DipIFR-Session27 d08 Interest in JVs

SESSION 27 IAS 31 INTERESTS IN JOINT VENTURES
Accountancy Tuition Centre (International Holdings) Ltd 2008 2701

Overview
Objectives
To define joint ventures.
To describe the accounting treatment for joint ventures.

IAS 31
JOINT
VENTURES
JOINTLY
CONTROLLED
ASSETS
JOINTLY
CONTROLLED
OPERATIONS
JOINTLY
CONTROLLED
ENTITIES
Description
Presentation and
accounting
Description
Presentation and accounting
Transactions between venturer
and a joint venture
Exemptions
Separate financial statements
Investors
Ceasing to be a venturer

Definitions
Forms of joint venture
Characteristics
DISCLOSURE
Contingencies
Interests

Description
Presentation and accounting

1 IAS 31
1.1 Scope
IAS 31 should be applied in accounting for interests in joint ventures and the
reporting of joint venture assets, liabilities, income and expenses in the
financial statements of venturers and investors, regardless of the structures or
forms under which the joint venture activities take place.
However, it does not apply to venturers interests in jointly controlled entities
held by:
venture capital organisations; or
mutual funds, unit trusts and similar entities,
accounted for in accordance with IAS 39 Financial Instruments: Recognition
and Measurement.

Commentary
Such investments are measured at fair value in accordance with IAS 39, with
changes in fair value recognised in profit or loss in the period of the change.
2 Joint ventures
2.1 Definitions
A joint venture is a contractual arrangement whereby two or more parties
undertake an economic activity, which is subject to joint control.
Control is the power to govern the financial and operating policies of an
economic activity so as to obtain benefits from it.
Joint control is the contractually agreed sharing of control over an economic
activity.

Commentary
It exists only when the strategic financial and operating decisions relating to
the activity require the unanimous consent of the joint venturers.
Significant influence is the power to participate in the financial and operating
policy decisions of an economic activity but is not control or joint control
over those policies.
A venturer is a party to a joint venture and has joint control over that joint
venture.
An investor in a joint venture is a party to a joint venture and does not have
joint control over that joint venture.
Proportionate consolidation is a method of accounting and reporting
whereby a venturers share of each of the assets, liabilities, income and
expenses of a jointly controlled entity is:
(1) combined on a line by line basis with similar items in the venturers
financial statements; or
(2) reported as separate line items in the venturers financial statements.
The equity method is a method of accounting and reporting whereby an
interest in a jointly controlled entity is initially recorded at cost and adjusted
thereafter for the post acquisition change in the venturers share of net assets
of the jointly controlled entity. The profit or loss of the venturer includes the
venturers share of the profit or loss of the jointly controlled entity.
2.2 Forms of joint venture
Joint ventures take many different forms and structures. IAS 31 identifies
three broad types:
Jointly controlled operations;
Jointly controlled assets; and
Jointly controlled entities.
2.3 Characteristics
The following characteristics are common to all joint ventures:
two or more venturers are bound by a contractual arrangement; and
the contractual arrangement establishes joint control.

Commentary
No single venturer can be in a position to control the activity unilaterally.
The contractual arrangement will usually be in writing and cover:
the activity, duration and reporting obligations of the joint venture;
the appointment of the board of directors or equivalent governing
body of the joint venture and the voting rights of the venturers;
capital contributions by the venturers; and
the sharing by the venturers of the output, income, expenses or
results of the joint venture.

Commentary
One venturer may be the operator or manager under the terms of the
agreement. They will carry out the policy of the joint venture as agent for,
and as agreed by, the venturers. If they are able to govern the financial and
operating policies of the economic activity, they control the venture. If so,
the venture is a subsidiary of the operator and not a joint venture.
3 Jointly controlled operations
3.1 Description
The operation of some joint ventures involves the use of the assets and other resources
of the venturers rather than the establishment of a corporation, partnership or other
entity, or a financial structure that is separate from the venturers themselves.
Each venturer uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises its own
finance, which represent its own obligations.
The joint venture activities may be carried out by the venturers employees
alongside the venturers similar activities.
The joint venture agreement usually provides a means by which the revenue
from the sale of the joint product and any expenses incurred in common are
shared among the venturers.
Illustration 1 Jointly controlled operations

Two or more venturers combine their operations, resources and expertise in order to
manufacture, market and distribute jointly a particular product, such as an aircraft.
Different parts of the manufacturing process are carried out by each of the venturers.
Each venturer bears its own costs and takes a share of the revenue from the sale of the
aircraft, as determined in the contractual arrangement.

