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SAP AG 2007 eBook - Joint Venture Accounting


THE BEST-RUN BUSI NESSES RUN SAP
I OGW40
J oi nt Vent ur e Ac c ount i ng
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SAP AG 2007 eBook - Joint Venture Accounting
Joint Venture Configuration (in IMG)
4.1 Company Code Configuration
4.2 Master Data Configuration
4.3 Processing Configuration
4.4 JV Billing Configuration
Unit 4
Periodic Processes
3.1 Cutback
3.2 Month End Processing
3.3 Joint Venture Billing
Unit 3
Day-to-Day Processes
2.1 Data Entry
2.2 Operated Accounting
Unit 2
Basics
1.1 Introduction & Accounting Principles
1.2 Master Data
1.3 Integration
Unit 1
JVA Workshop - IOGW40
This online learning course consists of four units. Each unit is divided into several separate
lessons so you can work with one lesson for a longer time if necessary. However, we
recommend that you complete each unit in the defined sequence in order to understand the
solution better.
After you have completed the e-books in all four units, you should have a good
understanding of joint venture accounting concepts, be able to set up and manage basic joint
venture contracts using the SAP JVA solution, and have good knowledge of the breadth and
capabilities of the SAP JVA functions.
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SAP AG 2007 eBook - Joint Venture Accounting
By the end of this lesson, you will be
able to:
Define joint venture accounting concepts
Explain the accounting principles behind
SAP JVA
Unit 1.1 Objectives
By the end of this lesson, you will be able to define joint venture accounting concepts and to
explain the accounting principles behind SAP JVA.
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SAP AG 2007 eBook - Joint Venture Accounting
Introduction of JVA Concepts
JVA 1.1
The first topic of lesson 1 explains joint venture accounting concepts.
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SAP AG 2007 eBook - Joint Venture Accounting
Joint
Venture
Apples
Joint
Venture
Apples
Joint
Venture
Oranges
Joint
Venture
Oranges
Farmer A
Farmer B Shop
Joint
Venture
Carrots
Joint
Venture
Carrots
What is a Joint Venture?
Sometimes, several companies can jointly run a business venture more successfully than an
individual company can. The companies can combine efforts for that one venture without
merging their businesses. Such projects are known as joint ventures.
In the example shown here, a shopkeeper and two farmers enter a joint venture. The
shopkeeper provides the capital, transportation, and shop space while the farmers provide
the produce. The three partners share profits and losses from the joint venture as agreed
between them.
The companies can run several joint ventures between them, but each venture is separate.
The agreements for each joint venture can be different or they can be shared. Each
company participating in a joint venture is referred to as a partner.
SAP Joint Venture Accounting or SAP JVA was designed for the upstream oil industry so all
the examples relate to upstream oil companies. Such companies regularly enter into joint
ventures for exploration purposes, and to develop and maintain oil and gas production
facilities.
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SAP AG 2007 eBook - Joint Venture Accounting
Joint
Venture
2
Joint
Venture
2
Joint
Venture
3
Joint
Venture
3
Joint
Venture
1
Joint
Venture
1
Partner A
Partner B
Plan future activities of venture
Run day-to-day activities of
venture
Maintain accounting records for
venture
Report venture activity to
partners
Report profit or loss to partners
Operator
Who Runs a Joint Venture?
Sometimes, one partner takes responsibility for the day-to-day running of the joint venture.
This partner is the operator. The operator also manages the joint venture accounts and must
send profit and loss reports to the other partners.
The remaining partners, who do not operate the venture, are referred to as the non-
operating partners.
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SAP AG 2007 eBook - Joint Venture Accounting
Risk
Investment
Resources
Companies can share
Why Are Joint Ventures Used?
Companies enter joint ventures for several reasons, such as to share risks, to share the burden
of large or lengthy investments, and to share personnel or other resources.
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SAP AG 2007 eBook - Joint Venture Accounting
Non-Operating Partners
Maintain accounting records for
their own share of the venture
Settle accounts with the
operating partner, according to
the conditions of the venture
Operating Partner
Manages the venture on a day-to-day
basis
Maintains venture accounting records
Calculates partner shares of venture
expenditure and revenue
Reports venture activity to partners
SAP JVA
In a typical oil industry joint venture, one partner acts as the operator.
The operator is responsible for managing the venture on a day-to-day basis, maintaining the
venture accounting records, calculating partner shares of venture expenditure and revenue,
and reporting venture activity to the partners.
The non-operating partners are responsible for maintaining accounting records for their own
share of the venture and settling accounts with the operating partner, according to the
conditions of the venture.
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SAP AG 2007 eBook - Joint Venture Accounting
Accounting Principles
The second topic of
lesson 1 describes the
accounting principles
behind SAP JVA.
JVA 1.1
The second topic of lesson 1 describes the accounting principles behind SAP JVA.
