lOMoARcPSD|7749282
AFAR 06 Joint Arrangements
Accountancy (University of the Philippines System)
StuDocu is not sponsored or endorsed by any college or university
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
ADVANCE FINANCIAL ACCOUNTING AND REPORTING
Handout 06: Joint Arrangements
Instructor: J. Cayetano
Introduction
Effective January 1, 2013, PFRS 11 – Joint Arrangements superseded PAS 31 – Interest in Joint Ventures and
also SIC 13 – Jointly Controlled Entities.
Joint Arrangement
Defines by PFRS 11 as a contractual agreement whereby two or more parties undertake an economic activity
that is subject to joint control. This means no single venturer or operator should be in a position to control
the joint arrangement unilaterally. Each venturer/operator that participates in the joint control of the joint
arrangement must be identified and disclosed appropriately.
Joint Control
Is the contractually agreed sharing of control of an arrangement, which exists only when the decisions about
the relevant activities require the unanimous consent of the parties sharing control. The relevant activities of
an arrangement are those that significantly affect the investee’s returns and the investor must have the power
and capability to affect these variable returns to which it is exposed, or has rights, under the terms of the
contractual agreement. Often, the agreement among the parties is in writing but not always.
It is clear from the above discussions that not all joint business activities are joint arrangements as referred
to PFRS 11. Under PFRS 11, a Joint Arrangement is either a Joint Operation or a Joint Venture.
Joint Operation
Refers to a type of joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangements. Joint Operators are the
parties to a joint operation that has joint control. A joint arrangement is classified as joint operation when:
1. The arrangements are not structured through a separate vehicle (i.e., the arrangement are structured
through a contractual arrangement only). Note that a separate vehicle is the legal entity established for
purpose of the joint arrangements.
2. The arrangements are structured through separate vehicles and:
a. The legal form of the separate vehicle does not cause the vehicle to be considered in its own right (i.e.,
the assets and liabilities placed in the separate vehicle are the assets and liabilities of the parties and
not the assets and liabilities of the separate vehicle).
b. The arrangement is structured in a separate vehicle that can be considered in its own right but the
terms agreed by the parties in their contractual arrangement modify the features of the legal form
and cause the assets and liabilities held in the separate to the parties’ assets and liabilities.
Joint Venture
Refers to the type of joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement. Joint Venturers are the parties to a joint venture that has joint
control. Joint ventures are arrangements structured in separate vehicles that have the following features:
a. The legal form of the separate vehicle and contractual terms agreed by the parties do not confer on the
parties’ rights to the assets and obligations for the liabilities of the activities carried out; and
b. They have been designed to have a trade on their own, which makes them face directly the risks arising
from activities such as, demand, credit or inventory risk.
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Separate Vehicle
Refers to a separately identifiable financial structure, including separate legal entities or entities recognized
by statute, regardless of whether those entities have a legal personality.
Joint Operations VS. Joint Venture
Joint operations
Criteria for Classification
Rights of parties
No separate juridical personality or
with weak juridical personality for
being mere alter ego of joint
operation.
Rights to the assets, and
obligations for the liabilities,
relating to the arrangement.
Presence of investment
account
Accounting Method
Joint venture
Strong juridical personality separate
and distinct from its joint venturers.
Rights to the net assets of the
arrangements.
None
With investment account (Investment
in Joint Venture)
Contract Based (Based on the
contractual provision of joint
arrangement of the operators)
Equity method under PAS 28
Accounting for Joint Operation (JO)
1. Sale or contribution – when an entity enters into a transaction with a joint operation in which it is a joint
operator, such as a sale or contribution of noncash assets, it is conduction the transaction with the other
parties to a joint operation and, as such, the joint operator shall recognize gains and losses resulting from
a transaction only to the extent of the other parties’ interest in the joint operation.
Fair value of noncash asset contributed to JO
Carrying amount of noncash asset contributed to JO
Difference (change in value)
Times: 100% - percentage of share in JO
Gain to be recognized
Less:
P
(
P
XX
XX)
XX
X%
XX
2. Financial statements of parties to a joint operation.
A joint operator recognizes in relation to its interest in a joint operation:
• Its unshared assets, including its share of any assets held jointly;
• Its unshared liabilities, including its share of any liabilities incurred jointly;
• Its revenue from the sale of its share of the output of the joint operation;
• Its share of the revenue from the sale of the output by the joint operation;
• Its expenses, including its share of any expenses incurred jointly;
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in
a joint operation in accordance with the relevant PFRSs.
