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    Joint Arrangement & Investment in Associate, Suger 2nd

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    Company Balance Sheet as at Dec. 31, 2006 - IFRS 11 and IAS 28 provide the accounting standards for joint arrangements and investments in associates. IFRS 11 defines joint control and the two types of joint arrangements: joint operations and joint ventures. Assets - For a joint operation, parties account for their rights to the joint operation's assets, liabilities, revenues and expenses. For a joint venture, parties account for their investment using the equity method in accordance with IAS 28. Cash 80,000 Equipment 480,000 Total Assets 560,000 Liabilities and Equity - The

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    Joint Arrangement & Investment in Associate, Suger 2nd

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    nati
    435 views36 pages
    Company Balance Sheet as at Dec. 31, 2006 - IFRS 11 and IAS 28 provide the accounting standards for joint arrangements and investments in associates. IFRS 11 defines joint control and the two types of joint arrangements: joint operations and joint ventures. Assets - For a joint operation, parties account for their rights to the joint operation's assets, liabilities, revenues and expenses. For a joint venture, parties account for their investment using the equity method in accordance with IAS 28. Cash 80,000 Equipment 480,000 Total Assets 560,000 Liabilities and Equity - The

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    Company Balance Sheet as at Dec. 31, 2006 - IFRS 11 and IAS 28 provide the accounting standards for joint arrangements and investments in associates. IFRS 11 defines joint control and the two types of joint arrangements: joint operations and joint ventures. Assets - For a joint operation, parties account for their rights to the joint operation's assets, liabilities, revenues and expenses. For a joint venture, parties account for their investment using the equity method in accordance with IAS 28. Cash 80,000 Equipment 480,000 Total Assets 560,000 Liabilities and Equity - The

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    © All Rights Reserved
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    Download as ppt, pdf, or txt
    435 views36 pages

    Joint Arrangement & Investment in Associate, Suger 2nd

    Uploaded by

    nati
    Company Balance Sheet as at Dec. 31, 2006 - IFRS 11 and IAS 28 provide the accounting standards for joint arrangements and investments in associates. IFRS 11 defines joint control and the two types of joint arrangements: joint operations and joint ventures. Assets - For a joint operation, parties account for their rights to the joint operation's assets, liabilities, revenues and expenses. For a joint venture, parties account for their investment using the equity method in accordance with IAS 28. Cash 80,000 Equipment 480,000 Total Assets 560,000 Liabilities and Equity - The

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    of 36

    IFRS 11 and IAS 28

    Joint Arrangements
    and Investment in
    Associates
    1
    This material is the property of Department of Accounting
    and Finance, CoBE, AAU. Permission must be obtained from

    Learning Objectives
    At the completion of studying
    chapter, you will be able to:

    this

    Definesjoint control;
    Determiningthe typeof joint arrangement;
    Accountfor
    the
    investment
    in
    a
    joint
    arrangement

    List of Applicable Standards


    Topic List

    Standards

    Joint Arrangement
    Investment in Associates and Joint
    Ventures
    Disclosure of Interest in Other
    Entities

    IFRS 11
    IAS 28
    IFRS 12

    Degree
    of
    influence
    over
    investees
    & the relevant IFRS standards
    Degree of
    influence
    Unilateral Control

    Joint control (joint


    arrangements)

    Significant
    influence

    IFRS accounting
    Account for investment according to
    IFRS 10( Consolidated Financial
    Statements)
    Joint operation: Account for assets
    and liabilities using IFRS 11 Joint
    Arrangements.
    Joint venture: Account for investment
    using
    the
    equity
    method
    in
    accordance with IAS 28
    Account for investment using the
    equity method in accordance with IAS
    28

    Joint Arrangements(IFRS
    11)

    The creation of joint arrangements ( corporation or


    partnership joint ventures) is very common in projects
    that typically:
    Require significant funding
    Involve significant project risk
    Require
    collaboration among investors to share
    expertise and resources.
    Has the following benefits:
    Capital needed can be raised .
    Transfer of technology and knowhow.
    Provide raw materials for the Joint Arrangement .
    Marketing
    of the Joint Arrangement products
    6
    particularly exported products

    Joint Arrangement ( IFRS 11)


    Basic Concepts and
    Terminologies

    Joint arrangement: is an arrangement of which


    two or more parties have joint control.
    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.

    Identifying relevant activities


    Who appoints
    the Board
    and key
    management
    personnel?
    Who can
    change the
    strategic
    direction of
    the entity?

    Relevant activities are those activities that significantly affect


    the investee's return.

