CPA Review & Training Center
Urdaneta City, Pangasinan
AFAR-0106
Joint Arrangement
A joint arrangement is an agreement of which two or more parties have joint control.
A joint arrangement has the following characteristics:
(a) The parties are bound by a contractual arrangement. An enforceable contractual arrangement is often, but not
always in writing, usually in the form of a contract between the parties. Joint arrangements may be structured through a
separate vehicle. When joint arrangements are structured
through a separate vehicle, the contractual
arrangements will in some cases be incorporated in the articles, or by-laws of the separate vehicle.
(b) The contractual arrangement gives two or more of those parties joint control of the arrangement.
Separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognized by
statute, regardless of whether those entities have a legal personality. This maybe in the form of a partnership or
corporation
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about
the relevant activities require the unanimous consent of the parties sharing control.
TYPES OF JOINT ARRANGEMENT
A joint arrangement is either a joint operation or a joint venture.
A Joint Operation is a 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 arrangement. Those parties are called joint operators.
A joint operator shall recognize in relation to its interest in a joint operation:
(a) Its assets, including its share of any assets held jointly;
(b) Its liabilities, including its share of any liabilities incurred jointly;
(c) Its revenue from the sale of its share of the output arising from the joint operation;
(d) Its share of the revenue from the sale of the output by the joint operation; and
(e) Its expenses, including its share of any expenses incurred jointly.
A Joint Venture is a joint arrangement whereby the parties that have joint control of the arrangement have right to the
net assets of the arrangement. Those parties are called joint venturers. This type is usually structured through a
separate vehicle (a partnership or corporation).
A joint venture shall recognize its interest in a joint venture as an investment and shall account for that investment using
the equity method.
Under the equity method, on initial recognition the investment in joint venture is recognized a t cost, and the carrying
amount is increased or decreased to recognize the venturer’s share of the profit or loss of the joint arrangement after
the date of acquisition. Distributions received from the joint arrangement reduce the carrying amount of the
investment. The venturer’s share of the profit or loss is recognized in the venture’s profit or loss.
PROBLEMS
**Use for 1-3**
A and B (the parties) are two companies whose businesses are the construction of many types of public
and private construction services. They set up a contractual arrangement to work together for the purpose of
fulfilling a contract with the government for the construction of a motor way between two cities for P24
million (a fixed price contract).
The contractual arrangement determines the participation shares of A and B and establishes:
a. Joint control of the arrangement;
b. The rights to all the assets needed to undertake the activities of the arrangement are shared by the
parties
on the basis of their participation shares in the arrangement;
c. The parties have joint responsibility for all operating and financial obligations relating to the activities of the
arrangement on the basis of their participation shares in the arrangement; and
d. The profit or loss resulting from the activities of the arrangement is shared by A and B on the basis of
their participation shares in the arrangement.
In 2013, in accordance with the agreement between A and B:
A and B each used their own equipment and employees in the construction activity
A constructed three bridges needed to cross rivers on the route at a cost of P8 million
B constructed all of the other elements of the motorway at a cost of P10 million.
A. ALVAREZ
CPA Review & Training Center
Urdaneta City, Pangasinan
AFAR-0106
Joint Arrangement
A and B shares equally in the P24 million jointly invoiced (and received from) the government.
1. What is the gross profit of the joint arrangement?
a. P8million
b. P14million
c. P6million
d. P4million
2. What is the gross profit earned by A in 2013?
a. P6million
b. P14million
c. P4million
d. P2million
3. What is the gross profit earned by B in 2013?
a. P2million
b. P14million
c. P7million
d. P6milllion
**Use for 4-6**
Two real estate companies, R and S (the parties) set up a separate vehicle (entity X) for the purpose of
acquiring and operating a shopping centre. The contractual arrangement between the parties establishes joint
control of the activities that are conducted by entity X. The main feature of entity X’s legal form is that
entity, not the parties, has rights to the assets, and obligations for the liabilities, relating to the arrangement.
These activities include the rental of the retail units, managing the car park, maintaining the centre and its
equipment, such as lifts, and building the reputation and customer base for the centre as a whole.
