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FASB Moves Forward With New Disclosure Requirements for Joint Ventures

Sept. 14, 2022

The U.S. accounting standards-setter has advanced new requirements that would close a current accounting gap for joint ventures

Businesses would have to start reporting on the assets they bring into certain joint ventures under a new proposal from the U.S. accounting standards-setter that is aimed at filling a void in existing disclosure requirements.

Companies that enter joint ventures typically share costs and liabilities. But U.S. generally accepted accounting principles don’t state how joint ventures should account for what each party initially contributes to the joint entity, such as buildings and equipment. The proposed disclosures would offer more clarity to audit firms as well as companies that set up joint ventures, accounting experts said.

Under the proposal, which the Financial Accounting Standards Board voted on Wednesday, joint ventures would have to disclose their formation date, why they are being formed and their fair value at formation, which involves measuring liabilities and assets at their current value.

They would also have to share the size of certain assets and liabilities that will be recognized by the joint venture. Joint ventures additionally would have to disclose what makes up the goodwill—or intangible assets—recognized by the joint venture such as benefits that come from combining assets or businesses, according to the FASB.

U.S. joint-venture activity is at a five-year high as businesses look to share risks and costs amid economic uncertainty. Fifteen U.S. joint ventures have been set up this year as of Wednesday, up from nine during the same period last year and four in 2020, according to data provider Dealogic.

The FASB’s proposal will apply to the financial statements of a small cohort of joint ventures that result in a stand-alone business—as opposed to two parties simply working together toward a shared goal—and generally include involvement from each party to the joint venture. The disclosure requirement would apply only at the time a joint venture is formed and not for the lifetime of the entity. As proposed, the disclosures would only affect existing joint ventures.

Mercedes-Benz Group AG this month said it is working with Rivian Automotive Inc. on a European factory to make electric vans for both companies. Honda Motor Co. in late August announced a joint venture with Korean battery company LG Energy Solution Ltd. to build a $4.4 billion electric-vehicle battery factory in the U.S. The proposed new rule would apply only to new joint ventures, not existing ones. Mercedes-Benz declined to comment. The other companies didn’t immediately respond to requests for comment.

The FASB has been considering changes to joint-venture formations for the past three years. It expects to issue a proposal next quarter before it then asks the public for feedback.

“There isn’t guidance for how to measure assets and liabilities in a joint venture,” said Tom Linsmeier, chair of the accounting department at the Wisconsin School of Business and a former FASB member. “This project was added to fill that gap.”

In September 2019, the FASB added joint-venture formations to its agenda, saying it was influenced by speeches given by Securities and Exchange Commission staff on the topic. The main goal is to reduce diverging approaches to measuring assets and liabilities when a joint venture is formed, according to the FASB.

The board in July 2020 decided that contributions to a joint venture must be recognized at fair value, meaning that assets will be booked at the current market value, as opposed to the balance sheet value–or carry forward value–which accounts for depreciation. This requirement will be folded into the proposal, the FASB said.

[CFO Journal]

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