The FASB may need to revise the definition of a joint venture for its October 2022 proposal related to the topic for it to effectively work with the rules it is accompanying, some companies said in comment letters.

In general, the proposal was issued to provide specific accounting rules where there is none in U.S. GAAP for joint business ventures-working partnerships that are popular in the technology sector where new products are constantly being jointly developed.

But the guidance would apply only to entities that meet the definition of a joint venture or a corporate joint venture in the FASB’s Master Glossary at their formation date.

“The proposed amendments define the formation date as the date an entity initially meets the definition of a joint venture. We believe this definition is subject to interpretation and could be refined,” Mary-Lee Stillwell, Vice President-Accounting & External Reporting at Verizon Communications, said in a Dec. 21, 2022, letter.

“For example, the formation date could be interpreted as the inception date of the legal entity (i.e. legal incorporation date), or as the date at which members have contributed their assets/liabilities into the joint venture,” she wrote. “As there is often a time delay between the two dates, we believe the formation date definition needs additional clarification to avoid creating diversity in practice.”

The responses were to proposed Accounting Standards Update (ASU) No. 2022-ED300, Business Combinations - Joint Venture Formations (Subtopic 805-60) Recognition and Initial Measurement, which the FASB issued on Oct. 27 for public comment.

The board plans to hold redeliberations this year based on the feedback.

Proposal received 17 comment letters

The board received 17 comment letters to the proposal by its Dec. 27 deadline, including from Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR), the AICPA’s Financial Reporting Executive Committee, NAREIT, the Accounting Principles and Auditing Standards Committee of the Florida Institute of Certified Public Accountants (FICPA), the New York State Society of Certified Public Accountants, Grant Thornton LLP, Liberty Global Plc, among others.

If finalized, the proposal would require joint ventures to recognize and measure acquired assets and assumed liabilities at fair value upon formation, consistent with the guidance in Topic 805, Business combinations.

The venture would not be treated as the acquisition of one business by another, but as a collective business. The scope of the proposal includes all contributions, irrespective of whether they are monetary or nonmonetary. Entities would be required to disclose enough information in footnotes to enable investors to be able to evaluate the nature and effect of the joint venture that was formed, text of the provisions explain.

In general, most respondents favored the rules, though various suggestions were made for clarifications and other revisions. Each letter had its own view of the issues at hand.

Views mixed about cost

Among questions the proposal asked included whether the guidance would impose significant costs on companies - a factor the board must carefully weigh when issuing standards.

Views were mixed on that issue, and not everyone answered that question.

Grant Thornton, for example, in its Dec. 27 letter said the proposal “would not impose significant incremental auditing costs because many JVs already apply fair value accounting upon formation and auditing the fair values of assets and liabilities in similar transactions (such as business combinations) has become commonplace,” while FICPA said it would impose significant one-time and recurring costs for private companies “that are not currently applying fair value to their joint venture formation transactions.”

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