The FASB on October 13, 2021, continued to hammer out a proposal for joint venture formations, voting on disclosures stand-alone joint ventures would need to provide.
Joint ventures are typically business arrangements whereby two or more parties pool their resources. GAAP does not have explicit guidance on the initial recognition and measurement of nonmonetary assets in such agreements, and therefore accountants are conflicted about how to properly report them.
The disclosures would enable investors and other financial statement users to evaluate the nature and financial effect of the joint venture formation, but would not be difficult or costly to comply with as the information is easy to obtain, according to board discussions. Moreover, the disclosures would not duplicate existing disclosures under Topic 275, Risks and Uncertainties.
The disclosures would provide “the basic information that would be needed in order to meet the disclosure objective,” FASB member Christine Botosan said. “And having that list I think will reduce cost for companies because if they didn’t have the list they’re each going to have to figure out what sorts of disclosures are going to meet this disclosure objective, they’re then going to have that judgement audited and there’s always the potential it could be second guessed after the fact by a regulator for a public company.”
Having the list would therefore be a cost reduction for the entity, said Botosan. “I also think it’s better for the user because the user can count on getting this set of disclosures in a consistent way from one company to the next.”
Specifically, in the period of formation, the joint venture would disclose:
- the formation date;
- a description of the purpose for which the joint venture was formed (for example, 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);
- the formation-date fair value of the joint venture as a whole;
- the amounts recognized by the joint venture for each major class of assets and liabilities as a result of accounting for its formation, either on the face of the financial statements or in notes;
- the amounts recognized by the joint venture for each major class of assets and liabilities as a result of accounting for its formation, either on the face of the financial statements or in notes;
- a qualitative description of the factors that make up the goodwill recognized, such as expected synergies from combining operations of the contributed assets or businesses, intangible assets that do not qualify for separate recognition, or other factors.
The board also discussed whether a joint venture should be permitted to apply the measurement period guidance in accordance with Subtopic 805-10, Business Combinations—Overall, and voted no on the topic.
“I think we should explicitly prohibit the application of 805-10 [as part of this project],” FASB member Susan Cosper said. “I think it is an unnecessary area of complexity and as we heard in the outreach, I don’t think that there is a strong clamoring for us to include this, and in many instances they will have the information.”
Measurement period adjustments are understandable for business combinations but are not helpful for financial statement users, the discussions indicated.
“I’ve found historically that the measurement adjustments, especially adjustments to goodwill, made it difficult to analyze what was happening at a company during the measurement period so that’s understandable in business combinations when they come together very quickly,” FASB analyst Fred Cannon said. “And I think the accounting profession probably needs some time to get the numbers right, however I don’t think that fact pattern holds in JVs.”
Next on the project, the board will discuss external review comments, and vote on comment period and any miscellaneous issues before year-end, according to the discussions.
In addition, FASB staff will ask whether to issue the proposal to solicit public comment.
This article originally appeared in the October 18, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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