The terms of the contractual arrangement are such that:
(a) Entity X owns the shopping centre. The contractual arrangement does not specify that the parties have
rights to the shopping centre.
(b) The parties are not liable in respect of the liabilities of entity X. if entity X is unable to pay any of
its liabilities, the liability of each to any third party will be limited to the parties unpaid contribution.
(c) The parties have the right to sell or pledge their interests in entity X.
(d) Each party receives a share of the income from the shopping centre (which is the rental income net
of the operating costs) in accordance with interests in entity X.
Transactions of the contractual arrangement for 2012 and 2013 follow:
2012:
Co. R and Co. S contributed P10 million each for one-half interest in the net assets of Entity X.
Organization expenses incurred amounts to P100,000.
Entity X acquired land at a cost of P2 million.
Constructed a building (shopping centre) at a cost of P15 million.
Operating expenses for the year amounts to P1 million.
Rental income collected from the tenants, P10 million.
Net income or loss is distributed to the venturers in accordance with their interest
2013:
Operating expenses (including depreciation) incurred for the year, P3.5 million
Rental income collected for the year, P12 million
Each venturer receives a share of the income or loss from rental income net of the operating
expenses.
4. What is the interest of Co. R in the joint venture as of December 31, 2012?
a. P14M
b. P14.45M
c. P15M
d. P20M
5. What is the net income (loss) of Entity X on December 31, 2013?
a. P8.5M
b. P12M
c. P15.5M
d. P10.5M
6. What is the interest of Co. S in the joint arrangement as of December 31, 2013?
a. P18.7M
b. P14.5M
c. P10.0M
d. P14.0M
A. ALVAREZ
AFAR-0106
CPA Review & Training Center
Urdaneta City, Pangasinan
Joint Arrangement
**Use For Item 7-9**
On January 1, 2013, Red, White and Blue (the joint operators) jointly buy a helicopter for P30 million
cash. The joint arrangement includes the following arrangements:
a. The parties are joint owners of the helicopter.
b. The helicopter is at the disposal of each party for 70 days each year.
c. The parties may decide to use the helicopter or lease it to a third party.
d. The maintenance and disposal of the helicopter require the unanimous consent of the parties.
e. The contractual arrangement is for the expected life (20 years) of the helicopter and can be change only
if all the parties agree. The residual value of the helicopter is NIL.
f. Revenues and expenses are to be shared equally among the joint operators.
In 2013, the parties paid P300,000 to meet the costs of maintaining the helicopter.
In 2013 each party also incurred costs of running the helicopter when they made use of the helicopter (eg
Red incurred costs of P200,000 on pilot fees, aviation fuel and landing costs). In 2013 the parties earned
rental income of P2.5 million by renting the helicopter to others.
7. What is the net income (loss) of the joint arrangement on December 31, 2013?
a. P5M
b. P2M
c. P1.5M
d. P2.5M
8. What is the book value of the helicopter on the books of Red on December 31, 2013?
a. P28.5M
b. P19M
c. P21M
d. 9.5M
9. What is the share of White in the net income (loss) of the joint arrangement on December 31, 2013?
a. P166,667
b. P150,000
c. P125,000
d. P160,000
**Use for Item 10-11**
Banks A and B (the parties) agreed to combine their corporate, investment banking, asset management
and service activities by establishing a separate vehicle (bank X). Both parties expect the arrangement to
benefit them in different ways.
The assets and liabilities held in Bank X are the assets and liabilities of Bank X and not the assets and
liabilities of the parties. Banks A and B each have a 40 percent ownership interest in Bank X, with the
remaining 20 percent being listed and widely held. The stockholders’ agreement between bank A and bank
B establishes joint control of the activities of bank X.
Transactions for the year 2013 and 2014 follow:
Investments:
Bank
Bank
Revenues
Cost and expenses
Dividends paid -
A
B
2013
P50M
2014
P5M
50M
10M
6M
5M
12M
7M
4M
Bank X
10. What is the interest of bank A in the joint arrangement at December 31, 2013?
a. P50M
b. P48.4M
c. P48M
d. P40M
11.What is the interest of bank B in the joint arrangement at December 31, 2014?
a. P52.5M
b. P52.4M
c. P54.5M
d. P50.5M
A. ALVAREZ