New Accounting Guidelines for the Formation of Joint Ventures

Prior Accounting Guidance

Prior to ASU 2023-05, there was no authoritative guidance on accounting for JV formations. Unlike business combinations (Topic 805), where there are explicit rules on the measurement of an acquirer’s contributed assets and liabilities assumed, there were no specific standards for JV formations. A JV could record either the carrying values, or the fair values of the assets acquired, and liabilities assumed from the venturers’ records at the formation date.

Specifically, US GAAP did not prescribe the accounting by a JV for noncash assets contributed at formation. This was because, under the prior guidance, there was no clear requirement to identify the acquirer when a new entity was formed to effectuate a business combination or when two businesses were merged to form a new business. In a typical business combination, one business would be considered the “acquirer” and continue to record its assets at carrying value while the “acquiree” would be measured at fair value and use a new basis of accounting.

During the deliberations leading up to the issuance of the new guidance, FASB considered two alternative measurement approaches: the carrying amount measurement approach and the optionality measurement approach. The carrying value approach maintains historical trends and is less costly to prepare. On the other hand, the fair value approach is relevant for decision-making usefulness by investors, such as when calculating important metrics (e.g., return on equity and return on assets). The JVs’ operations would not include the gains or losses embedded in the carrying values of the venturers. In addition, the fair value method avoids the difference between the venturers’ and the JV’s basis. Historically, it was believed that the SEC staff preferred the carrying value approach in order to avoid the subjectivity of measuring fair value. Alternatively, the optionality approach would allow the venturers to account for the formation of a JV at the carrying amount of the assets contributed and liabilities transferred. This approach would result in diverse practices regarding how assets received and liabilities assumed would be recorded at the formation of the JV, and therefore, a lack of comparability in how JV formation transactions were reported and presented. When the FASB issued the exposure draft of the proposed ASU (https://tinyurl.com/32usm4sr), 21 out of 23 respondents supported the fair value approach in their comment letters, and neither alternative was included in the final standard (FASB, “Comment Letters,” https://tinyurl.com/mry34src; ASU 2023-05, BC 79).

The following presents a concise summary of the new guidance for JV formations, including the recognition of a business or net assets by the JV as well as the derecognition of a business or net assets by the venturers when forming the JV. An example below illustrates a JV formation where the venturers contribute business entities with 100% ownership.

Guidance Under ASU 2023-05

ASU 2023-05, Business Combinations—Joint Venture Formations, (Subtopic 805-60), Recognition and Initial Measurement, is the first authoritative guidance on accounting for JV formations, which previously had not been covered under ASC 805, Business Combinations. In a business combination, an acquirer generally takes control of the other (acquiree) entity. In the formation of a JV, there is no acquirer, because the JV is created with resources contributed by the venturers. In a business combination, the acquirer would continue to use the previous carrying values for its assets. In a JV formation, however, all contributed assets and liabilities assumed must be remeasured at fair value.

ASU 2023-05 requires a new basis of accounting for the formation of a JV. The new guidance requires that all assets received, liabilities assumed, and any related noncontrolling interest are to be recorded at fair value by the JV as of the formation date (with certain exceptions). In addition, the JV is measured at fair market value. Any value in excess of the identifiable net assets is recognized as goodwill. This approach is consistent with the new basis of accounting models in GAAP, such as “fresh-start” reporting (FASB, ASC 852-10-45-21).

For example, consider what happens when one venturer contributes an automated parking system with no carrying value and a fair market value of $100,000 to a newly formed JV. In the past, this transaction could be recorded under the carrying value method or the fair value method. Under the new standard, the JV must record this transaction using the fair value approach. In some cases, venturers could contribute assets that do not have a carrying value, such as an in-process research and development project that has not met the capitalization criteria under relevant guidance. With no authoritative guidance, there could be an asymmetric recognition by different venturers whereby some venturers might not identify a new asset due to the absence of a carrying value, whereas others might recognize the asset at its fair value at the formation.

