34-1 copyright 2007 mcgraw-hill australia pty ltd ppts t/a australian financial accounting 5e by...

34-1 Copyright 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Australian Financial Accounting 5e by Craig DeeganSlides prepared by Craig Deegan

Chapter 34

Accounting for interests in joint ventures


Objectives

• Understand what a joint venture is• Understand that joint ventures are, for accounting purposes, to

be classified as jointly controlled operations, jointly controlled entities, or as involving jointly controlled assets

• Be able to define a jointly controlled operation and be able to provide the necessary accounting entries in the books of the venturer to account for the venturer’s interest in a jointly controlled operation


Objectives (cont.)• Be able to define a jointly controlled entity and understand that a

venturer is to recognise its interest in a jointly controlled entity by using the equity method of accounting

• Be aware that some joint ventures involve simply the joint control of assets, and be able to provide the necessary accounting entries in the books of the venturer to recognise interests in jointly controlled assets


Introduction to accounting for interests in joint ventures

• ‘Joint ventures’ defined in AASB 131 ‘Interests in Joint Ventures’ as being under joint control (stronger than significant influence)

• No one entity usually has control of the joint venture—entities typically not considered to be subsidiaries of parent entity

AASB 131• Addresses how to account for the venturer’s interest in a joint

venture• Does not address how the joint venture itself should prepare its

own financial statements


Joint ventures defined• “A contractual arrangement whereby two or more parties

undertake an economic activity that is subject to joint control”• Joint control is a requirement for an arrangement to be

considered to constitute a joint venture for the purposes of AASB 131

Joint control (AASB 131, par. 3)• The contractually agreed sharing of control over an economic entity,

existing only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers)


Joint ventures defined (cont.)

Further, under AASB 131 (par. 9)

• The existence of a contractual arrangement distinguishes interests

that involve joint control from investments in associates in which the

investor has significant influence (see AASB 128). Activities that

have no contractual arrangement to establish joint control are not joint

ventures for the purposes of this standard.


Joint ventures defined (cont.)• The contractual arrangement between the parties to the joint

venture establishes a number of issues, including the operation

and management of the joint venture

Under AASB 131 (par. 10)

The contractual arrangement may be evidenced in a number of

ways, for example by a contract between the venturers or

minutes of discussions between the venturers. In some cases,

the arrangement is incorporated in the articles or other by-laws

of the joint venture


Joint ventures defined (cont.)AASB 131 (par. 10) (cont.)

Whatever its form, the contractual arrangement is usually in writing and deals with such matters as(a) the activity, duration, and reporting obligations of the joint venture;(b) the appointment of the board of directors or equivalent governing body of the

joint venture and voting rights of the venturers;(c) capital contributions by the venturers; and(d) the sharing by the venturers of the output, income, expenses or results of

the joint venture

AASB 131 (par. 11)The contractual arrangement establishes joint control over the joint venture. Such a requirement ensures that no single venturer is in a position to control the activity unilaterally


Joint ventures defined (cont.)Classifications of joint ventures• Jointly controlled entity

– a separate entity is formed to undertake joint activity

– includes partnerships, trusts, incorporated entities

• Jointly controlled operation– involves shared use of assets, other resources and expertise of

venturers, but no separate entity formed

• Joint controlled assets– involves the joint control by the venturers of one or more assets

contributed to the joint venture


Required accounting treatment

Accounting treatment required for a joint venture will depend on

whether the joint venture is represented by

– a jointly controlled operation

– jointly controlled assets

– a jointly controlled entity


Jointly controlled operationsWhere jointly controlled operation exists the venturer must recogise the assets it controls, the liabilities and expenses it incurs and revenues from its share of the joint venture

Jointly controlled operations (AASB 131, par. 13)• The operation of some joint ventures involves the use of

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 it own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represents its own obligations. The joint venture activities may be carried out by the venturer’s employees alongside the venturer’s 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.


Jointly controlled operations (cont.)Jointly controlled operations (AASB 131, par. 14)– An example of a jointly controlled operation is when two or more

venturers combine their operations, resources and expertise 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, such share being determined in accordance with the contractual arrangement


Jointly controlled operations (cont.)

The interests in joint venture operations must be recognised in the venturer’s own financial statements. AASB 131 (par. 15)

In respect of its interests in jointly controlled operations, a venturer shall recognise in its financial statements

(a) the assets that it controls and the liabilities that it incurs; and

(b) 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.


Jointly controlled operations (cont.)Further guidance concerning accounting for jointly controlled operations is offered in AASB 131 (par. 16) Because the assets, liabilities, income and expenses are

recognised in the financial statements of the venturer, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents a consolidated financial report

Further, AASB 131 (par. 17) states Separate accounting records might not be required for the

joint venture itself and a financial report might not be prepared for the joint venture. However, the venturers may prepare management accounts so that they may assess the performance of the joint venture


Jointly controlled operations (cont.)Disclosure

Disclosure requirements in relation to jointly controlled operations, as outlined in AASB 131, are as follows

In respect of jointly controlled operations and assets, the venturer shall disclose the following information

(a) the name and principal activities of each significant jointly controlled operation or asset;

(b) its percentage interest in the output of each significant jointly controlled operation or asset during the annual reporting period; and

(c) for each category of assets, the aggregate amount employed in jointly controlled operations or assets



Disclosure (cont.)– assets arising from a venturer’s share in the items employed in a

jointly controlled operation are normally included in the venturer’s balance sheet with other assets that have a similar nature or function