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Accounting for Joint Venture (JV)
An entity shall apply first PFRS 11 to determine the type of arrangement in which it is involved. If the entity
determines that tit has an interest in a joint venture, the entity shall recognize its interest as investment and
account for it using the equity method in accordance with PAS 28 Investment in Associates and Joint Ventures,
unless the entity is exempted from applying the equity method as specified in that standards.
Under equity method, the investment is initially recognized at cost and subsequently adjusted for the
investor’s share in the changes in the equity of the investee. Such share includes the investor’s share in the
investee’s:
1. Profit or loss
2. Dividends
3. Other comprehensive income
Balance sheet – The investment in joint venture account will be presented in the entity’s balance as of yearend using the following formula:
Investment in Joint Venture
Initial measurement (at cost)
XX
Share in profit of JV
XX
XX
Share in net loss of JV
Share in Other Comprehensive Inc. of JV
XX
Share in Other. Comprehensive Loss of JV
XX
Dividends received
XX
Impairment loss (CA-RA)
Carrying amount at year-end
XX
Income statement – The related income statement account for investment in joint venture is the share in the
net profit or loss of the JV. However, the net profit of the JV should be adjusted first by the inter-company
transaction and the amortization of intercompany transaction.
Net profit reported in JV’s book
Times: Percentage of ownership interest
Unadjusted share in net profit of JV
P
P
XX
X%
XX
Intercompany Transaction
Intercompany gain shall be deducted to the unadjusted share in net profit.
Intercompany loss shall be added back to the unadjusted share in net profit.
Intercompany gain or loss is computed as follows:
Selling price
Times: Carrying amount
Intercompany gain (loss)
P
P
XX
X%
XX
There are two types of intercompany transactions, namely:
1. Down-stream – Sale of Joint venturer to the joint venture.
2. Up-stream – Sale of the joint venture to the joint venturer.
•
•
For down-stream transaction - full elimination of intercompany gain or loss shall be made.
For up-stream transaction – the portion of intercompany gain or loss to be eliminated is equal to the
intercompany gain or loss multiply by the percentage of ownership.
Amortization of Intercompany Gain or Loss
When the intercompany gain or loss is realized through sale to third party (for inventories and nondepreciable asset) or through passage of time (for depreciable asset), it will be once again recorded.
The amortization of intercompany gain should be added back.
The amortization of intercompany loss should be deducted.
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Amount of amortization
a. For inventory – amortization is equal to intercompany gain or loss multiply by the percentage sold to third
party.
b. For depreciable asset – amortization is equal to intercompany gain or loss divided by the remaining useful
life on the date of sale.
c. For non-depreciable asset – amortization is 100% recognized once sold to third party.
Joint Venture (JV) for SME
PFRSs for SMEs provide three (3) methods of accounting for its interest in the joint venture:
a. The equity method;
b. The cost model;
c. The fair value model;
Equity method
Cost model
Fair value model
Cost + transaction cost
Cost + transaction cost
Cost only
Capitalized
Capitalized
Expensed
Recognized as
investment income
Ignored
Ignored
Recognized as deduction
to investment account
Recognized as dividend
income
Change in FV of
investment
Ignored
Ignored
Recognized as
dividend income
Recognized as
unrealized gains or
loss
Impairment loss
With impairment loss
With impairment loss
Initial measurement
Transaction cost
Share in profit of the JV
Cash dividend
No impairment loss
If published price quotations are available, use of the cost model is not allowed. In the absence of published
price quotation the method to be used is deemed to be a matter of choice.
Illustration 01 – Joint Operations, Contribution
On January 1, 2021, Entity A and Entity B enter into a contractual agreement to form a joint arrangement
deemed to be a joint operation. Their agreement provides that Entity A will contribute land with a fair value
of P9,000,000 (book value P8,000,000) and machinery with a fair value of P3,000,000 (net book value
P2,000,000).
Entity B will contribute P8,000,000 in cash. It was further agreed that they will share output, assets and future
contribution in the ratio of 60:40 for Entity A and Entity B, respectively.
