2. IFRS 11 defines a JOINT ARRANGEMENT 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.
3. Under IFRS 11, a JOINT ARRANGEMENT is either a JOINT OPERATION or
a JOINT VENTURE. An entity sharing control in the joint arrangement
must assess its rights and obligations arising from the undertaking.
If the entity has rights to the assets and obligations for the liabilities
relating to the arrangement, then the undertaking is a JOINT
OPERATIONS and parties sharing control are called JOINT OPERATORS.
If an entity has rights to the net assets, the arrangement is a JOINT
VENTURE and parties sharing control are called JOINT VENTURERS.
4. In assessing its rights and obligations, the venturer or the operator
must look into the
(1) structure and legal form of the arrangement;
(2) terms of the contractual agreement; and
(3) other relevant facts and circumstances.
5. If the activities of the joint arrangement will NOT be carried through a
SEPARATE VEHICLE, then the arrangement is a joint operation.
If carried in a separate vehicle, then its legal form could help assess the
nature of an entity’s rights and obligations:
(1) if it is a general partnership, the arrangement is deemed to be a
joint operations because the entity would still have rights to the
assets and obligations for liabilities;
(2) if it is a corporation, the arrangement is deemed to be a joint
venture as the corporation itself would have rights to assets and
obligations for liabilities (not the venturer), unless the terms of the
contractual agreement and other facts and circumstances would
show otherwise.
In all cases, these three factors unilaterally or collectively determine
the nature of an entity’s rights and obligations relating to the joint
arrangement.
6. Accounting by the venturer or by the operator for its interest in the
joint arrangement, generally, would be as follows:
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENTS.
1. IFRS-11 requires a joint operator to recognize and measure the
assets and liabilities (and recognize the related revenues and
expenses) in relation to its interest in the arrangement in
accordance with relevant IFRSs applicable to the particular assets,
liabilities, revenues, and expenses.
2. IFRS-11 requires a joint venturer to recognize an INVESTMENT and
to account for that investment using the EQUITY METHOD in
accordance with PAS 28 – INVESTMENTS IN ASSSOCIATES AND
JOINT VENTURES, unless the entity is exempted from applying the
equity method as specified in that standard.
7. Equity Method
1. On January 1, 2020 Venturer A invested P400,000 for a 40% interest
and Venturer B invested P600,000 for a 60% interest in a joint
arrangement, Corporation C, which will issue 8,000 ordinary shares at
P100 par value each.
2. The joint venture purchased merchandise worth P400,000, paying
P300,000, the balance on account.
3. The joint venture paid expenses amounting to P50,000.
4. Cash sales, P600,000; cost of sales, P300,000.
Required: Prepare journal entries in the books of A, B,
and Corporation C.
8. A B C
Inv in JV 400,000 Inv in JV 600,000 Cash 1,000,000
Cash 400,000 Cash 600,000 CS 800,000
APIC 200,000
No entry No entry MI 400,000
Cash 300,000
A/P 100,000
No entry No entry Exp 50,000
Cash 50,000
No entry No entry Cash 600,000
Sales 600,000
CLOSING ENTRIES Sales 600,000
COS 300,000
Exp 50,000
I/S 250,000
Inv in JV 100,000 Inv in JV 150,000 I/S 250,000
P/L 100,000 P/L 150,000 RE 250,000
9. Accounting for SALE or CONTRIBUTION of assets to a Joint Operation.
- 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 assets, it
is conducting the transaction with the other parties to a joint
operation and, as such, the joint operator shall recognize gains and
losses resulting from such a transaction only to the extent of the other
parties’ interest in the joint operation.
