Joint Venture Accounting Methods

A joint venture involves two or more parties working together on a business endeavor for a limited period of time. The partners pool their assets and skills for the benefit of the company. Each partner typically has some authority to participate in the joint venture's management instead of being only a passive investor. Accounting can be complicated because different methods of joint ventures can be used depending on the circumstances.

Benefits of Joint Ventures

Joint ventures let partners use their strengths to complement each other and grow the company. For example, a partner with great sales skills and no capital may be able to partner with another individual with plenty of money, but no experience in business. The end result of a successful joint venture is a more efficient use of underutilized resources that benefits all of the partners. The joint venture structure also reduces the risk of loss to any one partner.

Choosing an Accounting Method

Accounting Principles Board Opinion No. 18 from the Financial Accounting Standards Board requires the use of the equity method to account for corporate joint ventures in the U.S. There is no clear guidance for unincorporated joint venture accounting. In these cases, look to others in the same industry to determine the common practice.

Use the proportional consolidation methods in cases where partners customarily hold a share of assets and liabilities versus treating the net amount as an investment in the joint venture. Foreign companies are governed by the International Financial Reporting Standards, which require investors in joint ventures to use the equity method. Venture capital firms may use the proportional consolidation method and prepare separate financial statements.

Equity Method

The equity method records the share of the joint venture based on the amount actually invested, not the current value of its general ledger accounts. This method is generally preferred because it keeps the partner's books separate from the joint venture. To use the equity method, start with the initial investment the partner made in the joint venture. Add the partner's share of net income or subtract his share of net loss. Subtract any dividends paid out to the partner to find his net equity in the joint venture, as noted by Accounting Tools.

Proportional Consolidation Method

The proportional consolidation method of joint venture accounting reports each partner's actual pro rata share of each asset, liability, expense and revenue account listed on the joint venture's general ledger. Using this method is often avoided if one or more partners is attempting to obtain financing. Listing multiple liabilities from the joint venture's books may hurt the partner's ability to obtain new financing.