3.2 Presentation and accounting
A venturer should recognise in its separate financial statements:
the assets that it controls and the liabilities that it incurs; and
the expenses that it incurs and its share of the income that it earns
from the sale of goods or services by the joint venture.

Commentary
As the assets, liabilities, income and expenses are recognised in the financial statements
of the individual venturers, no separate financial statements for external use are
required for the venture. No adjustments or consolidation procedures are required in
respect of those items in any consolidated accounts produced by the venturers.
Each venturer will usually maintain a joint venture account (as part of its management
accounts) in which all transactions they enter into on behalf of the venture are recorded.

Commentary
At end of each period a memorandum joint venture account is prepared
which combines all expenses and income from individual joint venture
accounts, in order to calculate the profit/loss to date. The profit/loss arising
is then split in the agreed profit sharing ratios.
Points for consideration
Transfer of goods between ventures should be ignored (since it does
not change who paid for the goods).
Expenses borne by one venturer only:
(1) Record expense as normal
Dr Joint venture x
Cr Cash x
(2) Remove expense from memorandum account.
(3) Adjust joint venture account of venturer who will bear expense:
Dr Expense x
Cr Joint venture x

Worked example 1

Q, a sound engineer, and R, a lighting engineer, entered into a joint venture to stage a
concert. They agreed to purchase certain items of equipment needed to convert their
local hall into a suitable venue, book the performers and sell tickets. Both are self-
employed and decided to record all transactions in joint venture accounts within their
own business books.
Q purchased a number of radio microphones for $400. He also paid $150 for the
printing of tickets and programmes.
R purchased a computerised lighting deck for $600 and paid a total of $2,000 to the
performers. She also paid $800 for the rental of the hall.
Q sold 200 tickets at $12 each. R sold 500.
After the concert, Q and R prepared a pint venture account. They agreed that they
would each retain the equipment they had purchased at a valuation of $150 for the
microphones and $350 for the lighting deck. Q and R also agreed to share profits in
the ratio 2 to 3.
Rather than liquidate the venture, they decided to form a limited company (QR). Each
would contribute the equipment purchased for the concert, valued at the amounts
agreed earlier. They would also leave a total of $800 of the cash raised from the
concert in the company, allocated to each in such a way that their investment was
equal. Q and R would be the sole shareholders and each would receive a number of $1
shares equal in value to his/her investment.
Required:
(a) Prepare a memorandum joint venture account for the concert and the
subsequent appropriation of profit.
(b) Prepare joint venture accounts for Q and R which show the amounts
invested by each in QR.
(c) Prepare the statement of financial position of QR as would have
appeared immediately after the companys incorporation.

Worked solution 1
(a) Memorandum Joint Venture Account Q and R
$ $
Sales (200 + 500 $12) 8,400
Expenses:
Cost of equipment (600 + 400) 1,000
Less: Retained (150 + 350) (500)

Net cost of equipment 500
Tickets and programmes 150
Rental 800
Performers 2,000 3,450

Net profit (4,950)

Allocated:
Q (2/5) 1,980
R (3/5) 2,970 4,950

(b) Joint Venture accounts
Q R
Bank equipment 400 600
printing 150
rents 800
performers 2,000
Profit 1,980 2,970
Balance c/d 20

2,550 6,370

Balance b/d 20
Equipment 150 350

Bank 520 280

670 650

Q R
Bank tickets 2,400 6,000

Equipment 150 350

Balance c/d 20

2,550 6,370

Balance b/d 20
Shares in QR 650 650

670 650

Q will invest equipment of $750 and cash of $520
R will invest equipment of $350 and cash of $280
(c) QR Statement of financial position on incorporation
$
Non-current assets (150 + 350) 500
Bank 800

1,300

Share capital (650 + 650) 1,300

4 Jointly controlled assets
4.1 Description
This type of joint venture involves the joint control, and often the joint
ownership, by the venturers of one or more assets contributed to, or acquired
for the purpose of, the joint venture and dedicated to the purposes of the joint
venture.
The assets are used to obtain benefits for the venturers.
Each venturer may take a share of the output from the assets and each bears
an agreed share of the expenses incurred.
These joint ventures do not involve the establishment of a corporation,
partnership or other entity, or a financial structure that is separate from the
venturers themselves. Each venturer has control over its share of future
economic benefits through its share in the jointly controlled asset.
Illustration 2 Jointly controlled assets

Many activities in the oil, gas and mineral extraction industries involve jointly
controlled assets. For example, a number of oil production companies may jointly
control and operate an oil pipeline. Each venturer uses the pipeline to transport its own
product in return for which it bears an agreed proportion of the expenses of operating
the pipeline.

