The Financial Accounting Standards Board has proposed an update to accounting standards to make some targeted improvements to the guidance on accounting for collaborative arrangements, or “virtual” joint ventures.

Under Generally Accepted Accounting Principles, a collaborative arrangement is one where two or more parties enter a contractual relationship to actively participate in a joint operating activity. It's a little different from a true joint venture because it does not involve the creation of a standalone legal entity. Historically, accounting guidance has not provided explicit requirements for how to recognize or measure any proceeds generated through collaborative arrangements, so companies have developed different practices, FASB says.

Some companies, for example, apply revenue recognition guidance, directly or by analogy, to all or a portion of the arrangement; others apply a different accounting method as an accounting policy. That produces different results that make it difficult for investors to compare outcomes for arrangements that are otherwise similar, FASB says.

Now that companies are following a comprehensive new guidance on revenue recognition, questions about collaborative arrangements are surfacing and leading to questions, FASB says. That prompted the board to try to resolve questions or uncertainties with some new guidance.

The proposed accounting standards update would change three specific aspects of existing guidance to clarify requirements and promote more consistent reporting. First, it adds unit-of-account guidance to the language on collaborative arrangements to align it with existing new guidance on revenue recognition.

The proposal also clarifies that certain transactions between participants in collaborative arrangements should be accounted for as revenue when a participant is a customer in the context of the unit of account. Finally, it clarifies when transactions not directly related to sales to third parties cannot be accounted for as revenue.

FASB is accepting comments on the proposal through June 11. The board has not set a planned effective date, waiting first to see what kind of feedback it receives. It is asking entities to weigh in with not only any reaction to the proposal itself, but also how much time will be needed to implement the change and whether it should be applied retrospectively to coincide with the adoption of the new revenue recognition standard.

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