Financial Accounting Standards Board Nearing New Disclosure Rules for Joint Ventures
In August, Honda and LG Energy Solution revealed that they would be investing $4.4 billion to develop a U.S. electric-vehicle battery factory. The automaker and battery company are taking part in an increasingly popular U.S. corporate arrangement: a joint venture. Financial analytics firm Dealogic reported that as of Sept. 14, companies in 2022 had established 15 joint ventures, which involve businesses combining resources to partner on a project. There were nine joint ventures in all of 2021 and only four in 2020.
Perhaps coincidentally, the Financial Accounting Standards Board wants companies to start providing more transparency on what goes into these deals. Specifically, FASB is proposing that participants disclose their contributions to joint ventures.
FASB has worked for years to standardize accounting practices for joint venture contributions and enhance financial reporting related to joint ventures as part of its ongoing Joint Venture Formations project. The objective of the project is to rectify the FASB’s lack of authoritative guidance regarding accounting for the ventures. Moreover, the project is seeking to reduce the differences in basis that tend to be reflected in the financial statements of joint ventures versus what their participants report.
The board met earlier this month and arrived at a number of decisions regarding joint ventures, with plans to issue a proposed accounting standards update in October. Among them, the board members voted to require joint ventures to disclose their fair value at the time of their formation, defined as the point in time at which the “entity initially meets the definition of a joint venture.” In other words, joint ventures would need to calculate the current value of their assets and liabilities. If a partner contributes equipment to the venture, for example, the joint venture would need to book those assets at fair value, not their carry-forward value reflecting depreciation.
FASB is also attempting to address the issue of goodwill. The proposal requires joint ventures to disclose their intangible assets, such as the value of combining assets in the transaction.
The FASB’s proposed disclosure requirements would apply only to joint ventures that result in standalone businesses and generally include involvement from each party to the joint venture. Multiple companies simply partnering on a project or working toward a common goal would not be subject to the updated rules. Additionally, the board’s disclosure requirements would only be in effect at the time of the joint venture’s formation.
Once the proposed disclosure requirements are released next month, the public will have the usual 60-day comment period to provide feedback before they can be finalized. Given that joint ventures offer an appealing avenue for companies to grow in times of economic uncertainty by offloading risk, their popularity likely won’t dissipate any time soon. Considering the increasingly foggy economic picture, clarity on the rules is coming at an opportune time.
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