Interests in Joint Ventures
IAS 31
Interests in Joint Ventures
IAS 31
Definitions
- Joint Venture = is a contractual arrangement where two or more parties take on an economic activity that is subject to joint control
- Joint control = is the contractually agreed sharing of control over an economic activity, such that the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers)
Three types of Joint venture and Basis of Accounting
There are three different types of joint ventures:
1. Jointly controlled operations
• Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own financing
• The revenue from the sale of goods/services by the joint venture and expenses incurred in common are shares among the venturers
• No corporation, partnership or other enterprise established
2. Jointly controlled assets
• The venturers jointly control one or more assets contributed or acquired for the joint venture and used for joint venture’s business activities
• Each venturer gets a share of the output generated by the assets and share certain expenses (such as equipment maintenance)
• No corporation, partnership or other enterprise established
3. Jointly controlled enterprise
• A joint venture that involves the establishment of a corporation, partnership or another enterprise; each venturer has an interest in the enterprise
• There is joint control over the economic activity of the enterprise.
Basis of Accounting
- Under IFRS, the basis of accounting for a joint venture depends on the type of joint venture:
Type of Joint Venture | Accounting Method | Description |
Jointly controlled operations | Proportionate consolidation
| The venturer includes:
|
Jointly controlled assets
| Proportionate consolidation
| The venturer includes:
|
Jointly controlled enterprise
| Proportionate consolidation or Equity method
| Proportionate consolidation The venturer includes:
Equity method – see investments in associates (IAS 28) notes |
Transactions between a venturer and a joint venture
Sale of asset from venturer to joint venture (downstream):
- When a venturer contributes or sells assets to a joint venture, and has transferred the significant risks and rewards of ownership, the venturer shall recognize only the portion of the gain or loss that is attributable to the interests of the other venturers.
- But it needs to recognize the full amount of any loss when the contribution or sale provides evidence of a reduction in the net realizable value of current assets or an impairment loss
Example
- Venturer who owns 40% of the joint venture sells inventory with BV=1000 and FMV=2000
- Venturer can recognize gain = (2000-1000)*60% = $600
Sale of asset from venturer to joint venture (downstream):
- When a venturer purchases assets from a joint venture, it needs to wait until it resells the assets to an independent party, before recognizing its share of the gains or losses
- But it needs to recognize its share of the losses immediately when it represents a reduction in the net realisable value of current assets or an impairment loss
Example
- Venturer who owns 40% of the joint venture buys inventory with BV=1000 and FMV=2000
- Assume venturer has not sold this inventory to a third party
- Assume the JV has total profits of $5,000
- When venturer consolidates, it needs to remove the upstream gains such that consolidated NI = (5,000-1,000)*40% = $1,600
- When venturer sells inventory to a third party, it can then recognize $1,000*40% = $400
Exemptions from Proportionate Consolidation and Equity Method
- The Joint Venture is classified as held for sale (use IFRS 5 – non-current assets held for sale and discontinued operations)
- An entity will be exempt from JV accounting if all the following apply:
- Venturer is a wholly owned subsidiary or partially owned subsidiary whose owners do not object to not using JV accounting; and
- Venturer’s debt or equity instruments are not traded publically not are they in the process of doing so; and
- Ultimate parent prepared consolidated financial statements
An investor in a joint venture that does not have joint control:
- Account for the investment using with IAS 39 (financial instruments); or
- If it has significant influence in the joint venture use IAS 28.
SIC 13: jointly controlled entities — non-monetary contributions by venturers (advanced topic)
- Applies to situations where
- non-monetary assets are contributed to a jointly controlled entity (JCE) in exchange for equity interest (shares); and
- the JCE is accounted for using the proportionate consolidation method
- when non-monetary assets are contributed to a JCE in exchange for equity interest, the venturer recognises the portion of a gain or loss attributable to the equity interests of the other venturers except when:
- the significant risks and rewards of ownership of the contributed non-monetary assets have not been transferred to the JCE; or
- the gain or loss on the non-monetary contribution cannot be measured reliably; or
- the contribution transaction lacks commercial substance
- If any of these 3 exceptions apply, the venturer cannot recognize any gain or loss;
- however, if the venturer receives monetary assets or other non-monetary assets alongside the equity interest, it can recognize a portion of the gain or loss.
- SIC 13 doesn’t provide guidance on how this portion is to be calculated, but the common approach (assuming cash is received alongside equity interests) is as follows:
- Other venturer’s share of gain (A)=(FMV – CV of assets contributed)* other venturer’s interest
- Gain immediately recognized (B) = Cash – [(Cash/total FV)*BV]
- Deferred gain = A – B è this is amortized to income over the useful life of the contributed asset (if asset is sold by the JV, take unamortized balance into income)
- Venturer’s share of the gain = (FMV-CV of assets contributed)* venturer’s interest è is deducted from the value of the contributed asset when proportionate consolidating