venture disclosure requirements, upon formation are different from the requirements specified in case of business combinations.

Effective date: The amendments are effective prospectively for all the joint venture formations, with a formation date on or after 1 January 2025. Additionally, a joint venture that was formed before 1 January 2025 may elect to apply the amendments retrospectively, if it has sufficient information available. Early adoption is permitted.

To access the text of the ASU, please click here