Scope Exceptions

The guidance in ASU 2023-05 has its own specific scope regarding the types of entities and transactions to which it applies. Specifically, it applies to JVs and corporate joint venture entities as defined in the standard. In addition, the guidance in this ASU does not apply to the following transactions:

• Transactions between the JV and its owners other than the formation of the joint venture
• Formation of not-for-profit entities
• Combinations of entities, businesses, or not-for-profit entities under common control
• Companies in the construction and extractive industries
• Collaborative arrangements (ASU 2023-05, p.7).

Characteristics of Joint Ventures

Over the past four decades, JVs have been a vehicle for companies to share risks or pool resources and capabilities to achieve a common goal (R. C. Graham, R. D. King, and C. K. Morrill, “Decision Usefulness of Alternative JV Reporting Methods,” Accounting Horizons, vol. 17, no. 2, pp. 123-137, 2003). Some benefits of forming a JV are: 1) sharing risks and rewards in developing new products, technology or markets, 2) gaining access to foreign markets in order to comply with political or regulatory requirements, 3) pooling resources in achieving economies of scale, and 4) merging complementary technological expertise and knowledge (D. L. Reklau, “Accounting for Investments in JVs—A Reexamination,” Journal of Accountancy, vol.144, no. 3, p. 96, 1977; ASU 2023-05, p. 6).

A JV is created by a small group of two or more venturers to achieve a mutual goal. Most of the venturers share equal ownership and management responsibilities, however, this is not a requirement. Each venturer may elect to directly or indirectly participate in the overall management of the JV. A venturer cannot, however, be a passive investor. A subsidiary of a venturer is not a JV, but a venturer may contribute a business with majority ownership as its investment in the JV. Furthermore, a government may be one of the venturers. Generally, a JV is in the legal form of a partnership or corporation but is usually not publicly traded (ASU 2023-05, p. 10). FASB decided not to provide the requirement of joint control for the definition of a JV (ASU 2023-05, BC 91-4, pp. 82–83). In practice, stakeholders have used joint control as one of the requirements in satisfying the definition of a JV (PwC, “Equity Method Investments and Joint Ventures,” updated December 2025, https://tinyurl.com/37rra32e).

ASU 2023-05 emphasized the characteristics of a JV. For example, consider a case wherein Companies A, B, and C each contributes businesses into a new legal entity and retains an equal amount of equity interest. Each company also holds one voting right. Significant decisions are made based on the voting majority, that is, two out of the three votes. This arrangement would not constitute a JV. But if all significant decisions require unanimous agreements among the three venturers, the arrangement would be considered a JV.

Collaborative Arrangements Compared to Joint Ventures

In some cases, business partners would conduct activities without forming a new entity, instead relying upon a contractual agreement outlining the roles of the participants (ASC 808-10-45). These are collaborative arrangements, which are covered under ASC Topic 808, Collaborative Arrangements, are usually shared business activities without the creation of a separate legal entity. In an example provided by FASB, Pharma and Biotech agree to develop and market a new pharmaceutical product where Biotech will provide the research and development and Pharma will be responsible for the commercialization and marketing. Pharma and Biotech agree to share anticipated profits equally. This would be characterized as a collaborative arrangement because of the absence of a separate “legal entity” (ASC 808-10-55-3). Thus, the key difference between a JV and a collaborative arrangement is the existence of a separate “legal entity” (ASU 2023-05, BC31, pp. 67-68). Using the same example, if Biotech and Pharma established a separate and specific business entity to develop and market the same product, this would be classified as a JV because there would exist a required separate “legal entity.”

During its deliberations, FASB excluded all collaborative arrangements under the guidance of JVs in the exposure draft. After receiving the comments from various respondents (e.g., AICPA, BDO, EY, and PwC, https://tinyurl.com/mry34src), the board clarified the scope considerations over the relationship between a JV and a collaborative arrangement. Specifically, a separate “legal entity” that is part of a collaborative arrangement would be considered a JV. In addition, a collaborative arrangement among JV venturers would not qualify as a JV (ASU 2023-05, BC31, pp. 67-68).