Q1:
What is the journal entry to record the formation of the joint operation in the books of Entity A?
A. Dr. Investment in Joint Operation
4,000,000
Cr. Land
2,000,000
Cr. Machinery
800,000
B. Dr. Investment in Joint Operation
Cr. Land
Cr. Machinery
4,800,000
3,600,000
1,200,000
C. Dr. Cash
Cr. Land
Cr. Machinery
Cr. Profit on sale of land
Cr. Profit on sale of machinery
4,800,000
3,200,000
800,000
400,000
400,000
D. Dr. Investment in Joint Operation
Cr. Land
Cr. Machinery
Cr. Asset revaluation
4,800,000
3,200,000
800,000
800,000
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Q2:
What is the journal entry to record the formation of the joint operation in the books of Entity B?
A. Dr. Land
Dr. Machinery
Cr. Investment in Joint Operation
3,600,000
1,200,000
B. Dr. Investment in Joint Operation
Cr. Cash
4,800,000
4,800,000
C. Dr. Land
Dr. Machinery
Cr. Cash
3,600,000
1,200,000
4,800,000
D. Dr. Investment in Joint Operation
Cr. Cash
4,800,000
4,800,000
4,800,000
Illustration 02 – Joint Operations, Revenue and Expenses
Entity A, Entity B and Entity C sign an agreement to collectively purchase an oil pipeline and to hire a company
to manage and operate the pipeline on their behalf. The cost involved in running the pipeline and the revenue
earned from the pipeline are shared by the three parties based on their ownership interest.
All major operating and financing decisions related to the pipeline must be agreed to by the three companies.
The cost of purchasing the pipeline was P1400,000. The pipeline has an estimated 20-year life with no residual
value. The management fee for operating the pipeline for 2021 was P28,000,000. Revenue earned from the
pipeline was P46,200,000. Entity A invested P42,000,000 for a 30% interest.
Q1:
Compute the share of Entity A in the revenue of the joint operation for 2021:
A. 28,000,000
C. 13,860,000
B. 42,000,000
D. 3,360,000
Q2:
Compute the share of Entity A in the expense of the joint operations for 2021:
A. 8,400,000
C. 10,500,000
B. 2,100,000
D. 13,860,000
Q3:
Compute the share of Entity A’s net income in the joint operation for 2021:
A. 3,360,000
C. 13,860,000
B. 42,000,000
D. 28,000,000
Illustration 03 – Joint Venture, Share in Profit and Carrying Amount
On January 1, 2021, ABC Company entered into joint agreement classified as joint venture. For an investment
of P500,000, ABC Company obtained 40% interest in Joint Venture, Inc.
During the year, Joint Ventures, Inc. reported profit of P1,000,000 and other comprehensive income of
P500,000, for a total comprehensive income of P1,500,000. Joint Venture, Inc. declared dividends of P600,000
during the year.
Q1:
How much is the share in profit of the joint venture?
A. 200,000
C. 400,000
B. 360,000
D. 500,000
Q2:
How much is the share in OCI of the joint venture?
A. 200,000
C. 400,000
B. 360,000
D. 500,000
Q3:
How much is the carrying amount of investment in joint venture on December 31, 2021?
A. 240,000
C. 500,000
B. 360,000
D. 860,000
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Illustration 04 – Joint Venture, Intercompany Transaction (Upstream, Inventory)
On January 1, 2021, Entity A, a public entity and Entity B, a public entity incorporated Entity C by investing
P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of the incorporating
entities provides that the decisions on relevant activities of Entity C will require the unanimous consent of both
entities. Entity A and Entity B will have rights to the net asset of Entity C.
The financial statements of Entity C provide the following data for its two-year operation:
• Entity C reported net income in the amount of P1,000,000 and net loss of P500,000 for year 2021 and
2022, respectively.
• Entity C declared dividends in the amount of P400,000 and P100,000 for year 2021 and 2022
respectively.
• During 2021, Entity C sold inventory to Entity A with gross profit of P50,000. 80% of those inventories
were resold by Entity A to third persons during 2021 and the remainders were resold to third persons
during 2022.
Q1:
What is the investment income to be reported by Entity A for the year ended December 31, 2021?
A. 603,000
C. 594,000
B. 606,000
D. 597,000
Q2:
What is the investment loss to be reported by Entity A for the year ended December 31, 2022?
