A FASB proposal provides guidance on accounting for joint venture formations. The board is seeking comments.
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- On Oct. 27, 2022, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU), “Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement,” which would provide guidance for recognition and measurement of contributions made to a joint venture at its formation, in the joint venture’s separate financial statements.
- Currently, GAAP does not provide specific guidance on how a joint venture should recognize and measure assets contributed and liabilities assumed at its formation. The proposed guidance would require that at the formation date, a joint venture would apply a new basis in accounting by valuing the net assets contributed upon formation. The value of the net assets in total is then allocated to individual assets and liabilities by applying Topic 805 with certain exceptions.
- The proposed ASU provides that a joint venture formation date is the date when an entity initially meets the definition of a joint venture.
- The amendments in this proposed ASU do not amend the definition of a joint venture, the existing guidance for the accounting by an equity method investor for its investment in a joint venture, or the accounting by a joint venture for contributions received subsequent to formation.
- The proposed changes to the joint venture formation guidance would apply prospectively. In addition, joint ventures formed prior to the effective date of the proposed ASU would have an option to elect to apply the guidance retrospectively.
- Comments on the proposal are due by Dec. 27, 2022.