    Joint arrangement cont


    Unanimous consent: means that any party within the
    arrangement can prevent any of the other parties from
    making unilateral decisions without its consent.
    Contractual
    arrangement:
    are
    enforceable
    agreements reached among the parties which are often
    in writing.
    However Joint arrangement
    may not always be in
    explicit ( no clear contract) and hence determined
    by substance of the dealings between the parties
    like :
    From documented minutes of discussion,
    From the articles of association, charters, bylaws and
    9
    similar mechanisms.

    How are relevant activities


    directed primarily?

    It dictates the standards to be applied to account investment.


    The existence of joint control ( unanimous consent) may
    explicitly stated in the contract ( partnership or Plc vehicle) Or
    It is implied in the article of association and needs our judgment
    to determine weather there exist a joint control.

    Testing Existence of Joint control

    Example 1: Three Factories ( Mathara, Wenji and Finchia) have

    established another new sugar factory ( Shebelle Sugar factory)


    on Wabe Shebelle river basin . Mathara has 55%, Wenji has 15%
    and Finchia has 30% ownership rights in the new factory.
    The contractual arrangement reached
    between the parties
    specifies that unanimous consent of all the parties is required to
    make decisions about the entitys relevant activities .
    Required: Assess the existence of joint control
    By which standard shoud the three accounts their investment?
    11

    The existence of joint control


    ( unanimous consent)
    is not explicitly stated.
    Example 2: Assume the previous data that the Shebelle
    factory is established between Wanji and mathara only
    and each has 50% of the voting rights (and equivalent
    power) over the investees relevant activities.
    The article of association between the two owners
    indicate that at least 51% of the voting rights are
    required to make decisions about the entitys relevant
    activities.
    Required:
    Assess the existence of joint control
    Which standard should be used to account investment
    by the two?

    12

    consent)
    is not explicitly stated.

    Example 3: Three Factories ( Mathara, Wenji and


    Finchia) have established another new sugar
    factory ( Shebelle Sugar factory) on Wabe
    Shebelle river basin
    Mathara 50% , Wenji 30% and Finchia 20% .
    Their article of association indicate that at least
    75% of the voting rights are required to make
    decisions about the entitys relevant activities.
    Required: Assess existence of a joint control?
    Which relevant standard is used to account
    investment made by the three factories?
    13

    The existence of joint control


    ( unanimous consent) is not
    explicitly stated.
    Example 4
    Three Factories
    ( Mathara, Wenji and Finchia) have
    established another new sugar factory ( Shebelle Sugar
    factory) on Wabe Shebelle river basin
    Mathara 50% , Wenji 25%
    and Finchia 25% . Their
    article of association indicate that at least 75% of the
    voting rights are required to make decisions about the
    entitys relevant activities.
    Required: Assess existence of a joint control?
    Which relevant standard is used to account investment
    made by the three factories?
    14

    Types of Joint Arrangement

    IFRS11 identifies two types of joint arrangements :


    Joint operations or Joint ventures.
    The key distinction between the two forms is the
    parties rights and obligations under the joint
    arrangement .
    Joint Operation: is a joint arrangement whereby the
    parties that have joint control have rights to the assets,
    and obligations for the liabilities of the arrangement.
    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.
    15

    Types of Joint
    Arrangement cont..

    16

    Assessing separate entity as


    JV or JO

    The assessment(right to net asset or to specific


    asset) is based on the following facts:
    Structure of the arrangement
    legal form of the arrangement.
    The terms and conditions of the contractual
    arrangement.
    Other facts and circumstances.

    17

    Example 1: Berta
    and Satcon
    construction
    have
    Determination
    of separate
    entity
    as
    jointly
    formed aornew
    company
    joint
    operation
    joint
    venture to undertake a

    government project ( Addis Abeba Nairobi railway).


    The new companys legal form is that Berta and Satcon
    construction have rights to the assets, and obligations
    for the liabilities of the entity.( the new company has
    unlimited liablity)
    Required: Determine weather the new entity is joint
    operation or joint venture.

    18

    Example 2:
    Sunshine real estate and china
    construction companies, have set up a separate
    vehicle (SCCC Company) which manufactures
    constriction materials in Oromia special zone
    According to SCCC s legal form, SUF has rights to its
    own assets, and obligations for its own liabilities,
    relating to the arrangement. (SCCC is Plc)
    Is SUF a JO or a JV?

    19

    Accounting
    Arrangement

    for

    Joint

    Accounting for investment in a Joint Arrangement is


    dictated by the type of arrangement itself ( JO or JV)

    If

    the arrangement is joint operation, Joint operators


    account for their rights to assets and obligations for
    liabilities of joint arrangement according to the
    contractual arrangement established between the parties
    in their own financial statements.
    If

    the arrangement is joint venture, the Joint ventures


    account for their interest in the entity based on equity
    method of accounting(IAS28).
    20

    21

    22

    Classification cont
    Not structured
    through a separate
    vehicle *

    Assess the parties rights


    obligations
    arising
    from
    arrangement .

