According to the Ankura Joint Venture Index, global joint ventures and partnerships in 2024 experienced varied activity.
“New deal volumes got off to a slow start, soared to great heights, then declined, yet ended the year 14% higher than 2023. Within this dynamic environment, three key themes emerged. Joint venture and partnership deal activity is increasing in some industries while decreasing in others. Deal structures and terms are becoming more innovative. The outlook for deals remains positive for 2025.”
In alignment with the rise in global joint venture activity, the FASB released ASU 2023-05, effective for joint ventures formed on or after January 1, 2025.
ASU 2023-05 states that an entity qualifying as a joint venture or corporate joint venture, as defined in the FASB Accounting Standards Codification (ASC) master glossary, must recognize a new basis of accounting for contributed net assets as of the formation date. The guidance indicates that joint ventures must initially measure their assets and liabilities at fair value on the formation date. Previously, there was no specified guidance regarding the initial measurement of assets and liabilities, allowing a joint venture to record contributions either at the contributing parties’ carrying value or at fair value.
Additional Key Considerations within ASU 2023-05:
- Business combination guidance within ASC 805 should be utilized to assess fair value.
- Assets and liabilities should be measured on the formation date, defined by ASU 2023-05 as “the date on which the entity initially meets the definition of a joint venture.” It is important to ensure that the joint venture uses the correct formation date, since it might not align with the date on which assets were contributed.
- Excess of fair value over net assets contributed would be recognized as goodwill. Conversely, if the net assets exceed the fair value, it would result in negative goodwill as an adjustment to equity. At the formation date, the joint venture’s measurement of its net assets should equal the fair value of 100% of its equity.
Ensure that applicable disclosures are included in the financial statements, such as:
- Description of the joint venture’s purpose
- Fair value of the joint venture at the formation date
- Amounts recognized by the joint venture for each major class of assets and liabilities
- Qualitative description of factors contributing to any recognized goodwill
Exceptions to the Guidance:
- Formations of entities determined to be not-for-profit entities
- Combinations between entities and businesses under common control
- Entities in the construction or extractive industries that may be proportionately consolidated by any of their investor venturers according to paragraph 810-10-45-14.
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