Recognizing and measuring assets, liabilities, and equity
Once the formation date has been established, a JV must determine which identifiable assets and liabilities are part of the JV formation. These identified assets and liabilities are subject to the recognition and measurement principals outlined below.
The JV must also ascertain which assets and liabilities are not part of the JV formation and are therefore considered a separate accounting transaction accounted for under other relevant GAAP.
Because the formation of a JV also creates a completely new reporting entity from an accounting perspective, there is effectively no pre-existing relationship between the JV and the entities that provided contributions. Accordingly, the JV should not analogize to the guidance for pre-existing relationships in ASC 805 for transactions that are determined not to be part of the JV’s formation transaction.
At the formation date, a JV should account for and measure its formation by establishing a new basis of accounting for its identifiable assets and liabilities, as well as for any noncontrolling interest, in accordance with ASC 805-20. The impact of adopting a new basis of accounting is that the JV (1) may recognize assets or liabilities that were previously not recognized by the contributing investors, such as internally developed intangible assets, and (2) should recognize its assets, liabilities, and noncontrolling interests at their fair values on the formation date.
However, JVs should also take care to apply the exceptions in ASC 805-20 to the general requirement to recognize acquired assets and assumed liabilities at fair value. A JV should account for its formation in this manner regardless of whether the assets or group of assets recognized by the JV constitutes a “business,” pursuant to the definition in ASC 805.
Share-based payments expense attribution
Investors may contribute one or more businesses to the JV that have employees with share-based payment awards. In these situations, the JV must determine which portion of the compensation expense associated with those awards should be attributed to the employees’ pre-formation service and to their post-formation service.
If share-based awards in this scenario are replaced with new awards in the JV’s equity, the JV should apply the guidance in ASC 805-30-30-9 through 30-13 to determine which portion of the compensation expense associated with the replacement awards should be attributed to the employees’ pre-formation service and post-formation service.
Private Company accounting alternative
A JV that is a private company may elect to apply the accounting alternative for recognizing identifiable intangible assets described in ASC 805-20-25-30 through 25-33. Under this accounting alternative, JVs are not required to separately recognize from goodwill certain intangibles, such as certain customer-related intangible assets and noncompetition agreements. However, a JV that elects to apply this accounting alternative must also adopt the accounting alternative for amortizing goodwill.
Instruments, contracts, and share-based payment awards classified as equity
Equity-classified instruments, contracts, and share-based payment awards classified as equity should be accounted for as a reallocation of additional paid-in capital (or other similar equity account, such as members’ equity) and do not affect the total amount of equity or goodwill recognized by the JV upon formation.
Liability-classified share-based payment awards
Some share-based payments are classified as liabilities and are not equity-classified. For contributed businesses that have employees with share-based payment awards that are replaced with liability-classified awards in the JV, the JV should initially measure the liability-classified replacement awards under ASC 718.
Asset- or liability-classified contingent payments
A JV formation may involve a contingent consideration arrangement. For instance, upon formation, a JV might promise to make payments or issue additional equity interests to a contributing entity contingent upon the performance of assets or businesses contributed to the JV. A JV should initially measure any contingent payment arrangements between the JV and its venturers that are classified as liabilities (or assets) based on the measurement principles in ASC 805-20.
Accordingly, a JV would account for the contingent payment arrangement as a typical contingent asset or liability, rather than applying the specific contingent consideration arrangement guidance under ASC 805-30. Any asset or liability recognized will impact the measurement of goodwill, as described below, as part of the JV formation.
The FASB acknowledged that applying the exceptions to the fair value principle for assets and liabilities arising from contingencies in ASC 805-20 to contingent payments made between the JV and its venturers at JV formation may result in some arrangements that are similar to contingent consideration that are not (a) initially measured at fair value, or (b) subsequently measured at fair value with gains or losses recognized in earnings.
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