Each venturer should include the following items in its accounting records
and recognise them in its separate financial statements (and consequently in
its consolidated financial statements if the venturer is part of a group):
its share of the jointly controlled assets, classified according to the
nature of the assets rather than as an investment;
any liabilities which it has incurred on behalf of the joint venture, (e.g.
in financing its share of the assets);
its share of any joint liabilities incurred in relation to the joint venture;
its share of income the joint venture, together with its share of any
expenses incurred by the joint venture; and
any expenses that it has incurred in respect of its interest in the joint venture.

Commentary
As with jointly controlled operations, no separate financial statements for external use
are required for the venture. No adjustments or consolidation procedures are
required in respect of the jointly controlled asset in any consolidated accounts
produced by the venturers. Again, management accounts will usually be used to
assess the performance of the joint venture.
5 Jointly controlled entities
5.1 Description
This is a joint venture, which involves the establishment of a corporation,
partnership or other entity in which each venturer has an interest.
The entity operates in the same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over the
economic activity of the entity.
A jointly controlled entity controls the assets of the joint venture, incurs
liabilities and expenses and earns income. It may enter into contracts in its
own name and raise finance for the purposes of the joint venture activity.
Each venturer is entitled to a share of the results of the jointly controlled
entity, although some jointly controlled entities also involve a sharing of the
output of the joint venture.
Illustration 3 Jointly controlled entities

An entity may commence a business in a foreign country in conjunction with the
government or other agency in that country, by establishing a separate entity which is
jointly controlled by the entity and the government or agency.

Commentary
A jointly controlled entity maintains its own accounting records and prepares and
presents financial statements (e.g. under IFRS) in the same way as other entities.
Each venturer usually contributes cash or other resources to the jointly controlled
entity. These contributions are included in the accounting records of the venturer and
recognised in its financial statements as an investment in the jointly controlled entity.
A venturer shall recognise its interest in a jointly controlled entity using
either proportionate consolidation or the equity method.
5.2.1 Proportionate consolidation
The application of proportionate consolidation means that the statement of
financial position of the venturer includes its share of the assets that it controls
jointly and its share of the liabilities for which it is jointly responsible.
The statement of comprehensive income of the venturer includes its share of
the income and expenses of the jointly controlled entity.

Commentary
Note that the venturer may be a single entity or a group (in which case the
statement of financial position and statement of comprehensive income will
be consolidated statements).
Different reporting formats may be used:
The venturer may combine its share of each of the assets, liabilities,
income and expenses of the jointly controlled entity with similar
items in its financial statements on a line-by-line basis.

Commentary
For example, it may combine its share of the jointly controlled entitys
inventory with the inventory of the consolidated group and its share of the
jointly controlled entitys property, plant and equipment with the same items
of the consolidated group.
Alternatively, the venturer may include separate line items for its
share of the assets, liabilities, income and expenses of the jointly
controlled entity in its consolidated financial statements.
Worked example 2

Purple Inc owns 80% of Sepia and 40% of Jade. Jade is a jointly controlled entity.
Statements of financial position of the three companies at 31 December 2007 are:
Purple Sepia Jade
$ $ $
Investment: shares in Sepia 800
Investment: shares in Jade 600
Other non-current assets 1,600 800 1,400
Current assets 2,200 3,300 3,250

5,200 4,100 4,650

Share capital $1 ordinary shares 1,000 400 800
Retained earnings 4,000 3,400 3,600
Liabilities 200 300 250

5,200 4,100 4,650

Purple acquired its shares in Sepia many years ago when Sepias retained earnings
were $520. Purple acquired its shares in Jade at the beginning of the year when Jades
retained earnings were $400.
The balance of goodwill relating to Serpia had been written off as impaired three years
ago.The value of goodwill in respect of Jade remains unchanged at 31 December 2007.
Required:

Prepare the consolidated statement of financial position at 31 December 2007
incorporating the interest in Jade using proportionate consolidation.

