# ASC 805-60-55: Business Combinations — Joint Venture Formations — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

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## ASC 805-60-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/805/60/#55-implementation-guidance-and-illustrations)

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##### [805-60-55-1](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-1)

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This Section is an integral part of the requirements of this Subtopic. This Section provides illustrations that address the general application of accounting requirements for [joint venture](https://asc.understandingaccounting.org/glossary/j/#joint-venture "An entity owned and operated by a small group of businesses (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a joint venture frequently is to share risks and rewards in developing a new market, product, or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a joint venture. The ownership of a joint venture seldom changes, and its equity interests usually are not traded publicly. A minority public ownership, however, does not preclude an entity from being a joint venture. As distinguished from a corporate joint venture, a joint venture is not limited to corporate entities.") formations.

#### Illustrations

##### [805-60-55-2](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-2)

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On January 1, 20X0, a newly formed corporation with no assets or liabilities, New Venture, receives contributions of a controlling financial interest in Business A (90 percent voting interest) from Venturer 1 and Business B (100 percent voting interest) from Venturer 2 and, in exchange, issues 50 common shares to each Venturer 1 and Venturer 2. Assume that New Venture has no other classes of equity or any other equity instruments outstanding before receiving the contributions. It is determined that New Venture first met the definition of a joint venture on January 1, 20X0. New Venture determines January 1, 20X0, to be its [formation date](https://asc.understandingaccounting.org/glossary/f/#formation-date "The formation date of a joint venture is the date on which an entity initially meets the definition of a joint venture, which is not necessarily the legal entity formation date. The formation date is the measurement date for the formation transaction. If multiple arrangements are accounted for as a single transaction that establishes the formation of a joint venture, the formation date is the measurement date for all arrangements that form part of the single formation transaction.").

##### [805-60-55-3](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-3)

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In accordance with paragraph [805-60-30-2](https://asc.understandingaccounting.org/asc/805/60/#805-60-30-2), but before consideration of any liabilities for share-based payments, New Venture determines that the [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") of the joint venture as a whole is $100 million including a [noncontrolling interest](https://asc.understandingaccounting.org/glossary/n/#noncontrolling-interest "The portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent. A noncontrolling interest is sometimes called a minority interest.") (10 percent voting interest) in Business A that is owned by an outside entity. It also determines, in accordance with paragraph [805-60-30-2](https://asc.understandingaccounting.org/asc/805/60/#805-60-30-2), that the formation-date fair value of the identifiable assets is $120 million, the fair value of the liabilities is $40 million, and the fair value of the noncontrolling interest in Business A is $5 million.

##### [805-60-55-4](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-4)

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Upon formation, New Venture exchanges replacement awards that require one year of postformation vesting for share-based payment awards of Business A for which employees had not yet rendered all of the required services as of the formation date. The fair-value-based measure of both awards (the original awards and the replacement awards) is $20 million at the formation date. When originally granted, the awards of the contributed business had a requisite service period of four years. As of the formation date, the contributed business’s employees had rendered two years’ service, and they would have been required to render two additional years of service after the formation date for their awards to vest. Accordingly, only a portion of the contributed business’s awards is attributable to preformation vesting.

##### [805-60-55-5](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-5)

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The replacement awards require only one year of postformation vesting. Because employees have already rendered two years of service, the total requisite service period is three years. For simplicity, assume that New Venture estimates that there will be no forfeitures of the replacement share-based payment awards. The portion attributable to preformation vesting equals the fair-value-based measure of the contributed business’s award ($20 million) multiplied by the ratio of the preformation vesting period (2 years) to the greater of the total service period (3 years) and the original service period of the contributed business’s award (4 years). Thus, $10 million ($20 million × 2 ÷ 4 years) is attributable to preformation vesting and, therefore, New Venture’s additional paid-in capital upon formation. The remaining $10 million is attributable to postformation vesting and therefore recognized as compensation cost in New Venture’s postformation financial statements in accordance with Topic 718 on stock compensation.

##### [805-60-55-6](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-6)

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New Venture applies the guidance in Topic 718 to determine whether the share-based payments should be classified as liabilities or equity.

