FASB ASU 2023-05 Is Live:
What JV Partners Must Know

FASB Accounting Standards Update 2023-05, "Business Combinations — Joint Venture Formations (Subtopic 805-60)," is not a distant regulatory concern. It is live, effective for all JV formations with dates on or after January 1, 2025, and it fundamentally changes how assets and liabilities contributed to a joint venture must be recorded at formation. The CPA Journal published comprehensive coverage of this standard in April 2026, noting that no real estate-specific interpretive guidance yet exists — leaving Georgia JV operators to navigate a standard that has outsized implications for their asset class. This analysis fills that gap.

"ASU 2023-05 ends the prior accounting diversity that allowed JV partners to choose their formation accounting method. Fair value is now required — and for real estate JVs, that creates specific challenges."

What ASU 2023-05 Requires (Plain English)

Prior to ASU 2023-05, GAAP allowed a range of accounting approaches for joint venture formations. Some entities used the "carryover" method — recording contributed assets at the contributing partner's existing book value, not at market value. Others applied acquisition accounting. The resulting diversity made JV financial statements difficult to compare and created significant inconsistency in how similar transactions were reported.

ASU 2023-05 eliminates this optionality. Under the new standard, when a JV is formed, it must recognize all assets contributed and all liabilities assumed at fair value at the formation date. This is a comprehensive requirement — it applies to real property, intangible assets, equipment, cash, debt, and any other assets or liabilities transferred to the JV at formation. The fair value measurement follows the guidance in ASC 820, which defines fair value as 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.

The standard applies to JV formations with a formation date on or after January 1, 2025. For calendar-year entities, the first mandatory application cycle covers formations occurring throughout 2025, with first full-year financial reporting for calendar year 2025 (filed in early 2026). The standard permits, but does not require, retrospective application to earlier formations where sufficient information exists. Early adoption was permitted beginning in 2024.

Why This Matters Specifically for Real Estate JVs

Real estate JVs are the quintessential use case where ASU 2023-05 creates complexity. In a typical North Fulton real estate JV structure, one or more partners contribute real property — land, buildings, or both — in exchange for JV equity interests. These contributed properties often have significant embedded appreciation. A property purchased in 2015 for $3M that is now worth $7M cannot simply be contributed to a JV at the $3M historical cost basis under the new standard. The JV must record it at $7M fair value.

This fair value recording at formation has cascading effects. The depreciation basis for the building component is reset to fair value, which affects depreciation allocations to LP and GP partners. The land component (non-depreciable) is recorded at fair value, establishing a higher tax basis when the JV ultimately sells the property. And critically, if the contributing partner is a taxable entity, the difference between the fair value recorded in the JV books and the partner's historical cost basis may create deferred tax considerations that must be modeled before the deal closes.

In the prior framework, sophisticated real estate JV sponsors could use carryover basis accounting precisely to avoid these complications. ASU 2023-05 removes that option for new formations. Georgia operators forming JVs after January 1, 2025 must engage their CPAs at the deal structuring stage — not after the operating agreement is signed.

Pre vs. Post ASU 2023-05: What Changed

Fair Value of Contributed Real Property: Practical Challenges

Determining fair value for contributed real property under ASU 2023-05 requires adherence to ASC 820 measurement principles. In practice, this means obtaining a certified MAI appraisal at or very close to the JV formation date. The timing requirement is a practical challenge: closings move quickly, appraisal procurement takes 3–6 weeks, and the value must reflect conditions at the exact formation date — not months earlier.

Cost allocation between GP and LP is another pressure point. Appraisals for commercial real property in North Fulton can cost $8,000–$25,000 depending on asset complexity. Who bears this cost — and how it is treated in the JV waterfall — must be negotiated and documented in the operating agreement. Disputes between GP and LP over valuation methodology (income approach vs. sales comparison vs. cost approach) can delay formation and affect both parties' economic interests.

For LP investors, the fair value step-up creates a favorable outcome: a higher depreciable basis means more annual depreciation deductions, improving after-tax returns on their equity investment. For GPs who contribute appreciated property, the picture is more nuanced — the step-up in the JV books does not necessarily create a tax event at contribution (Section 721 of the IRC generally provides tax-free contribution treatment), but the deferred tax liability associated with the appreciation must be tracked and addressed in the JV's financial statements.

Implications for GP/LP Economics and Deal Modeling

Pro forma models built before ASU 2023-05 became effective may be materially wrong for post-January 2025 JV formations. The key variables that change under fair value recording are: (1) the annual depreciation deduction, which increases when the depreciable basis is stepped up to fair value; (2) the allocation of that depreciation between GP and LP under the operating agreement; and (3) the deferred tax position of the entity that reflects the difference between book fair value and tax carryover basis.

Consider a simplified example: A GP contributes a multifamily property with a tax basis of $2M and a fair value of $5M to a new JV. The building component (80% of value) is $4M at fair value vs. $1.6M at tax basis. The JV records annual depreciation on the $4M building at 1/27.5 = approximately $145,000 per year. Under the prior carryover approach, depreciation would have been approximately $58,000 per year — a difference of $87,000 annually in depreciation allocated to JV partners. Over a 5-year hold, this represents over $435,000 in additional depreciation deductions, meaningfully affecting LP after-tax returns.

GPs and their counsel must also update standard JV operating agreement language to address ASU 2023-05 compliance: who commissions the appraisal, how valuation disputes are resolved, how deferred tax is tracked and allocated, and what happens if the IRS or state taxing authority challenges the formation-date fair value. These are not theoretical concerns — they are deal-structuring issues that should be resolved before the operating agreement is executed.

What Georgia Operators Should Ask Their Accountants Before the Next JV Close

Before closing any real estate JV formed after January 1, 2025, Georgia operators should present the following questions to a CPA with demonstrated experience in real estate partnership accounting and FASB compliance:

• Is this JV subject to ASU 2023-05, and has the formation date been properly established?
• What third-party appraisal is required, and who will commission and pay for it?
• How does the fair value step-up on contributed property affect the depreciation schedule and LP allocations?
• Does the step-up create a deferred tax liability in the JV financial statements, and how is it presented?
• What is the Georgia state income tax treatment of the contributed property's fair value step-up (the Georgia Department of Revenue follows federal IRC with modifications)?
• Has the operating agreement been updated to reflect ASU 2023-05 compliance requirements including appraisal procurement and valuation dispute resolution?
• If the contributing partner is a corporation or taxable entity, how is the inside/outside basis difference tracked?

The Pillar Partners Compliance Resource Library provides additional frameworks for evaluating compliance requirements in Georgia JV structures. For entity-level legal considerations, the Georgia multi-entity laws guide addresses the state-level overlay. For JV risk management more broadly, the JV risk mitigation resource covers operational and structural risk frameworks relevant to new formations.

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