A. 603,000
C. 594,000
B. 606,000
D. 597,000
Q3:
What is the balance of Investment in Entity (i.e., Investment in Joint Venture) to be reported by Entity A
on December 31, 2021?
A. 3,600,000
C. 3,354,000
B. 3,400,000
D. 3,360,000
Q4:
What is the balance of Investment in Entity (i.e., Investment in Joint Venture) to be reported by Entity A
on December 31, 2022?
A. 3,300,000
C. 3,354,000
B. 3,000,000
D. 3,360,000
Illustration 05 – Joint Venture, Intercompany Transaction (Up-stream, Depreciable)
Tatay Company owns 20% interest in Joint Venture, Inc. and uses the equity method to account for its interest
in the joint venture. Tatay has joint control over Joint Venture, Inc. On January 1, 2021, Joint Venturer Inc.
sold equipment with a carrying amount of P100,000 and a remaining useful life of 10 years to Tatay Company
for P120,000. Gain of P20,000 was recorded by Joint Venturer Inc.
Both Tatay and Joint Venture Inc., use the straight-line method of depreciation. Joint Venture, Inc. reports
profit of P1,000,000 in 2021.
Q1:
The share in the profit of the Joint Venture is:
A. 182,000
C. 220,000
B. 218,000
D. 180,000
Q2:
Assuming the sale is a downstream sale, the share in profit of the Joint Venture is
A. 196,400
C. 182,000
B. 203,600
D. 218,000
Illustration 06 – Joint Venture, Intercompany Transaction (Up-stream, Inventory)
Red Notice Company owns 20% interest in Franco, Inc. and uses the equity method to account for its interest
in the joint venture. Red Notice has joint control over Franco, Inc. On January 1, 2021, Red Notice sold
equipment with a carrying amount of P100,000 and a remaining useful life of 10 years to Franco, Inc. for
P120,000. Gain of P20,000 was recorded by Red Notice and Franco uses straight line method of depreciation.
Q1:
How much is the adjusted share in profit of joint venture for 2021?
A. 182,000
C. 180,000
B. 200,000
D. 212,000
Downloaded by adrienne (adrienneimmaculate@gmail.com)
lOMoARcPSD|7749282
Illustration 06 – Joint Venture, Small and Medium Enterprise
On January 1, 2021, Entity A and Entity B, both SMEs, incorporated Entity C, a jointly controlled entity by
investing P500,000 each in exchange for 10,000 ordinary shares each of Entity C. Entity A and Entity B each
incurred P20,000 transaction costs.
The contractual agreement of the incorporating entities provides that the decisions on relevant activities of
Entity C will require the unanimous consent of both entities. Entity A and Entity B will have rights to the net
assets of Entity C.
For the year ended December 31, 2021, Entity C reported net income of P150,000 and declared dividends in
the amount of P30,000. On December 31, 2021, the shares of stock of Entity C are quoted at P57 and cost to
sell is P10,000.
Assume Entity A used Equity Method:
Q1:
What is the net effect in Entity A’s profit or loss for the year 2021 from its investment in Entity C?
A. 75,000 net profit
C. 85,000 net profit
B. 55,000 net profit
D. 15,000 net profit
Q2:
What is the carrying amount of investment in Entity C as of December 31, 2021?
A. 520,000
C. 560,000
B. 570,000
D. 580,000
Assume Entity A used Cost Method:
Q3:
What is the net effect in Entity A’s profit or loss for the year 2021 from its investment in Entity C?
A. 75,000 net profit
C. 85,000 net profit
B. 55,000 net profit
D. 15,000 net profit
Q4:
What is the carrying amount of investment in Entity C as of December 31, 2021?
A. 520,000
C. 560,000
B. 570,000
D. 580,000
Assume Entity A used Fair Value Method:
Q5:
What is the net effect in Entity A’s profit or loss for the year 2021 from its investment in Entity C?
A. 55,000 net profit
C. 85,000 net profit
B. 65,000 net profit
D. 70,000 net profit
Q6:
What is the carrying amount of investment in Entity C as of December 31, 2021?
A. 520,000
C. 560,000
B. 570,000
D. 580,000
Downloaded by adrienne (adrienneimmaculate@gmail.com)