Worked solution 2
Purple Inc: Consolidated statement of financial position as at 31 December 2007
$
Goodwill (W1) 120
Non-current assets (1,600 + 800 + (40% 1,400)) 2,960
Current assets (2,200 + 3,300 + (40% 3,250) 6,800

9,880

Share capital 1,000
Retained earnings (W4) 7,520

8,520
Non-controlling interests (20% (400 + 3,400)) 760
Liabilities (200 + 300 + (40% 250) 600

9,880

WORKINGS
(1) Goodwill
$
In joint venture (W3) 120
In subsidiary (W2) 64
In subsidiary amortised or written off as impaired (64)

In statement of financial position 120

(2) Goodwill in subsidiary
$
Cost of investment in subsidiary 800
Net assets of subsidiary on acquisition
(400 + 520) 80% (736)

Goodwill 64

(3) Goodwill in joint venture

$
Cost of investment in joint venture 600
Net assets of joint venture on acquisition
(800 + 420) 40% (480)

Goodwill 120


(4) Consolidated retained earnings

$
Purple 4,000
Sepia post-acquisition (3,400 520) 80% 2,304
Jade post-acquisition (3,600 400) 40% 1,280
Goodwill impaired (64)

7,520

5.2.2 Equity method
In its consolidated financial statements, a venturer should report its interest in
a jointly controlled entity using the equity method as described by IAS 28
(see previous session).
The use of the equity method is supported by those:
who argue that it is inappropriate to combine controlled items with
jointly controlled items; and
who believe that venturers have significant influence, rather than
joint control, in a jointly controlled entity.
However, IAS 31 does not recommend the use of the equity method because
proportionate consolidation better reflects the substance and economic reality of
a venturers interest in a jointly controlled entity (i.e. control over the venturers
share of the future economic benefits.

Commentary
Nevertheless, it permits the use of the equity method when recognising
interests in jointly controlled entities.
A venturer should discontinue the use of proportionate consolidation or the
equity method from the date on which it ceases to have joint control over, or
(for the equity method) have significant influence in, a jointly controlled
entity.
5.3 Transactions between venturer and a joint venture
When a venturer contributes or sells assets to a joint venture, recognition of
any portion of a gain or loss from the transaction reflects the substance of the
transaction.
While the assets are retained by the joint venture, and provided the venturer
has transferred the significant risks and rewards of ownership, the venturer
recognises only that portion of the gain or loss that is attributable to the
interests of the other venturers.
The venturer recognises the full amount of any loss when the contribution or
sale provides evidence of a reduction in the net realisable value of current
assets or an impairment loss.
When a venturer purchases assets from a joint venture, the venturer does not
recognise its share of the profits of the joint venture from the transaction until
it resells the assets to an independent party.

Commentary
A venturer recognise its share of the losses resulting from these transactions
in the same way as profits except that losses are recognised immediately
when they represent a reduction in the net realisable value of current assets
or an impairment loss.
Worked example 3
Alpha Group and Beta Group set up a joint venture, Gamma. Alpha owns 60% of Gamma whilst Beta
owns the remaining 40%.
Alpha sells to the joint venture a piece of land for $2m making a profit of $500,000 on the assets
carrying value. At the year end, the land remains in the books of the Gamma.
Required:
Show the entries that would be made in the consolidated accounts of Alpha Group to reflect the
sale of the land.

Worked solution 3
Portion of gain realised by Alpha group = 40% $500,000 = $200,000
Therefore the remaining 60% of the gain ($300,000) has not yet been realised by the
Alpha group and should be eliminated on consolidation.
On consolidation the following adjustment will be made:
Dr Profit or loss (retained earnings) 300,000
Cr Land 300,000
This eliminates Alphas unrealised share of the profit and reduces the land to $900,000, in effect
Alphas share of the carrying value prior to the sale to Gamma ($1,500,000 60%).
5.4 Exemptions to proportionate consolidation and equity methods

Commentary
The exemptions are basically the same as for interests in associates under
IAS 28 and subsidiaries under IAS 27
If the investment in a jointly controlled entity is classified as held for sale account for as
required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
If the investor is also a parent company within a group that has elected not to
present consolidated financial statements measure the investment at cost or in
accordance with IAS 39.
The investment in the associate will be measured at cost or in accordance with
IAS 39 if all of the following apply:
the venturer is a wholly-owned subsidiary (or partially-owned and
other owners do not object); and
the venturers debt or equity instruments are not traded in a public
market; and
the venturer does not file its financial statements with a securities
regulator; and
the ultimate (or any intermediate) parent of the venturer produces
consolidated financial statements available for public use under IFRS.

