Accounting for interests
in joint ventures
A.Revathi
Assistant Prof. of Commerce
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-1
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-2
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-4
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)
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-5
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.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-6
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-7
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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-8
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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-9
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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-10
Jointly controlled operations
Where 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.
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-11
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-12
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.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-13
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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-14
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
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Slides prepared by Craig Deegan
34-15
Jointly controlled operations (cont.)
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
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Slides prepared by Craig Deegan
34-16
Jointly controlled operations (cont.)
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-17
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
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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
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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
Copyright  2007 McGraw-Hill Australia Pty Ltd
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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
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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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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Joint venture entities
Sometimes 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.
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
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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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-24
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
Copyright  2007 McGraw-Hill Australia Pty Ltd
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Slides prepared by Craig Deegan
34-25
Disclosure requirements
Disclosure 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
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PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-26
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
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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
Copyright  2007 McGraw-Hill Australia Pty Ltd
PPTs t/a Australian Financial Accounting 5e by Craig Deegan
Slides prepared by Craig Deegan
34-28