FASB Seeks Input on Proposed Improvements to Accounting for Joint Venture Formations

 – October 27, 2022
FASB Seeks Input on Proposed Improvements to Accounting for Joint Venture Formations

The Financial Accounting Standards Board (FASB) today issued a proposed Accounting Standards Update (ASU) that is intended to (1) provide investors and other allocators of capital (collectively, investors) 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. Stakeholders are encouraged to review and provide comments on the proposed ASU by Dec. 27, 2022.

The proposed ASU would apply 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 is 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 a joint venture.

To reduce diversity in practice and provide decision-useful information to a joint venture’s investors, the amendments in this proposed ASU would require that a joint venture apply a new basis of accounting. As a result, a newly formed joint venture would initially measure its assets and liabilities at fair value (with certain exceptions that are consistent with the business combinations guidance) upon formation.