Joint Venture Formations
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Joint ventures, as defined in U.S. GAAP and formed after January 1, 2025, must apply a new basis of accounting, as issued by the FASB in Accounting Standards Update (ASU) 2023-05, Business Combinations — Joint Venture Formations (Subtopic 805-60). Under the new basis of accounting, a joint venture will recognize and initially measure its assets and liabilities at the joint venture’s fair value upon formation. The new guidance does not change the definition of a joint venture, an equity investor’s accounting for its investment in a joint venture, or the accounting by a joint venture for contributions received after formation. Joint ventures formed before this date can also apply the new guidance prospectively or retrospectively.
Affected Entities
The guidance in ASU 2023-05 applies to the accounting for contributions received upon formation of a new joint venture, as defined in U.S. GAAP (or a corporate joint venture). Existing joint ventures may apply the guidance retrospectively.
The new guidance also does not apply to entities in the construction or extractive industries that may be proportionately consolidated by any of their investor-venturers.
Definition of a Joint Venture
The definition of a joint venture in the Master Glossary is:
"An entity owned and operated by a small group of businesses (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 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 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 joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities."
To read more about the new guidance, download our Bulletin, or see Appendix D of our Blueprint, Business Combinations Under ASC 805.
Link to ASU 2023-05