Commentary
This allows investors who do not have investments in a subsidiary, but only
have an investment in a jointly controlled entity, to be exempt from the
requirement to use proportionate consolidation or the equity method on the
same basis as parents under IAS 27.
5.5 Separate financial statements of a venturer
An interest in a jointly controlled entity is accounted for:
Under IFRS 5 if classified as held for sale; or
At cost or in accordance with IAS 39.
5.6 Reporting the interests of an investor
An investor in a joint venture that does not have joint control accounts for
that investment in accordance with IAS 39 or, if it has significant influence in
the joint venture, in accordance with IAS 28.
5.7 Ceasing to be a venturer in a joint venture
From the date on which a jointly controlled entity becomes a subsidiary of a
venturer, the venturer accounts for its interest in accordance with IAS 27.
From the date on which a jointly controlled entity becomes an associate of a
venturer, the venturer accounts for its interest in accordance with IAS 28.
6 Disclosure
A venturer shall disclose the method it uses to recognise its interests in jointly
controlled entities.
6.1 Contingencies
A venturer should disclose the aggregate amount of the following contingent
liabilities, unless the probability of loss is remote, separately from the amount
of other contingent liabilities:
any contingent liabilities hat the venturer has incurred in relation to
its interests in joint ventures and its share in each of the contingent
liabilities which have been incurred jointly with other venturers;
its share of the contingent liabilities of the joint ventures themselves
for which it is contingently liable; and
those contingencies that arise because the venturer is contingently
liable for the liabilities of the other venturers of a joint venture.
A venturer discloses the aggregate amount of any capital commitments in
respect of its interests in joint ventures separately from other commitments.
6.2 Interests
A venturer should list and describe interests in significant joint ventures and
the proportion of ownership interest held in jointly controlled entities.
A venturer which reports its interests in jointly controlled entities using the
line by line reporting format for proportionate consolidation or the equity
method should disclose the aggregate amounts of each of:
current assets
long-term assets
current liabilities
long-term liabilities
income and expenses related to its interests in joint ventures.

Illustration 4

Scope of consolidation (extract)

Five joint ventures the same number as in the previous year are included by proportionate
consolidation in compliance with IAS 31 (Interests in Joint Ventures). Excluded
from consolidation are 103 subsidiaries that in aggregate are immaterial to the net worth,
financial position and earnings of the Bayer Group; they account for less than 0.3 percent
of Group sales, less than 0.7 percent of stockholders equity and less than 0.4 percent of
total assets.

The effect of joint ventures on the Group balance sheet and income statement is as
follows:

2006 2006
million million
Current assets 21 Income 59
Noncurrent assets 56 Expenses (64)
Current liabilities (30)
Noncurrent liabilities (9)
Net assets 38 Income after taxes (5)

Notes to the Consolidated Financial Statements of the Bayer Group 2006

7 Consolidation methods Summary
The three consolidation methods give the same results as is shown by the following:
Worked example 4

Entity M has acquired 50% of Entity X.
Entity X Summary statement of financial position at year end
$
Non-current assets 600
Net current assets 400
_____
1,000
_____
Capital 200
Retained earnings 800
_____
1,000
_____
Statement of comprehensive income for the year
$
Revenue 600
Costs (400)
___
Profit 200
___
Required:
Calculate the net assets and profit of Entity X which will be included in the
consolidated financial statements of Entity M if Entity X is:
(a) a subsidiary;
(b) an associate;
(c) a jointly-controlled entity (using proportional consolidation).

Worked solution 4
(a) Subsidiary (b) Associate (c) Joint venture
$ $ $
Non current 600 300
Net current 400 200
Investment in A 500
Non-controlling interests (500)
___ ___ ___
500 500 500
___ ___ ___
Included in
consolidated retained earnings 500 500 500
___ ___ ___

(a) Subsidiary (b) Associate (c) Joint venture
$ $ $
Revenue 600 300
Costs (400) (200)
Income from A 100
Non-controlling interests (100)
___ ___ ___
Profit for year 100 100 100
___ ___ ___

Focus
You should now be able to:
define joint ventures (i.e. jointly controlled operations, assets and entities);
distinguish between equity accounting and proportional consolidation;
describe and prepare accounts under the two formats of proportional
consolidation;
prepare consolidated financial statements to include a single subsidiary and a
joint venture (under both methods).

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SESSION 27 IAS 31 INTERESTS IN JOINT VENTURES

Accountancy Tuition Centre (International Holdings) Ltd 2008 2701

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