Accounting for Joint Ventures

ObjectivesTo explain the types of Joint Venture and its characteristics

To differentiate the financial reporting methods of JV between ventures book and investors book

IntroductionFRS 131 Financial Reporting of Interest in JV, para 3Joint Venture a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control Joint control the contractually agreed sharing of control over an economic activity, when two or more parties (venturers) must consent to all major strategic decisions.

IntroductionVenturer a party to a joint venture and has joint control over that joint venture

Control the power to govern the financial and operating policies of an economic activity/enterprise so as to obtain benefits from it.

Contractual ArrangementContract between venturers, minutes of discussions between venturers, arrangement in articles or other by-laws of JV in writingDeals with:the activity, duration & reporting obligationAppointment of BOD & voting right of the venturersCapital distribution by venturersSharing of output, income, expenses or result

Forms of Joint VenturesJointly controlled operationsJointly controlled assetsJointly controlled entities

Jointly Controlled Operations

when two or more venturers combine their operations, resources and expertise in order to produce, market and distribute jointly productNo establishment of a corporationEach venturers carried out a different manufacturing processEach venturers uses his own assets & incurs its own expensesShares of revenue from the selling of product based on contractual agreementEg: aircraft

Jointly controlled operations

Accounting treatment:No separate accounting records are required for the JV itself & FS may not be prepared for the JV (no consolidation procedures required)A venturer should recognise in its separate financial statements and cfs:the assets that is controls and liabilities that it incursThe expenses that it incurs and its share of the income that it earns from the sale of goods or services by the JV

Jointly Controlled Assets

involve the joint control and joint ownership by the venturers of one or more assets contributed to acquired for the purpose of JV.No establishment of a corporationEach venturers takes a share of output and agreed share of expensesEg: oil & gas industry an oil pipeline

Jointly controlled assetsAccounting treatment:

A venturer should recognise in its separate financial statements and cfs:share of the jointly controlled assetsAny liabilities which is has incurredShare of any liabilities incurred jointlyAny income from the sale of output of JV and expenses incurred in JVAny expenses which it has incurred in respect of interest in JV

Jointly Controlled Entitiesinvolves the establishment of a corporation, partnership or other entity in which each venturer has an interest.The joint venture have its own set of accounts and FSThe venturers entitled to share of the results of joint ventureVenturers contribution to JV-investment for venturer & capital contribution for JV

Jointly controlled entitiesAccounting treatment:In consolidated financial statements, shall report its interest in JV entities using: (FRS 131)i) Proportionate consolidation: or-recognize share of the assets and liabilities that it jointly control and responsiblerecognize share of the income and expenses of the jointly controlled entityii) Equity method:- investment in the jointly controlled entities is initially recorded at cost and the carrying amount is subsequently adjusted to recognise the venturers share of the profits and losses of Jointly Controlled Entities.

Exemption from applying Proportionate consolidation or the Equity method If interest in JV is acquired and held with a view to its disposal within 12 months of acquisition (FRS 131).Reason of operating under severe long-term restrictions- is not acceptable anymore. Joint control must be lost before the methods cease to apply.

Jointly controlled entities

ExampleExample 5.15 (TLT pg 311-315)Proportionate consolidation methodEquity method