10. For example, assume A, B, and C jointly control D (each having a 1/3 interest) and A sells
equipment having a book value of P40,000 to the joint operation for P100,000. Only 2/3 of
the apparent gain of P60,000, or P40,000 maybe realized. On A’s balance sheet, the
following will be presented:
Equipment (1/3 x P100,000) P33,333
Less Unrealized gain (P1/3 x P60,000) (20,000)
Net (1/3 x P40,000 pre-transfer amt) P 13,333
Assume the asset has useful life of 5 years from the date of the transaction. The deferred
gain would be amortized at a rate of P4,000/year. At the end of the first year, D would
present the equipment as follows:
Equipment P100,000
Less Accumulated Depreciation (20,000)
Book value P 80,000
and A would present the equipment as follows:
Equipment (1/3 x P80,000) P 26,667
Less Unrealized gain (P20,000-P4,000) (16,000)
Book value 1/3 x (P40,000 – P8,000) P 10,667
11. Accounting for SALE or CONTRIBUTION of assets to a Joint Operation.
- When such transactions provide evidence of a reduction in the NRV of
the assets to be sold or contributed to the Joint Operation, or of an
impairment loss of those assets, those losses should be recognized fully
by the joint operator.
12. For example, assume C (a 1/3 owner of D) transfers an asset it had
been carrying at P150,000 to D at a price of P120,000.
C must recognize the full loss of P30,000 at the time of the transfer and
picks up its 1/3 interest in the asset held by D (1/3 x P120,000 =
P40,000) as its own asset in its balance sheet before considering any
depreciation, and so on.
13. Accounting for PURCHASES of Assets from the Joint Operation.
- When an entity enters into a transaction with a Joint Operation in
which it is a joint operator, such as a purchase of assets, it shall not
recognize its share of the gains and losses until it resells those assets to
a third party.
14. For example, assume D sells an equipment having a book value of P200,000 to B for
a price of P275,000. Since B has a 1/3 interest in D, it must defer P25,000 of D’s gain
in order not to violate the realization concept under GAAP. B would report the
equipment in its balance sheet as follows:
Equipment P 275,000
Less deferred gain 25,000
Net (P200,000 + P50,000 gain) P 250,000
Assume the equipment has a remaining useful life of 10 years. B would report the
asset at the end of the first year as follows
Equipment P 275,000
Less accumulated depreciation 27,500
Book carrying value P 247,500
Less deferred gain (P25,000 – P2,500) 22,500
Net book value (90% x P250,000) P225,000
Depn expense (P27,500 – P2,500) P 25,000
@ (P250,000 x 10%)
15. Accounting for PURCHASES of Assets from the Joint Operation.
- When such transactions provide evidence of a reduction in the NRV of
the assets to be purchased or of an impairment loss of those assets, a
joint operator shall recognize its share of those losses.
16. For example, assume D sells an equipment carried at P50,000 to B for
P44,000 and records a loss of P6,000. B (and the other operators)
recognizes a P2,000 loss and B reports the asset on its balance sheet at
P44,000. Since no portion of the apparent loss has been deferred, the
1/3 loss of P2,000 will not be added to the carrying value of the asset
(as would have been the case if B treated only the P4,000 loss realized
by unrelated parties A and C as being recognizable,)
17. IFRS for SMEs provide three (3) methods of accounting for its interest in
the joint venture:
(1) the cost model,
(2) the fair value model, and
(3) the equity model.
This means that the proportionate consolidation method may not be
used if the venturer is an SME.
The equity method available to the SME is similar to the equity method
discussed under IAS 31.
To establish similarities and differences among the three methods, the
following are pro-forma entries for selected transactions.
18. Transactions Cost Model Fair value Model Equity Model
Original investment Inv. in JV X Investment in JV x Inv. in JV X
Cash X Cash X Cash X
Transaction cost Inv. in JV X P & L X Inv. in JV X
Cash x Cash X Cash X
Cash dividends Cash X Cash X Cash X
P & L X P & L X Inv. in JV X
Year-end adjustment
FV remeasurement Inv. in JV X
P & L X
Share of net income Inv. in JV X
P & L X
Share of impairment loss Profit and Loss x Profit & Loss X
Inv. in JV X Inv. in JV X
If published price quotations are available, use of the cost model is not allowed.. In the
absence of published price quotations the method to be used is deemed to be a matter of
choice.