Recognition and initial measurement. The contribution of assets and liabilities assumed and any noncontrolling interests (NCI) is measured similarly as under the guidance for business combinations (ASC 805-20). At the formation date, the JV records the contributed identifiable assets, and liabilities assumed from all the venturers at their respective fair values. The new entity must also recognize any NCI from the venturers, as well as any excess value, as goodwill (ASC 805-20-25-1). The JV formation date is the date that the entity meets the definition of a JV. This date is not necessarily the legal entity formation date. Multiple arrangements can make the determination of the formation date difficult. In this case, any of the following factors must be considered:

• The multiple arrangements are entered into at the same time or in contemplation of one another.
• The multiple arrangements form a single transaction designed to achieve an overall commercial effect.
• The occurrence of one arrangement noncontrolling interests is dependent on the occurrence of at least one other arrangement.
• One arrangement considered on its own is not economically justified, but the multiple arrangements are economically justified when considered together (ASC 805-60-25-4).

At or after the formation date, a JV may have arrangements with the venturers or other parties. These arrangements must be clearly identified and separated from the JV formation arrangements (ASC 805-60-25-4).

Research and development (R&D). R&D costs are expensed as incurred (ASC 730-10-25-1) and cannot be capitalized by the entity that incurs the costs. Prior to ASU 2023-05, companies can only recognize an in-process research and development (IPR&D) cost as an intangible asset in a business combination (rather than an asset acquisition transaction) provided certain criteria are met, that is, if the IPR&D project has “substance” and is “incomplete” on the date of the business combination. A venturer may have contributed an R&D project that was previously expensed; ASU 2023-05 provides the JV with the ability to recognize an IPR&D intangible asset even if the JV is not a “business” (FASB, 2023, ASU 2023-05, BC45, p. 71).

Any tangible or intangible assets contributed to a JV are recognized at fair value at the formation date. Contributed programs or projects that contain IPR&D costs are recognized as intangible assets. The JV accounts for the IPR&D costs as indefinite lived assets until the research is completed or abandoned. This guidance is applicable even when the JV does not satisfy the definition of a business. The IPR&D resource may not have been carried on a venturer’s records because most of the past expenditures have been expensed (see the illustrative example below). In their comment letters on the standard’s exposure draft, three respondents (Deloitte, Effectus Group, and IMA) did not agree with the proposal to recognize the contributed IPR&D costs as assets where the JV is not classified as a business (https://tinyurl.com/mry34src).

Intangibles—goodwill and other. The recognition and measurement of goodwill at the formation of a JV follows the same guidance as business combinations. Goodwill is the excess of the JV’s total fair value of the equity (net assets), including any NCI over the fair value of the identifiable net assets contributed by the venturers (FASB, ASC 805-60-30-2). Goodwill would not be amortized for a public entity and is subject to impairment testing. JVs that are private companies may elect to amortize goodwill on a straight-line basis over a ten-year period, or less if the useful life is shorter (ASC 805-60-25-12).

A JV must recognize any identifiable intangible asset that meets either the separability or contractual-legal criterion. A JV that elects the accounting alternative to amortize goodwill, as described above, should subsume customer-related intangible assets that cannot be sold or independently licensed from other assets of a business and noncompetition agreements in goodwill (ASC 805-20-25-30).

Furthermore, ASU 2023-05 provided a scenario where a newly formed entity can meet the definition of a JV even if it is not a “business.” This could result in the recognition of goodwill without the JV being classified as a business if it has more than an insignificant amount of goodwill. But FASB expects the occurrence of this scenario to be rare (ASU 2023-05, BC48, p. 72).

Deferred tax expense/benefit. ASU 2023-05 amended the existing deferred tax expense (or deferred tax benefit) requirements under ASC 740 by adding the requirements for corporate JVs. Specifically, if the JV is a taxable entity, deferred tax expense/benefit represents the change in the deferred tax liability or asset recognized since the formation date of the JV.

