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Accounting for Collaborative Arrangements [Virtual Joint Venture] A collaborative arrangement (sometimes referred to in practice as “line-item” joint ventures or “virtual” joint ventures) is a contractual agreement between two or more parties (participants) to jointly conduct business activities for their mutual benefit without the formation of a separate entity in which to conduct the activities. These types of arrangements are commonly used for such purposes as producing motion pictures; designing and developing hardware and/or software; or developing new pharmaceutical drugs.


Determining the proper accounting treatment for the various activities included in these endeavors is the subject of EITF 07-1, Accounting for Collaborative Arrangements ratified by FASB on December 12, 2007, effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2008.

Joint Operating Activities

As previously mentioned, collaborative arrangements are used to conduct many different types of business activities.

Examples of joint operating activities:

A collaborative arrangement may involve various types of activities conducted or supervised by the participants including, but not limited to research, development, branding, promotion, sales, marketing, order processing, package design, manufacturing, and distribution.

In some collaborative arrangements, a legal entity may be used for certain specified activities or in certain geographic jurisdictions due, for example, to legal restrictions imposed by the jurisdiction.

The participants’ roles and responsibilities vary between arrangements but can be structured where certain responsibilities are shared between the participants and other responsibilities are solely the responsibility of one of the participants.

Scope of Pronouncement of a Collaborative Arrangement [EITF 07-1]

Under EITF 07-1, an activity (referred to as an “endeavor”) that is the subject of a joint operating arrangement is characterized as a collaborative arrangement within the scope of the pronouncement if:

Active Involvement

In evaluating whether a participant is active with respect to an endeavor, management is to consider the arrangement’s specific facts and circumstances.

Examples of involvement that could constitute active participation include, but are not limited to:

Note: Solely providing financial resources to an endeavor would not constitute an active level of involvement for the purposes EITF 07-1.

Significant Risks and Rewards

Management of a participant is to exercise its best judgment in evaluating whether the participant is exposed to significant risks and entitled to significant rewards. Consideration is to be given to the terms and conditions of the arrangement and the facts and circumstances surrounding it including:

Examples of terms and conditions of an arrangement that may indicate that a participant is not exposed to significant risks or entitled to significant rewards include:

Frequently, a collaborative arrangement will involve the license of intellectual property with the participants to the arrangement exchanging consideration with respect to the license at the arrangement’s inception. The existence of terms of this nature are not necessarily indicative of the participants not being exposed to significant risks or entitled to significant rewards.

Timing of Determination or Re-determination

A participant may become involved in a collaborative arrangement at any time during the life cycle of the endeavor. From the perspective of a participant, determination of whether an endeavor is a collaborative arrangement is to be made at the inception of the arrangement or when the participant initially becomes involved in the arrangement based on the facts and circumstances existing at that time. A participant is to reevaluate whether the arrangement continues to qualify as a collaborative arrangement any time there is a change in a participant’s role in the arrangement or a change in a participant’s exposure to risks or entitlement to rewards from the arrangement.

Accounting For Transactions Conducted In A Separate Legal Entity

Any transactions associated with the endeavor that are conducted in a separate legal entity are to be accounted for under other applicable accounting pronouncements such as:

Accounting For Transactions with Unrelated Third Parties

A participant in a collaborative arrangement is to recognize revenue earned and costs incurred in transactions with third parties (parties that are not participants to the collaborative arrangement) in its income statement based on whether the participant is serving as a principal or an agent in the transaction under ASC 605-45:

Under no circumstances is a participant in a collaborative arrangement permitted to use the equity method of accounting to account for its activities associated with the collaborative arrangement.

ASC 605-45 does not provide a “bright-line” test that definitively would characterize the role of a participant in a transaction. Rather, it provides a series of indicators of gross reporting and a series of indicators of net reporting, the purpose of which is to enable management to analyze the facts and circumstances associated with the transaction to make a well-reasoned determination.

Indicators of Gross Reporting (Principals)

Indicators of Net Reporting (Agents)

Accounting For Transactions between Participants

In evaluating the income statement characterization of transactions between participants to a collaborative arrangement, management is to consider:

If no authoritative GAAP is identified that is relevant directly or by analogy, management is to elect a reasonable and rational accounting policy to be consistently applied to all such similar transactions.

Disclosure of Collaborative Arrangement

The following disclosures apply to the entire endeavor characterized as a collaborative arrangement, even if a portion of the endeavor is being conducted through the use of a legal entity.

A participant to a collaborative arrangement is required to disclose in the initial interim or annual period of its participation in the arrangement and all annual periods thereafter:

Note: Disclosures are to be made separately for each individually significant collaborative arrangement in which the reporting entity participates.

Curiously, the standard did not require disclosure of the nature, classification, and amounts of revenues and costs recognized in the income statement from transactions between the participant and third parties. The authors believe that management should voluntarily include such disclosures to supplement the disclosures listed above, as that information is exceedingly relevant to users of the financial statements to enable them to assess the relative significance of the arrangements to the reporting entity’s financial performance.


EITF 07-1 is to be adopted through retrospective application to all prior periods presented for all collaborative arrangements existing as of the effective date of the consensus. If it is not practical to retrospectively apply the consensus, management is to disclose both the reasons why reclassifications were not made and the effect of the reclassification on the current period in accordance with ASC 250-10-45.

The determination of whether retrospective application is practical is to be made on an arrangement-by-arrangement basis. In the period of initial application, a participant is to disclose:

Matters for Which Guidance Is Not Provided

Although the consensus is quite complex, the EITF took great pains to point out several matters that are not covered by the consensus and that require careful scrutiny of other authoritative literature and the exercise of professional judgment. The scope of 07-1 specifically excludes:

[1]. Arrangements for which the accounting treatment is addressed by other authoritative literature,

[2]. Guidance regarding matters such as:

Tags: Accounting For Collaborative ArrangementsAccounting For Transactions Between ParticipantsAccounting For Transactions Conducted In A Separate LegAccounting For Transactions With Unrelated Third PartieActive InvolvementDisclosure Of Collaborative ArrangementEITF 07-1Examples Of Joint Operating ActivitiesIndicators Of Gross Reporting (Principals)Indicators Of Net Reporting (Agents)Joint Operating ActivitiesLine-Item Joint VenturesScope Of Pronouncement Of A Collaborative ArrangementSignificant Risks And RewardsTiming Of Determination Or Re-DeterminationVirtual Joint Ventures

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