Deegan5e Sm Ch34

8/20/2019 Deegan5e Sm Ch34

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Chapter 34

Accounting for interests in joint ventures

34.1 A joint venture is defined in AASB 131 as a contractual arrangement whereby two or more

parties undertake an economic activity that is subject to joint control. he contractualarrangement between the parties establishes the operation and management of the jointventure. he economic activity being undertaken by the entity is the subject of joint control!if one organisation controlled the venture then it would not be classified as a joint venture".

#n relation to $joint control%& paragraph 3 of AASB 131 states'

(oint control is the contractually agreed sharing of control over an economic activityand e)ists only when the strategic financial and operating decisions relating to theactivity re*uire the unanimous consent of the parties sharing control !the venturers".

(oint ventures can be established through the creation of a separate entity+a jointlycontrolled entity. (oint ventures can also e)ist when a separate entity has not been established

but where the arrangement involves the shared used of assets& other resources and e)pertiseof the venturers+such joint ventures are referred to as jointly controlled operations. ,herethe joint venture simply involves the joint control of one or more assets then such anarrangement is referred to as $jointly controlled assets%. As AASB 131 states'

(oint ventures take many different forms and structures. his Standard identifies three broad types+jointly controlled operations& jointly controlled assets and jointlycontrolled entities+that are commonly described as& and meet the definition of& jointventures. he following characteristics are common to all joint ventures'!a" two or more venturers are bound by a contractual arrangement- and!b" the contractual arrangement establishes joint control.

34. (oint ventures can take many different forms and structures& such as partnerships& trusts& andincorporated entities. ,here a separate entity is formed& the joint venture is referred to as a

joint venture entity. (oint ventures can also e)ist even when a separate joint venture entity hasnot been established. #n such a situation the joint venture can simply involve the shared use of assets and other resources of the venturers. Such a joint venture would be referred to as a

joint venture operation. he accounting treatment re*uired for a joint venture entity isdifferent from that re*uired for a joint venture operation. #n relation to a joint ventureoperation& paragraphs 13 and 14 of AASB 131 state'

13. he operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation& partnershipor other entity& or a financial structure that is separate from the venturersthemselves. /ach venturer uses its own property& plant and e*uipment and carries itsown inventories. #t also incurs its own e)penses and liabilities and raises its ownfinance& which represent its own obligations. he joint venture activities may becarried out by the venturer%s employees alongside the venturer%s similar activities.he joint venture agreement usually provides a means by which the revenue from thesale of the joint product and any e)penses incurred in common are shared among theventurers.

14. An e)ample of a jointly controlled operation is when two or more venturers combinetheir operations& resources and e)pertise to manufacture& market and distribute

Solutions 0anual ta Australian Financial Accounting 2e by raig eegan 3451



jointly a particular product& such as an aircraft. ifferent parts of the manufacturing process are carried out by each of the venturers. /ach venturer bears its own costsand takes a share of the revenue from the sale of the aircraft& such share beingdetermined in accordance with the contractual arrangement.

#n relation to a jointly controlled entity& paragraphs 4 and 2 of AASB 131 state'

4. A jointly controlled entity is a joint venture that involves the establishment of acorporation& partnership or other entity in which each venturer has an interest. heentity operates in the same way as other entities& e)cept that a contractualarrangement between the venturers establishes joint control over the economicactivity of the entity.

2. A jointly controlled entity controls the assets of the joint venture& incurs liabilitiesand e)penses and earns income. #t may enter into contracts in its own name andraise finance for the purposes of the joint venture activity. /ach venturer is entitledto 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.

34.3 he accounting treatment re*uired for a joint venture operation is different to the treatmentre*uired for a joint venture entity. ,here a joint venture operation e)ists& the venturer mustrecognise the assets it controls& liabilities and e)penses it incurs& and revenues from its shareof the output of the joint venture. As paragraph 1 of AASB 131 states& a venturer%s interestsin joint venture operations must be recognised in the venturer%s own financial report byincluding in its respective classification categories'

!a" its share of the jointly controlled assets& classified according to the nature of theassets-

!b" any liabilities that it has incurred-!c" its share of any liabilities incurred jointly with the 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 e)penses incurred by the joint venture- and!e" any e)penses that it has incurred in respect of its interest in the joint venture.

he recognition of the above items is subject to the usual re*uirements pertaining to$measurability% and $probability%.