Subsequent measurement and contingencies. The measurement of all contributed assets and liabilities assumed by the JV must be recognized at the formation date and allows necessary subsequent measurement adjustments. Any subsequent adjustments to the contributed assets and liabilities assumed will alter the valuation of goodwill, which could have a consequential impact on the JV’s income statement during the measurement period. This is similar to the guidance for business combinations during the “measurement period” (i.e., not to exceed one year from the acquisition date) where additional information may affect the valuation of an acquiree’s assets received and liabilities assumed at the acquisition date (FASB, ASC 805-2025-1). Some of the comment letters received by FASB indicated that the values for the contributed assets and liabilities assumed would generally be available at the formation date, and thus a measurement period would not be necessary (ASU 2023-05, BC66-9, p. 79). But some respondents requested additional guidance for subsequent measurements after the JV formation date (e.g., Liberty Global Plc, EY, and Nareit). In the final standard, FASB decided not to provide duplicative guidance instead referring to the existing rules for business combinations (ASC 805-10-25-13–19).

In general, like under a business combination, the assets received and liabilities assumed by a JV are measured at fair value. For example, contingencies such as the estimated liability for product warranties assumed by the JV follow the same guidance as in business combinations and are recognized at the formation date. A special area is contingencies, under which the venturers may receive additional consideration where specified targets or milestones are achieved. Where the additional consideration affects the JV’s assets or liabilities are to be recognized in current earnings. When the additional consideration affects the ventures’ capital accounts, it will also require changes in the venturers’ equity accounts (FASB, ASC 805-30-35-1). The accounting for JV formations follows the same scope exceptions as in business combinations.

As an example, assume that, at the formation date of July 1, 2025, one of the venturers contributed an artificial intelligence (AI) enabled 3-D printing system to the JV. The equipment was valued at $100,000 at the formation date and goodwill was reported at $200,000. The estimated remaining life of the equipment was five years. On September 30, 2025, the final fair value provided by a professional appraiser was $60,000. The subsequent measurement would revalue the equipment to $60,000 (a reduction of $40,000). This would increase goodwill to $240,000. In addition, the depreciation for the equipment (assuming a straight-line method) would be revised from an annual amount of $20,000 ($100,000/5years) to $12,000 ($60,000/5 years).

Disclosure Requirements

ASU 2023-05 requires the following disclosures regarding the JV’s formation:

• The formation date
• A description of the JV’s purpose
• The formation date fair value
• A description of the assets acquired and liabilities assumed by the JV at the formation date
• The assets and liabilities are to be presented by the JV either on the face of the balance sheet or in the notes
• A qualitative description of the factors such as anticipated synergies that resulted in the recognition of goodwill (ASU 2023-05, BC74, p. 78).

An illustrative example. Venturer A, Mia Enterprise (ME), is a $15 billion international conglomerate in the business of real estate and luxury apartment rentals. Venturer B, Kai Technologies (KT), is a $10 billion multinational technology corporation. In order to maximize its utilization of its real estate capacity, ME negotiated with KT to form a JV, Avi Parking Corp. (APC), a newly formed corporation to develop an AI-enabled mobile parking system. APC would make it easier for tenants and visitors to locate parking spaces, as well as to maximize revenue. For example, when tenants take their automobiles out of town for an extended period, their parking spaces are not utilized. With the AI-enabled mobile parking app, these unoccupied parking spaces can be easily identified and rented out for additional revenue.

To form this JV, ME is contributing one of its subsidiaries, Mia Parking Corporation (MPC), which has been operating ME’s parking facilities. KT is contributing one of its subsidiaries, Kai Systems Corp. (KSC), which has been developing an AI-enabled mobile parking system (see Exhibit 1). Each venturer will receive 100,000 shares of common stock and therefore has 50% equity and joint control of APC. ME and KT will have three members of a six-member board of directors. Profits and losses will be shared equally between MP and KT. Unanimous approval is required for all decisions related to the JV. After conducting negotiations between the venturers and contracting the services of a valuation specialist, the total net assets (total equity) of the JV are valued at $1.34 billion. Exhibit 2 provides the respective balance sheets of MPC and KSC.