– liabilities incurred by a venturer as a result of its interest in a jointly controlled operation are included with other liabilities of the venturer that have a similar nature

– method is referred to as ‘line-by-line’ method—assets in the balance sheet will include both assets controlled by the entity and those that have been contributed by the joint venture

Refer to Worked Example 34.1 on pp. 1188–91—Accounting for a joint venture operation



Transfer of assets to joint venture• Where venturers make contributions of assets to the joint venture, the

value of the contribution is assessed at fair value

• Transfer of assets typically treated as a sale of the ownership proportion of the assets given up

• Where there is a difference between the book value and the fair value of the asset, this difference will typically be treated as a profit or loss on sale


Jointly controlled operations (cont.)Transfer of assets to joint venture (cont.)AASB 131 (par. 48) states– When a venturer contributes or sells assets to a joint venture,

recognition of any portion of a gain or loss from the transaction shall reflect 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 shall recognise only that portion of the gain or loss that is attributable to the interests of the other venturers. The venturer shall recognise 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.

Refer to Worked Example 34.2 on p. 1192—Transfer of assets to a joint venture operation where book value and fair value differ


Jointly controlled assets• Accounting treatment for jointly controlled assets is very similar to

that required for jointly controlled operations

AASB 131 (par. 18)Some joint ventures involve 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 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


Jointly controlled assets (cont.)AASB 131 (par. 19)• These joint ventures do not involve the establishment of a

corporation, partnership or other entity, or a financial structure that is separate from venturers themselves. Each venturer has control over its share of future economic benefits through its share of the jointly controlled asset

AASB 131 (par. 20)• 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. Another example of a jointly controlled asset is when two entities jointly control a property, each taking a share of the rents received and bearing a share of the expenses


Jointly controlled assets (cont.)Accounting requirements for jointly controlled assets (AASB 131, par. 21)

In respect of its interest in jointly controlled assets, a venturer shall recognise in its financial statements

(a) Its share of the jointly controlled assets, classified according to the nature of the assets;

(b) any liabilities that it has incurred;

(c) its share of any liabilities incurred jointly with other venturers in relation to the joint venture

(d) any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and


Jointly controlled assets (cont.)In respect of its interest in jointly controlled assets, a venturer shall recognise in its financial statements (cont.)

(e) any expenses that it has incurred in respect of its interest in the joint venture

Note– Because the assets, liabilities, income and expenses are recognised in the

financial statements of the venturer, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents a consolidated financial report


Joint venture entitiesSometimes joint ventures are undertaken through an entity that has been separately established to undertake the activities concerned

Jointly controlled entity defined (AASB 131, par. 24)– A joint venture that 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

AASB 131 (par. 25)– 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 profits of the jointly controlled entity, although some jointly controlled entities also involve a sharing of the output of the joint venture.


Joint venture entities (cont.)Accounting records required of a jointly controlled entity (AASB 131, par. 28)

– A jointly controlled entity maintains its own accounting records and prepares and presents a financial report in the same way as other entities in conformity with Australian equivalents to IFRSs.

– AASB 131 requires a venturer to account for its interest in a jointly controlled entity using the equity method of accounting


Joint venture entities (cont.)

AASB 131 (par. 38)

• A venturer shall recognise its interest in a jointly controlled entity using the equity method

• A venturer that prepares consolidated financial reports will recognise its investment in a joint venture entity by using the equity method in its consolidated reports (and recording the investment at cost, or at a recoverable amount, in its own financial report). A venturer that is not required to prepare a consolidated financial report will recognise its investment in the associate by using the equity method of accounting in its own financial report


Disclosure requirementsDisclosure requirements of AASB 131 depend on whether

the joint venture is classified as– a jointly controlled operation– jointly controlled assets– a jointly controlled entity (refer to pars Aus 57.2–5)

Contingent liabilities and other commitments– there are requirements to separately disclose

information about contingent liabilities and other commitments that relates to a joint venture regardless of whether it is a jointly controlled entity, jointly controlled operation, or involves jointly controlled assets

– disclosure requirements are addressed in AASB 131, pars 54 and 55


Summary• Joint ventures can be classified as

– jointly controlled assets– jointly controlled operations– jointly controlled entities

• Accounting approaches dependent on classification• Jointly controlled operations—joint ventures that involve the shared

use of assets of the venturers rather than the establishment of a corporation, partnership or other form of entity or a financial structure that is separate from the venturers themselves

• Jointly controlled operation—established by the venturers to obtain individual benefits as opposed to joint or collective profitability, i.e. each venturer derives a share of output from the joint venture operation rather than necessarily shared revenue or profit


Summary (cont.)• Jointly controlled entity—a joint venture that involves the

establishment of a corporation, partnership, or other entity in which each venturer has an ownership interest

• Where an entity has an interest in a jointly controlled operation, the venturer must recognise the assets within the joint venture that it controls, the liabilities and expenses that it incurs in relation to the joint venture and revenues from its share of the output of the joint venture

• Where the joint venture is a jointly controlled entity, the equity method of accounting must be applied in the consolidated accounts of the parent entity and the cost method applied in its own financial reports or, if the venturer does not prepare consolidated accounts, the equity method is to be used in the accounts of the venturer itself

• The equity method of accounting is described in detail in Chapter 33

34-1 copyright 2007 mcgraw-hill australia pty ltd ppts t/a australian financial accounting 5e by...

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