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Accounting boards issue Accounting Standards globally to solve ambiguity in measuring, treating, and reporting an accounting item. This brings about uniformity in reporting, making the financials comparable. To meet this objective of uniformity, constant reviewing and updation of the standards by accounting bodies is required as the world of business and accounting evolves. The Financial Accounting Standards Board (FASB) has amended the Accounting Standards Codification® Master Glossary to include accounting for Joint Ventures. The term joint venture is defined in the Master Glossary; however, no clarification in the Codification applies to formation accounting by a joint venture in its separate financial statements. The amendment aims at guiding the joint venture’s recognition and initial measurement of assets and liabilities, including businesses that contributed to it.

The reason for this amendment is:

• to provide investors and other allocators of capital with information-driven decision-making in a joint venture’s separate financial statements; and
• bring uniformity in practice in this area of financial reporting.

The Accounting Standard Update 2023-05 that adds Business Combinations – Joint Venture Formations (Subtopic 805-60) stemmed from the fact that there was no authoritative guidance in the GAAP on how a joint venture should recognize and measure assets and liabilities, including business contributed. Instead, GAAP explicitly provides that transaction between a joint venture and its owners is excluded from Topic 845, Nonmonetary Transactions, and the formation of the joint venture is outside the scope of Business Combinations of Topic 805, which has led to diversity in practice. Practitioners viewed the formation of a joint venture as a change in control and contended that the net assets must be accounted for on a new basis when feedback was sought by the FASB.

The amendment in this Update does not amend the joint venture definition, the accounting for its investment in the joint venture by an equity method investor, or the accounting for a joint venture for contributions received after its formation. It requires that a joint venture, upon formation, will recognize and measure its assets and liabilities initially at fair value (with exceptions to fair value measurements consistent with business combination guidance).

The amendment applies to accounting for contributions received upon formation by corporate joint ventures that meet the definition of a joint venture or corporate joint venture defined in the Master Glossary of Codification. The amendments in this ASU are effective prospectively from January 1, 2025, for all joint ventures formed after the said date; however, early adoption is permissible.

KNAV Opinion

Although accounting standards worldwide are expected to provide clarity on most matters related to financial reporting, there are few areas that are grey zones that lead to differential practices while accounting. In such scenarios, preparers and reviewers must follow the best practices that lead to the most accurate presentation of financial statements. Auditors, through their interactions with various clients and exposure to diverse accounting approaches, can leverage this experience to recommend methods that are both equitable and compliant with other GAAP standards, promoting accuracy.