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SAP AG 2007 eBook - Joint Venture Accounting
100
2 50
150 1
Partner Account
Account name
Debit entry
Credit entry
Final balance
of account
Asset account Liability account Capital account
Increase Increase Increase Decrease Decrease Decrease
150
1 150
JV Costs
50
50 2
JV Bank
Notes
1. Partner share of venture costs
2. Settle partner account
T Accounts
Accounting principles are often illustrated using T accounts.
As with other forms of bookkeeping, JVA uses a double entry system. Each accounting
transaction requires at least two entries, one debit and one credit. You usually make the
entries to different accounts. For example, if you purchase an asset using a check, the
transaction is recorded as a debit entry to an asset account and a credit entry to a bank
account.
These transactions are displayed in T accounts. Debits are shown on the left side of the T
and credits on the right.
One important feature of double entry bookkeeping is that the sum of all entries always
equals zero.
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SAP AG 2007 eBook - Joint Venture Accounting
Company B Company A
Notes
1. Company A incurs
costs running the
venture.
2. Company A calculates
company Bs share of
costs as 40%.
3. Company B accounts
for its own share of
costs.
4. Company B
reimburses company
A.
4 40
40 2
Partner B
60
40 4
1 100
Venture Bank
60
2 40
100 1
Venture Costs
40 4
3 40
Venture Account
4 40
Own Bank
40 3
Venture Costs
Operator Oriented Accounting
In this example, company A operates a joint venture and holds a 60% share. Company B is
the only other venture partner. The accounting steps are as follows:
In step 1, the operator, company A, incurs costs of 100 on behalf of the venture. In this example,
the costs are paid directly from the venture bank. This is done to simplify the example even
though not all ventures have their own bank accounts. Typically, only large ventures use this
operating method. In recent years even large ventures tend to be funded from shared bank
accounts.
In step 2, company A calculates 40% of the costs and charges these costs to the account for the
partner, company B.
In step 3, company A notifies company B of the costs incurred, and company B records its own
40% share of these costs in its books.
In step 4, company B reimburses company A. Funds are transferred from the company B bank
to the venture bank and the partner accounts are cleared.
Company A combines accounting records for the activities within the venture with those for
its own activity. This ensures simple accounting entries, however, great care is needed when
reporting because venture activities and a companys own activities are represented by sub-
balances in accounts. Particular care is needed when reimbursing the venture for the
operator share of costs.
In the oil industry, this accounting method is used mainly by US and Canadian companies
that traditionally operate many small joint ventures.
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SAP AG 2007 eBook - Joint Venture Accounting
Operating Co. Company A
Venture
Notes
1. Company A incurs
costs while running
the venture.
2. Company A
calculates the share
of costs for partner A
and partner B.
3. Company A accounts
for its own share of
costs.
4. Company B accounts
for its own share of
costs.
5. Company A
reimburses the
venture.
6. Company B
reimburses the
venture.
5 60
60 2
Partner A 60%
40 6
60 5
1 100
Venture Bank
2 40
2 60
100 1
Venture Costs
60 5
3 60
Venture Account
60
5 60
Own Bank
60
60 3
Venture Costs
Company B
40 6
4 40
Venture Account
40
6 40
Own Bank
40
40 4
Venture Costs
6 40
40 2
Partner B 40%
Partner Oriented Accounting
Company A operates a joint venture and holds a 60% share. The venture has one other
partner, company B. Company A creates a special operating company in which to record the
venture accounts separately from its own accounts. Sometimes a real legal entity is created
for a large venture. In the oil industry, this would be an exception. The accounting steps are
as follows:
In step 1, the venture incurs costs of 100. These are paid directly from the venture bank to
simplify the example.
In step 2, company A assumes 60% of the costs, and 40% of the costs are charged to company
B.
In step 3, company A records its 60% share of the costs in its own books.
In step 4, company A notifies company B of the costs incurred, and company B records its 40%
share of the costs in its books.
In step 5, company A reimburses the venture. Funds are transferred from the company A bank
to the venture bank and the partner accounts are cleared.
In step 6, company B reimburses the venture. Funds are transferred from the company B bank
to the venture bank and the partner accounts are cleared.
In this method, the operator, company A, keeps separate accounting records for activities
within the venture and for its own activity. This means more accounting entries are required,
but reporting for venture activity and a companys own activity is clear and simple.
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SAP AG 2007 eBook - Joint Venture Accounting
Company A
Company Venture
Notes
1. Company A incurs
costs running the
venture.
2. Company A
calculates the share
of costs for partner
A and partner B.
3. Company A
accounts for its own
share of costs.
4. Company B
accounts for its own
share of costs.
5. Company A
reimburses the
venture.
6. Company B
reimburses the
venture.