##### [805-60-55-7](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-7)

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If New Venture determines that the replacement share-based payment awards are classified as liabilities, then total liabilities will equal $50 million ($40 million + $10 million). For simplicity, when taking the share-based payment liabilities into account, the fair value of New Venture as a whole is $90 million ($100 million – $10 million).

##### [805-60-55-8](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-8)

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New Venture calculates goodwill as follows (in millions), consistent with the guidance in paragraph [805-60-30-2](https://asc.understandingaccounting.org/asc/805/60/#805-60-30-2). The formation-date fair value of the joint venture as a whole is equal to the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-DB4C79A8-947F-4078-A24A-9A09A9244147-low.gif)
    
    Fair value of New Venture as a whole (including $5 noncontrolling interest) $90 Less: Net fair value of identifiable assets and liabilities recognized ($120 assets − $50 liabilities) (70) Goodwill recognized by New Venture at formation date $20

##### [805-60-55-9](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-9)

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New Venture calculates additional paid-in capital as follows (in millions).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-49B0BB60-78D5-42DC-A472-29022B07E246-low.gif)
    
    "Net assets recognized by New Venture, excluding share-based payment liabilities ($120 identifiable assets – $40 liabilities + $20 goodwill)" $100 Less: The fair value of noncontrolling interest in business contributed to New Venture (5) Less: The fair value of preformation vesting replacement share-based payments classified as a liability (10) Additional paid-in capital recognized by New Venture at the formation date $85

##### [805-60-55-10](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-10)

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New Venture records the following entry at the formation date (in millions).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-209D267C-DA1F-4444-97DE-EB2538AE6637-low.gif)
    
    Identifiable assets recognized $120 Goodwill 20 Liabilities recognized $40 Noncontrolling interest 5 Share-based payment liability (preformation vesting) 10 Additional paid-in capital 85

##### [805-60-55-11](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-11)

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If New Venture determines that the replacement share-based payment awards are classified as equity, then total liabilities will equal $40 million and the fair value of New Venture as a whole is $100 million.

##### [805-60-55-12](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-12)

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New Venture calculates goodwill as follows (in millions), consistent with the guidance in paragraph [805-60-30-2](https://asc.understandingaccounting.org/asc/805/60/#805-60-30-2). The formation-date fair value of the joint venture as a whole is equal to the fair value of 100 percent of the joint venture’s equity (net assets) immediately following formation (including any noncontrolling interest in the net assets recognized by the joint venture).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-7DA11843-71E1-49E5-A74F-55EEB145DFA8-low.gif)
    
    Fair value of New Venture as a whole (including $5 noncontrolling interest) $100 Less: Net fair value of identifiable assets and liabilities recognized ($120 assets − $40 liabilities) (80) Goodwill recognized by New Venture at formation date $20

##### [805-60-55-13](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-13)

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New Venture calculates additional paid-in capital, excluding additional paid-in capital attributable to share-based payments, as follows (in millions).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-25C813EF-9ADF-4804-AB97-817F5B708C3C-low.gif)
    
    "Net assets recognized by New Venture, excluding share-based payment liabilities ($120 identifiable assets – $40 liabilities + $20 goodwill)" $100 Less: The fair value of noncontrolling interest in business contributed to New Venture (5) Less: The fair value of preformation vesting replacement share-based payments classified as equity (10) Additional paid-in capital recognized by New Venture at the formation date (excluding additional paid-in capital attributable to preformation vesting share-based payments) $85

##### [805-60-55-14](https://asc.understandingaccounting.org/asc/805/60/#805-60-55-14)

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New Venture records the following entry at the formation date (in millions).

-   ![](https://asc.understandingaccounting.org/asc-img/GUID-2BC25624-18F1-4DAC-83DF-CEC68C0CCBF0-low.gif)
    
    Identifiable assets recognized $120 Goodwill 20 Liabilities recognized $40 Noncontrolling interest 5 Additional paid-in capital—share-based payments (preformation vesting) 10 Additional paid-in capital 85