#n relation to accounting for an interest in a joint venture entity& AASB 131 re*uires that aventurer that prepares consolidated financial reports will recognise its investment in aventurer by using the e*uity method in its consolidated reports. A venturer that is notre*uired to prepare a consolidated financial report will recognise its investment in theassociate by using the e*uity method of accounting in its own financial report. As paragraph36 of AASB 131 states'

A venturer shall recognise its interest in a jointly controlled entity using the e*uitymethod.

34.2 he answer to this *uestion depends upon whether the joint venture is a joint venture entity&or a joint venture operation. #f it is a joint venture operation& AASB 131 re*uires that aventurer%s interest in joint ventures shall be brought to account by including& in their respective asset classification categories& the amount of the venturer%s share in each of theindividual assets employed in the joint ventures. As paragraphs 12 and 17 of AASB 131 state'




12. #n respect of its interests in jointly controlled operations& a venturer shall recognisein its financial statements'!a" the assets that it controls and the liabilities that it incurs- and!b" the e)penses that it incurs and its share of the income that it earns from the

sale of goods or services by the joint venture.

17. Because the assets& liabilities& income and e)penses are recognised in the financialstatements of the venturer& no adjustments or other consolidation procedures arere*uired in respect of these items when the venturer presents consolidated financialstatements.

he method re*uired by AASB 131 is fre*uently referred to as the line by line method.Applying this method will result in the assets in the balance sheet including both those assetsthat are controlled by the entity& and those that have been contributed to the joint venture!and hence are under joint control".

#f the joint venture is a joint venture entity then the e*uity method of accounting shall beapplied. his method of accounting does not involve the separate disclosure of the venturer%sshare of the various assets and liabilities of the joint venture.

34.7 his will occur when a venturer has an interest in a joint venture operation. ,hether it isappropriate to mi) a venturer%s proportional share of the net assets of a joint ventureoperation with its other assets is a matter of opinion. 8bviously those responsible for developing the Accounting Standard believe it to be appropriate. An issue is& however& thelevel of control the reporting entity has over the assets contributed to the joint venture. #f theentity does not have control !and control relates to the capacity of the entity to benefit fromthe asset in the pursuit of its objectives and to deny or regulate the access of others to that

benefit" then perhaps& conceptually& it should not include the assets in the balance sheet. anan entity have differing levels of control9 #s it appropriate to combine the assets where thereare differing levels of control9

34.: !Appreciation to ;eter <eet for supplying this *uestion"!a"he venture between Simon =td and Anderson =td is a joint venture& because'

• he oil e)ploration and development venture is jointly controlled by Simon and

Anderson'

• Simon and Anderson jointly make all decisions relating to the e)ploration and

development venture. >AASB 131.3& definition of joint control?-

• here is a contractual arrangement between Simon and Anderson& the joint ventureagreement- and

• he oil e)ploration and development venture is an economic activity.

>AASB 131.3& definition of (oint @enture?.

he (oint @enture between Simon =td and Anderson =td is a joint venture& involving jointlycontrolled assets& because it is not a (oint @enture /ntity. >AASB 131.16 to.?.

• he oil e)ploration and development joint venture has not been incorporated as a

company& nor established as a trust.

• he oil e)ploration and development joint venture is not a partnership because'

•

he joint venture does not have a profit objective& !a view to profit"'• he venturers& !Simon and Anderson"& will each receive an agreed share of any output

produced.




• he oil e)ploration and development joint venture will not derive any revenue&

because it does not sell any output.

• herefore the oil e)ploration and development joint venture is incapable of earning

profits.

• he joint venture is not a business in common'

• he venturers& !Simon and Anderson"& will sell their share of the output individually.

• he venturers are conducting their individual businesses.

• he oil e)ploration and development joint venture is merely a cost sharing venture.

>he ;artnership Act defines a partnership as a business in common with a view to profit.C?

!b" Simon =td is re*uired by AASB131.1 to account for its investment in the oil e)plorationand development joint venture& involving jointly controlled assets& by using the line by linemethod& in its own financial report& and if Simon is a parent entity& it is also re*uired to usethe line by line method in its consolidated financial report& whereby'

• Simon%s share of each joint venture asset will be included in the relevant asset account

in Simon%s accounts& e.g. Simon%s share of joint venture inventory will be included in

Simon%s inventory account. Dote that Simon may own 1E of some joint ventureassets& may jointly own some joint venture assets& !in specified proportions with other @enturers"& and may have no interest in some other joint venture assets& as specified inthe (oint @enture Agreement.