5 60
60 2
Partner A 60%
40 6
60 5
1 100
Venture Bank
2 40
2 60
100 1
Venture Costs
60 5
3 60
Venture Account
60
5 60
Own Bank
60
60 3
Venture Costs
Company B
40 6
4 40
Venture Account
40
6 40
Own Bank
40
40 4
Venture Costs
6 40
40 2
Partner B 40%
Operator and Partner Accounting
Company A operates a joint venture and holds a 60% share. Company B is the only other
venture partner. Company A records the venture accounts separately from its own accounts,
but as the same company. The accounting steps are as follows:
In step 1, the venture incurs costs of 100. These are paid directly from the venture bank to
simplify the example.
In step 2, company A assumes 60% of the costs, and 40% of the costs are charged to company
B.
In step 3, company A records its 60% share of the costs in its own books.
In step 4, company A notifies company B of the costs incurred and company B records its 40%
share of the costs in its books.
In step 5, company A reimburses the venture. Funds are transferred from the company A bank
to the venture bank and the partner accounts are cleared.
In step 6, company B reimburses the venture. Funds are transferred from the company B bank
to the venture bank and the partner accounts are cleared.
With this method, the operator, company A, keeps separate accounting records for activities
within the venture and for its own activity. This means more accounting entries are required,
but reporting for venture activity and a companys own activity is clear and simple.
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SAP AG 2007 eBook - Joint Venture Accounting
Expenditure based
Invoice based
Cash based
Joint venture partners are billed for their share of expenditure
using the following types of billing basis:
Billing Basis
Billing basis refers to the point in the procurement cycle at which joint venture partners are
charged for their share of expenditure.
When billing is expenditure based, partners are charged as soon as expenditure is incurred,
such as when venture materials are received at the warehouse.
When billing is invoice based, partners are charged when the operator receives an invoice
for venture services or materials.
When billing is cash based, when the operator pays for services and materials for the
venture, partners are charged when funds actually leave the operators bank account.
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SAP AG 2007 eBook - Joint Venture Accounting
Venture
100
100 1
Expenditure
100 3
2 100
Vendor
100
3 100
Venture Bank
100 2
1 100
GRNI Accruals
B
i
l
l
a
b
l
e
N
o
n
-
B
i
l
l
a
b
l
e
Notes
1. Expenditure is
incurred in
month 1.
2. An invoice is
received in
month 2.
3. An invoice is
paid in month
3.
JV Billing Month 1
100 Total
100 Expenditure
JV Billing Month 2
0 Total
0 Expenditure
JV Billing Month 3
0 Total
0 Expenditure
Billing Basis: Expenditure Based
Expenditure based billings are calculated using transactions from expenditure accounts only.
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SAP AG 2007 eBook - Joint Venture Accounting
Venture
100
100 1
Expenditure
100 3
2 100
Vendor
100
3 100
Venture Bank
100 2
1 100
GRNI Accruals
B
i
l
l
a
b
l
e
N
o
n
-
B
i
l
l
a
b
l
e
Notes
1. Expenditure is
incurred in
month 1.
2. An invoice is
received in
month 2.
3. An invoice is
paid in Month
3.
JV Billing Month 1
0 Total
-100 GRNI Accruals
100 Expenditure
JV Billing Month 2
100 Total
0 GRNI Accruals
100 Expenditure
JV Billing Month 3
0 Total
0 GRNI Accruals
0 Expenditure
Billing Basis: Invoice Based
Invoice based billings are calculated using transactions from expenditure accounts and from
accruals accounts, such as the goods received, not invoiced (GRNI) account.
The balance in the accruals accounts offsets the value of expenditure, resulting in a zero
billing until the accrual is reversed by an incoming invoice.
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SAP AG 2007 eBook - Joint Venture Accounting
Venture
100
100 1
Expenditure
100 3
2 100
Vendor
100
3 100
Venture Bank
100 2
1 100
GRNI Accruals
B
i
l
l
a
b
l
e
N
o
n
-
B
i
l
l
a
b
l
e
Notes
1. Expenditure
incurred in
month 1.
2. Invoice
received in
month 2.
3. Invoice paid in
month 3.
JV Billing Month 1
0 Total
0 Vendor
-100 GRNI Accruals
100 Expenditure
JV Billing Month 2
0 Total
-100 Vendor
0 GRNI Accruals
100 Expenditure
JV Billing Month 3
100 Total
0 Vendor
0 GRNI Accruals
100 Expenditure
Billing Basis: Cash Based
Invoice based billings are calculated using transactions from expenditure accounts, from
accruals accounts, and from payable accounts.
The balance in the accruals and the payables accounts offsets the value of expenditure,
resulting in a zero billing until the accrual balance is reversed by an incoming invoice and the
payable balance is reversed by an outgoing payment.
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SAP AG 2007 eBook - Joint Venture Accounting
You are now able to:
Define joint venture accounting concepts
Explain the accounting principles behind
SAP JVA
Unit 1.1 Summary
You are now able to:
Define joint venture accounting concepts
Explain the accounting principles behind SAP JVA

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