Accy 33/BSA 25C
Joint Arrangements – Joint
Operations and Joint Ventures /
Investment in Associates
Chapter 9
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Related PAS/PFRS Standards
• PFRS 9 – Financial Instruments
• PFRS 10 – Consolidated Financial Statements
• PFRS 11 – Joint Arrangements
• PFRS 12 – Disclosure of Interests in Other Entities
• PAS 28 – Investments in Associates and Joint Ventures
Refer to the diagram: Figure 9-1
Excerpts from PFRS 11:
Joint Arrangement
• PFRS 11 defines a joint arrangement as “an arrangement of
which two or more parties have joint control.”
Characteristics of a joint arrangement
1. The parties are bound by a contractual arrangement.
2. The contractual arrangement gives two or more of those
parties joint control of the arrangement.
• 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.”
Excerpts from PFRS 11:
Types of Joint Arrangements:
1. 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.
2. Joint venture – is a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the
net assets of the arrangement. Those parties are called joint
venturers.
Excerpts from PFRS 11:
Joint operations
Financial reporting by joint operators:
A joint operator shall recognize in relation to its interest in a joint
operation:
1. its assets, including its share of any assets held jointly;
2. its liabilities, including its share of any liabilities incurred
jointly;
3. its revenue from the sale of its share of the output arising
from the joint operation;
4. its share of the revenue from the sale of the output by the
joint operation; and
5. its expenses, including its share of any expenses incurred
jointly.
Excerpts from PFRS 11:
Accounting for joint operation transactions
• Separate accounting records may or may not be
required for the joint operation itself and financial
statements may or may not be prepared for the joint
operation. However, the joint operators may prepare
management accounts so that they may assess the
performance of the joint operation.
Excerpts from PFRS 11:
Excerpts from PFRS 11:
Excerpts from PAS 28:
PAS 28 Investments in Associates and Joint
Ventures
Learning Objectives
• Define an investment in associate.
• Describe the accounting requirements for investments in
associates and joint ventures.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Definition of terms
• Associate – an entity, including an unincorporated entity such
as a partnership, over which the investor has significant
influence.
• Significant influence – the power to participate in the financial
and operating policy decisions of the investee but is not control
or joint control over those policies.
(PAS 28)
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Significant influence
• Significant influence is presumed to exist if the investor
holds, directly or indirectly (e.g. through subsidiaries),
20% or more of the voting power of the investee,
unless it can be clearly demonstrated that this is not the
case.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Evidence of existence of significant influence by
an investor
The following may provide evidence of significant influence even if
the percentage of ownership interest is less than 20%:
a) Representation on the board of directors or equivalent
governing body of the investee;
b) Participation in policy-making processes, including
participation in decisions about dividends or other
distributions;
c) Material transactions between the investor and the investee;
d) Interchange of managerial personnel; or
e) Provision of essential technical information.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Equity method:
• Investments in associates or joint ventures are accounted for
using the equity method. Under this method, the investment is
initially recognized at cost and subsequently adjusted for the
investor’s share in the changes in the EQUITY of the investee.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Effect on investment in Effect on investment
Share in associate’s
associate income
a. Profit or loss - increase for share in - increase for share in
profit/ decrease for profit; decrease for
share in loss share in loss
b. Dividends - decrease - no effect
c. Other - increase for share in - no effect; the share in
comprehensive gain/ decrease for OCI is included in the
income share in loss investor’s OCI
Conceptual Framework & Acctg.
14
Standards (by: Zeus Vernon B. Millan)
Excerpts from PAS 28:
Preference shares issued by an associate
If an associate has outstanding preference shares that are held by parties other
than the investor, the investor computes its share of profits or losses after
making the following adjustments.
Preference share is Preference share is Preference share is
cumulative noncumulative redeemable
Deduct one-year Deduct dividends only No dividend is
dividend, whether when declared before deducted when
declared or not computing share in computing share in
before computing associate’s profit or associate’s profit or
share in associate’s loss. loss.
profit or loss.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Discontinuance of the use of equity method
• An investor starts to apply the equity method on the date it
obtains significant influence and ceases to apply the equity
method on the date it loses significant influence.
• On the loss of significant influence, the investor shall measure
at fair value any investment the investor retains in the former
associate. The investor shall recognize in profit or loss any
difference between:
a. The fair value of any retained investment and any
proceeds from disposing of the part interest in the
associate; and
b. The carrying amount of the investment at the date when
significant influence is lost.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Classification of retained interest
Following the discontinuance of equity method, the
retained interest shall be classified as follows:
Loss of significant influence due to Accounting treatment
Decrease of ownership interest Financial asset at fair value under
below 20%. PFRS 9 (Financial Instruments)
Increase of ownership above 50% Investment in subsidiary under
PFRS 3 (Business Combinations)
and PFRS 10 (Consolidated
Financial Statements)
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Reclassification of cumulative OCI
• If an investor loses significant influence over an associate,
all amounts recognized in other comprehensive income in
relation to the associate shall be accounted on the same
basis as would be required if the associate had directly
disposed of the related assets or liabilities.
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Share in losses of associate
If an investor’s share of losses of an associate equals or exceeds its
interest in the associate, the investor discontinues recognizing its
share of further losses.
Interest in the associate includes the following:
1. Investment in associate measured under equity method
2. Investment in preference shares of the associate
3. Unsecured long-term receivables or loans
Interest in the associate does not include the following:
1. Trade receivables and payables
2. Secured long-term receivables or loans
FAR PART 1B: Zeus Vernon B. Millan
Excerpts from PAS 28:
Share in losses of associate (con’t)
After the investor’s interest in the associate is reduced to zero,
additional losses are provided for, and a liability is recognized,
only to the extent that the investor has incurred
a. Legal or constructive obligations or
b. Made payments on behalf of the associate.
• Any other losses are not recognized.
• If the associate subsequently reports profits, the investor
resumes recognizing its share of those profits only after its
share of the profits equals the share of losses not recognized.
FAR PART 1B: Zeus Vernon B. Millan
Refer to the Summary Guidelines of Joint Venture,
pp. 801 to 802
FAR PART 1B: Zeus Vernon B. Millan
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