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Module 1.6 - Joint Arrangements PDF

1. Joint arrangements are contractual agreements where two or more parties have joint control. There are two types: joint operations and joint ventures. 2. A joint operation exists when parties have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture exists when parties have rights to the net assets of the arrangement and is usually structured through a separate vehicle. 3. For a joint operation, a party recognizes its share of assets, liabilities, income and expenses. For a joint venture, the equity method is used to account for the investment, though the cost method may be used in separate financial statements.

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180 views3 pages

Module 1.6 - Joint Arrangements PDF

1. Joint arrangements are contractual agreements where two or more parties have joint control. There are two types: joint operations and joint ventures. 2. A joint operation exists when parties have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture exists when parties have rights to the net assets of the arrangement and is usually structured through a separate vehicle. 3. For a joint operation, a party recognizes its share of assets, liabilities, income and expenses. For a joint venture, the equity method is used to account for the investment, though the cost method may be used in separate financial statements.

Uploaded by

Mila Mercado
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management


Accountancy and Accounting Information Systems Department

LECTURE NOTES
Module 1: Partnership, Corporate Liquidation, and Joint Arrangements

JOINT ARRANGEMENTS

Joint arrangement – an arrangement of which two or more parties have joint control. (PFRS 11.4)

Essential elements:

(a) Contractual arrangement – establishes joint control over the joint arrangement. Such
requirement ensures that no single party is in a position to control the activity unilaterally.
It may be evidenced by a contract between the parties. Whatever its form, the contractual
arrangement is usually in writing and deals with such matters as:
1. The activity, duration and reporting obligations of the joint arrangement;
2. The appointment of the board of directors or equivalent governing body of the joint
arrangement and the voting rights of the parties;
3. Capital contributions by the parties; and
4. The sharing by the parties of the output, income, expenses or results of the joint
arrangement.

(b) Joint control – 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. (PFRS 11.7) It exists when all the parties sharing joint control over
the arrangement act collectively in directing the activities that significantly affect the
returns of the arrangement.

Type of Joint Arrangement Characteristics Accounting

1. Joint operation  Parties that have joint  Recognize own assets,


control have rights to liabilities, income and
the assets and expenses plus share in
obligations for the the assets, liabilities,
liabilities relating to the income and expenses of
joint arrangement. the joint operation.

 Normally, not structured  When an entity acquires


through a separate interest in a joint
vehicle. operation whose activity
constitutes a business,
the entity accounts for
its share as a business
combination.

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GMM A. DIMACULANGAN
2. Joint venture  Parties that have joint  Equity method.
control have rights to
the net assets of joint  However, in the
arrangement. separate financial
statements, the
 Structured through a investment is accounted
separate vehicle. for either:
However, the terms of a. At cost,
the contractual b. At fair value (PFRS
arrangement and other 9), or
facts and circumstances c. Using equity
may lead a joint method.
arrangement structured
through a separate
vehicle classified as
joint operation.

Practice Problems:

1. Banks A and B (the parties) agreed to combine their corporate, investment banking, asset
management and services 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 the Bank X and not the
assets and liabilities of the parties. Banks A and B each have a 40% ownership interest in Bank X,
with the remaining 20% 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 2023 and 2024 follow:


2023 2024
Investments: Bank A 50M 5M
Bank B 50M 5M
Revenues 10M 12M
Cost and expenses 6M 7M
Dividends paid - Bank X - 4M

a) What is the interest of bank A in the joint arrangement at December 31, 2023?
b) What is the interest of bank B in the joint arrangement at December 31, 2024?

2. On January 1, 2021 entities A and B (the venturers) form a joint venture (entity X). Upon
incorporation of entity X, entities A and B each take up 50% of the share capital of entity X. In return
for their interests in entity X, entities A and B each contribute P100,000 to entity X. Entity A
contributes machine with a fair value of P100,000 and a carrying amount of P80,000. Entity B's
contribution is P100,000 cash.

The machine contributed by entity A has an estimated useful life of 10 years with no residual value.
Entity X's profit for the year ended December 31, 2021 is P30,000 (after deducting depreciation
expense of P10,000 on the machine contributed by entity A). Entity A accounts for his investment
using the equity method.

What is the cost of investment of entity A on December 31, 2021?

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GMM A. DIMACULANGAN
References:
 Millan, Z. (2018). Accounting for Special Transactions (Advanced Accounting 1). (2018 Edition).
Baguio City, Philippines: Bandolin Enterprise.
 Guererro, P., Peralta, J. F. (2017). Advanced Accounting Volume I and II
 Philippine Financial Reporting Standards

--o0o--
“Commit to the Lord whatever you do, and your plans will succeed.”
– Proverbs 16:3

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GMM A. DIMACULANGAN

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