ACCOUNTING BRIEF
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FASB Issues Accounting Standards Update on New Joint Ventures Financial Statements
The Financial Accounting Standards Board (FASB) yesterday issued an Accounting Standards Update (ASU), which aims to provide investors and other allocators of capital with more consistency and information in a joint venture’s separate financial statements.
THE WHO (not the band)
- The ASU applies to the formation of entities that meet the definition of a joint venture (or a corporate joint venture), defined as “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.”
The Why
- Generally accepted accounting principles (GAAP) have not provided specific guidance that applies to the formation accounting by a joint venture in its separate financial statements.
- Stakeholders have noted that the lack of guidance has resulted in inconsistency in how contributions to a joint venture upon formation are accounted for by the joint venture, according to FASB.
Amendments Provide Decision-Useful Information to Investors
The amendments detailed in the ASU provide “decision-useful information” to a joint venture’s investors and requires that a joint venture apply a new basis of accounting upon formation. “As a result, a newly formed joint venture, upon formation, would initially measure its assets and liabilities at fair value (with exceptions to fair value measurement that are consistent with the business combinations guidance),” the ASU states.
The When
- The amendments are effective prospectively for all joint ventures with a formation date on or after January 1, 2025, though early adoption is permitted.
- A joint venture formed before 2025 may elect to apply the amendments retrospectively if it has sufficient information.
Note. An Accounting Standards Update is not authoritative; rather, it is a resource that details how the FASB Accounting Standards Codification is being amended. The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP).
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