New Joint Venture Accounting Standard

Blake Miller, CPA, CFE, Partner

The new accounting standard for joint ventures introduces significant changes aimed at reducing diversity in practice and providing better information for decision-makers. Previously, joint ventures faced inconsistent guidance on how to measure and recognize net assets contributed upon formation.  Some opted to measure at carrying value, while others used fair value.  The amendments in this update establish a clearer, more consistent framework.

Key provisions of the standard include:

• Creation of a New Entity: Unlike certain business combinations, the formation of a joint venture does not involve identifying an accounting acquirer. Instead, the joint venture is treated as a new entity. No asset or business contributed to the venture is considered to have "survived" the formation as an independent entity.
• Fair Value Measurement: The most significant change is the requirement for joint ventures to measure assets and liabilities at fair value at the time of formation. This aligns with existing GAAP guidance for business combinations and fresh-start reporting.
• Initial Measurement of Net Assets: A joint venture must measure its total net assets based on the fair value of its equity as a whole, which includes any noncontrolling interest in the venture's net assets.
• Disclosures: Joint ventures must provide detailed disclosures on the financial effects of the formation. These disclosures include the formation date, the purpose of the joint venture, and the beginning assets and liabilities of the joint venture, among other relevant information.

These new provisions aim to make GAAP more consistent and transparent in accounting for newly created joint ventures. The standard will be effective for all joint ventures formed after January 1, 2025. Joint ventures formed before this date may elect to apply the amendment if they have sufficient information to do so.