FASB proposes changes in accounting for joint ventures

The Financial Accounting Standards Board issued a proposed accounting standards update Thursday to give investors more information about a joint venture's financial statements.

The proposed ASU aims to reduce the differences in how joint ventures do their financial reporting. The proposal would apply to the formation of entities that meet the definition of a joint venture (or a corporate joint venture) as defined in the FASB Accounting Standards Codification Master Glossary.

While joint ventures are defined in the Master Glossary, there's no specific guidance on the formation accounting by a joint venture in its separate financial statements, specifically on the joint venture's recognition and initial measurement of net assets, including businesses contributed to it. In the absence of specific guidance, different practices have evolved, influenced by various sources, including speeches given by members of the Securities and Exchange Commission's staff. 

Courtesy of GASB

Constituents have told FASB that the lack of guidance has led to diversity in practice in how a joint venture accounts for the contributions it receives upon formation. "While some joint ventures initially measure their net assets at fair value at the formation date, other joint ventures account for their net assets at the venturers' carrying amounts," said FASB. 

To reduce this diversity in practice and provide decision-useful information to a joint venture's investors, FASB decided to require joint ventures to apply a new basis of accounting when they're formed. By applying a new basis of accounting, a joint venture would recognize and initially measure its assets and liabilities at fair value (with certain exceptions that are consistent with the business combinations guidance), upon formation. 

FASB is asking for comments on the proposed update by Dec. 27, 2022.