Exhibit 3 provides the fair market value of the identifiable net assets and liabilities. Under the provisions of ASU 2023-05, net assets are recorded at their respective fair values by APC and the gains are recognized by the venturers (ME and KT). Note that “AI Parking System” is an in-process research and development (IPR&D) resource whose total costs have been expensed by KSC. The JV must record the fair value at $400 million (see the detailed discussion in “Research and development” above).

Exhibit 4 provides the calculation of goodwill. Under the new guidance, the initial measurement of a JV’s total net assets must be the fair value of 100% of the JV’s equity (FASB, ASU 2023-05, p. 3). In this example, the total fair value of APC, as assessed by valuation professionals, is $1.34 billion at the formation date. As shown in Exhibit 4, the total fair value of the JV of $1.34 billion exceeds the fair value of its identifiable net assets of $1.04 billion. This excess value of $300 million is attributed to goodwill, and the venturers agree to share it equally. The goodwill is the result of combining the resources of the two companies to the JV in achieving synergistic benefits. Venturer KT will recognize a gain of $570 million for contributing KSC’s net assets to the JV ($670 – $100). Venturer ME will recognize a gain of $380 million for contributing MPC’s net assets to the JV ($670 – $290).

Exhibit 5 presents all of the necessary journal entries by the JV and its venturers at the formation date. Although the new guidance is focused on the accounting by the JV, the journal entries by the venturers is also presented for informational purposes. As required by FASB, at the formation date, in JE01 APC records the total fair value of the entity at $1.34 billion. To conform to FASB’s example (ASU 2023-05, p. 21–24), an insignificant value of $0.0000001was used for the par value of the APC’s common stock. This places nearly all of the contributed equity of $1.34 billion in additional paid-in capital.

In JE01, KT derecognizes its investment in KSC for $100 million at the carrying value. It also records its investment in APC at the fair value of $670 million and recognizes the gain of $570 million on contributing KSC to APC.

Similarly, in JE01, ME derecognizes its investment in MPC for $290 million at its carrying value. It also records its investment in APC at the fair value of $670 million and recognizes the gain of $380 million on contributing MPC to APC.

As presented in Exhibit 6, all the assets and liabilities are recorded at fair value on the balance sheet. Each venturer receives 100,000 shares of common stock. The insignificant par value results in all the equity being allocated to additional paid-in capital.

One or more of the venturers may contribute a business that has an NCI to a JV. The NCI would also be measured at fair value, which would affect the valuation of goodwill. Corporate JVs are usually not publicly traded, therefore, ownership seldom changes. The existence of a publicly owned NCI would not preclude the newly formed corporation from being classified as a JV (ASU 2023-05, p. 3). In general, these passive investors would not be able to actively affect the management of the JV (EY, 2024).

Enhancing Relevance

This article intends to provide a concise summary of the new requirements for the formation of a JV under ASU 2023-05. The new guidance provides the definition of a JV and clarifies the accounting for JV formation. Prior to this new standard, there was no authoritative guidance that required a certain basis for the valuation of assets received and liabilities assumed by a JV. There was diversity in practice whereby some JVs accounted for the contributions at carrying value and others accounted for them at fair value. The intent of the new guidance is to eliminate asymmetrical accounting by JVs and produce more comparable financial accounting and reporting for investors.

Furthermore, the guidance specifies the fair value approach to enhance the relevance and decision-making usefulness of the JV’s financial reporting, for example, by providing a more accurate depiction of the return on investment for the venturers. The new guidance retained most requirements similar to those in a business combination, with some exceptions. Specifically, with respect to the recognition of goodwill, a JV would recognize goodwill when the fair value of the JV as a whole exceeds the fair value of the net assets received. In rare scenarios, goodwill may be recognized, even when the JV is not a business. Similarly, the JV would recognize IPR&D as an asset even if the JV is not a business. In addition, the comprehensive example with journal entries and balance sheets for the JV and its venturers above should assist practitioners in JV accounting. As indicated by most of the comment letters received by FASB, the new standard is expected to provide greater comparability for JV formations.