The FASB on Sept. 14, 2022, unanimously voted to issue a proposal that would create new requirements for joint ventures that do not exist in U.S. GAAP today.
The provisions would also change existing recognition and measurement guidance in a way that could significantly change reported financial information by some entities, according to the discussions. The changes, however, would likely affect only a limited number of transactions and entities and would have no significant consequential effects on other accounting topics or subtopics.
The proposal will be issued around mid-October with a public comment period spanning 60 days, the discussions indicated.
The guidance was developed because GAAP does not contain rules about the initial recognition and measurement of contributions made by venturers to a joint venture at formation. This has created accounting differences among entities, confusing those who have to use the financial reporting information to make investment decisions.
“I do think it’s helpful that we provide guidance in this area,” FASB Chair Richard Jones said. “I think ‘new basis’ is challenging but I think we’ve come up with the fundamental question of ‘what basis do you use’ [and] I also look forward to the input that we receive as part of the exposure process.”
Overall, the guidance 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 “in order to comply with the subsequent measurement requirements for certain assets including to intangible assets and goodwill,” which is justifiable, board members said.
“I think we’ve done the work to get to the point where, at least I’m convinced preliminarily, we have a cost beneficial solution,” FASB Vice Chair James Kroeker said.
Measure at Fair Value
The proposal would require that a joint venture, upon formation, account for contributions by the venturers as though the joint venture was the acquirer of a business within the scope of Subtopic 805-10, Business Combinations–Overall. The acquirer of a business must apply the recognition and measurement guidance in Subtopic 805-20, Business Combinations–Identifiable Assets and Liabilities, and Any Noncontrolling Interest, to identifiable assets and liabilities. That subtopic requires that the acquirer recognize and measure the identifiable assets acquired and liabilities assumed at fair value (with certain exceptions).
Board members observed that prior rules have created reporting issues, which the proposal could align.
“I think that the issuance of [Accounting Standard Update No.] 2017-5 created this mismatch between the venturer’s accounting and the joint venture’s accounting,” FASB member Susan Cosper said. “And I think it’s contributed to the diversity and the confusion in practice and so I think to that end that fair value is the better measure and I think it creates that alignment,” she said.
Discussions also focused on nine technical miscellaneous issues that were raised by external reviewers, plus three related to formation date and contingent payments. Among decisions, the board voted:
- to describe the formation date as the point in time at which an entity initially meets the definition of a joint venture.
- to define the term “formation date” in the Master Glossary.
- to address how a joint venture would account for certain contingent payments to one or more of the venturers that are determined to be part of the joint venture formation: i.e. measure total net assets including goodwill using the fair value of the joint venture as a whole. In this context the joint venture as a whole would represent the fair value of 100 percent of the joint venture’s equity upon formation.
- to state that any contingent payments due to the venturers that are deemed to be part of the joint venture formation and classified within assets and liabilities should 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 should not affect the total goodwill recognized in a joint venture.
- 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.
This article originally appeared in the September 15, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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