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FASB Proposes Rule on Joint Venture Reporting Disclosures

By:
S.J. Steinhardt
Published Date:
Sep 16, 2022

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The Financial Standards Accounting Board (FASB) voted on Wednesday to clarify how businesses report on the assets that they bring into certain joint ventures under generally accepted accounting principles, The Wall Street Journal reported.

The proposal would require joint ventures—business arrangements in which two or more parties pool their resources—“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,” the Journal reported. “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 recognized by the joint venture.”

Though joint ventures are at a five-year high—with 15 set up so far this year, according to data provider Dealogic—the proposal has been years in the making. The FASB added joint-venture formations to its agenda in September 2019. In July 2020, it decided that contributions to a joint venture must be recognized at fair value.

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

Two prominent joint ventures mentioned by the Journal are Mercedes-Benz Group AG and Rivian Automotive Inc.’s plan for a European factory to make electric vans for both companies, and Honda Motor Co. and Korean battery maker LG Energy Solution Ltd.’s building of a $4.4 billion U.S. electric-vehicle battery factory.

The proposed new rule would apply to the financial statements of only a small group of joint ventures that result in a stand-alone business. It would not apply to two entities just working together toward a shared goal. The disclosure requirement would apply only at the time a joint venture is formed and not for the lifetime of the entity.

The FASB expects to issue an exposure draft in the next quarter.

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