On August 23, 2023, the Financial Accounting Standards Board (FASB) issued Business Combinations - Joint Venture Formations (Subtopic 805-60) to address joint venture formations with respect to business combinations. The standard is intended to provide investors and other allocators of capital with useful information needed when making decisions regarding a joint venture’s separate financial statements. It also seeks to reduce diversity in financial reporting practices practice in this area.

Until now, US GAAP has not provided specific consistent guidance on how a joint venture should recognize and initially measure assets contributed and liabilities assumed, including the assets and liabilities of business contributed. The amendments in the ASU 2023-05 provide decision-useful information regarding how a newly formed joint venture, upon formation, will initially measure its assets and liabilities at fair value, with exceptions to fair value measurement consistent with the business combinations guidance.

The ASU applies to the formation of entities that either meet the definition of a joint venture or a corporate joint venture. Such joint ventures are defined in FASB Accounting Standards, but to date there had not been specific guidance in FASB Codification that applies to the joint venture’s recognition and initial measurement of net assets, including businesses contributed to it.

The ASU amendments become effective prospectively for all joint ventures with a formation date on or after Jan. 1, 2025, although early adoption is permitted in any interim or annual period in which financial statements have not yet been issued (or made available for issuance), either prospectively or retrospectively.

The FASB press release located on the organization’s website contains further details about the ASU. As always, contact our team of experts at MHM for further information on how this may affect your business.

Published on August 31, 2023