• Simon%s share of each joint venture liability will be included in the relevant liability

account in Simon%s accounts.

• Fsually each venturer individually raises the funds re*uired for its contributions to joint

venture resources. herefore& usually each venturer is individually responsible for particular joint venture liabilities& !as contracted with lenderscredit providers".

• 8ften the venturers will be jointly responsible& with other venturers& !in specified

proportions"& for liabilities such as trade creditors& accrued e)penses.

• Simon%s share of each joint venture e)pense will be included in the relevant e)pense

account in Simon%s accounts.

• he revenues that Simon !individually" derives by selling or using its share of the output

produced by the joint venture& will be included in the relevant revenue account inSimon%s accounts.

>AASB131.1?

34.6 #n the books of Goldey =td

r ;lant and machinery 4

r ash 4

!o recognise the contribution of cash to the joint venture and the proportional interest in the plant and machinery contributed by 8iley =td."

#n the books of 8iley =td

r ash 4 r ;lant and machinery 3 r Gain on disposal of machinery 1

!o recognise the contribution of machinery to the joint venture and the proportional interestin the cash contributed by Goldey =td."

8ptional entry in 8iley%s books




r 0achinery 1 r Hevaluation reserve 1

!o revalue the half interest in the machinery contributed to the joint venture. here has beenno adjustments to accumulated depreciation& because the *uestion provides no information

about the balance of accumulated depreciation. o take into account the ta) effect of therevaluation there should also be a debit entry to revaluation reserve and a credit entry todeferred ta) liability 5 however& this would re*uire knowledge of the ta) rate which is not

provided in this *uestion"

34.I !a" 1 (uly 6

he journal entry to record the establishment of the joint venture would be'

in o)ic =td%s accounts'

r ash 2 r =and 2 r =oss on sale of machinery 2 r Accumulated depreciation 4 2 r 0achinery 12

>o recognise o)ic =td%s share in the cash and land contributed by Sludge =td& andto recognise o)ic =td%s contribution of machinery !fair value of J - book value of J1 ".?

r Accumulated depreciation 4 2

r 0achinery 4 2 r =oss on revaluation of machinery 2 r 0achinery 2

>o revalue o)ic =td%s own interest in the machinery& such that the revalued amountwill be J1 !2 per cent of the asset%s fair value of J ".?

r 0achinery 3 2 r ash 3 2

o recognise o)ic =td%s proportional interest in the ac*uisition of the machinery'

in Sludge =td%s accounts'

r 0achinery 1 r ash 2 r =and 4 r ;rofit on disposal of land 1

>o recognise Sludge =td%s contribution of cash !J1 was contributed& of which Sludge =td has a 2 per cent interest" and contribution of land !the land has afair value of J1 " and to recognise Sludge =td%s proportional interest !2 per cent" in the machinery contributed by o)ic =td !fair value of J ".?

r =and 1 r Asset revaluation reserve 1




>o revalue Sludge =td%s own interest in the land& such that the revalued amount will be J2 !2 per cent of J1 ". Kor the revaluations there should also bea journal entry to take account of the ta) effect of the revaluation 5 a debit torevaluation reserve and a credit to deferred ta) liability 5 however this would re*uireinformation about the ta) rate which is not provided in the *uestion?

r 0achinery 3 2 r ash 3 2

!o recognise Sludge =td%s proportional interest in the ac*uisition of the machinery."

!b" 3 (une I

AASB 131 re*uires that a venturer& in respect of its interests in jointly controlledoperations& shall recognise in its financial statements'!i" the assets that it controls and the liabilities that it incurs- and

!ii" the e)penses that it incurs and its share of the income that it earns from thesale of goods or services by the joint venture.

herefore& the following entries would appear in both o)ic =td%s and Sludge =td%saccounts'

r 0ining assets under construction 1 1 r ash 6 r Accounts payable 3

he above entries recognise& as a liability in each joint venturers% own accounts& the

outstanding liabilities of the joint venture operation !which relate the e)cess of the production costs incurred& being J & over the actual payments made for thesecosts& being J1 7 ".

he individual venturers will depreciate the machinery in their own accounts in amanner consistent with their own accounting policies.


Deegan5e Sm Ch34

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