    Parties have rights to the assets


    and obligations for the liabilities

    Joint operation

    Assessment
    of
    parties
    rights
    obligations

    Structured through a
    separate vehicle *

    the
    and

    and
    the

    Parties have rights


    to the net assets

    Joint venture
    Accounting reflects the

    Accounting for assets,


    Accounting for an
    parties
    rights and
    liabilities, revenues and
    investment using
    obligations
    expenses in accordance with
    the equity method
    the contractual arrangements
    (*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities
    recognised by statute, regardless of whether those entities have a legal personality.

    Accounting for Joint


    operation

    Investors company account line-by-line their share of


    assets, liabilities, expenses, and revenues of joint
    operation according to the contract.
    It requires that a joint operator recognizes line-by-line
    the following in relation to its
    interest in a joint
    operation:
    Its assets, including its share of any jointly held assets
    Its liabilities, including its share of any jointly incurred
    liabilities
    Its revenue from the sale of its share of the output
    arising from the joint operation
    Its expenses, including its share of any expenses
    23
    incurred jointly.

    Accounting for Joint Venture

    IFRS 11 and IAS 28 require joint ventures to be


    accounted for using the equity method( single line
    reporting)
    Equity method : is a method of accounting whereby
    the investor initially recognizes its investment at cost
    and subsequent adjusted for :

    the investors share in profit or loss of the investee,

    the investors share in distribution made by the


    investee.
    Equity Method should be discontinued from the date
    on which the joint venturer ceases to have joint control
    over or have significant influence on a joint venture.
    24

    Example :
    XYZ Company is a company formed between Meta and
    Finchia companies on Jan. 1, 2006 by investing Br. 320,000
    each for a 50% interest in the joint arrangement . After
    operating for a year, the new entity has summarized the
    following financial statements. The two parties share
    profits and losses equally.
    XYZ Company/Income Statement
    For the Year Ended December 31, 2006
    Revenue
    1,600,000
    Less: Costs and expense
    ( 1,200,000)
    Net Income
    400,000
    Net Income Division :
    Meta
    200,000
    25
    Finchia
    200,000

    XYZ Company/Statement of Joint venturers(operator) Capital


    For the Year Ended December 31, 2006
    Meta
    Finchia
    Investment on January 1
    Br320000
    Br320000
    Add: Net Income
    200,000
    200,000
    Jointventurers(operator) capital, Dec31,
    Br520,000
    Br520,000
    XY Company/Balance Sheet

    Combined
    Br640000
    400,000
    Br1,040,000

    December 31, 2006


    Assets
    Current Assets
    Other Assets
    Total Assets
    Liabilities & Venturers Capital
    Current Liabilities
    Long-Term Liabilities
    Total Liabilities
    Venturers(oporators) Capital:
    Meta
    Finchia

    Total Liabilities & Venturers Capital

    $1,280,000
    1,920,000
    $3,200,000
    $640,000
    1,520,000
    $2,160,000
    $520,000
    520,000

    $1,040,000
    $3,200,000

    Mata /Income Statement


    For the Year Ended December 31, 2006
    Revenue
    4,000,000
    Investment income
    200,000
    Less: Costs
    ( 2,200,000)
    Net Income
    2,000,000

    Meta Company s separate


    Financial statements.
    Mata B/Sheet 12/31/2006

    Assets
    Current Assets
    Investment in XYZ Co.
    Other Assets
    Total Assets
    Liabilities & owners equity
    Current Liabilities
    Long-Term Liabilities
    Total Liabilities
    Dec31,2006,Capital:
    Total Liabilities & owners equity

    $1,200,000
    520,000
    2,080,000
    $3,800,000
    $500,000
    1,800,000
    2,300,000
    $1,500,000
    $3,800,000

    27

    ASSUMTION 1: XYZ is joint


    Operation(partnership)
    To record investment made in XYZ investments
    January 1,2006. Investment in XYZ Company
    320,000
    Cash
    320,000
    To record earnings in a joint operation
    Dec, 31,2006
    Investment in XYZ Company
    200,000
    Investment income
    200,000
    Investors( joint operators) account line-by-line its share of assets,
    liabilities, expenses, and revenues of joint operation based on the
    contractual arrangement reached among themselves as follows:

    Dec, 31,2006

    Current assets
    640,000
    Other assets
    960,000
    Investment income
    200,000
    Costs and expenses
    600,000
    Current liabilities
    Long-term Debt
    Revenue
    Investment in XYZ Company

    320,000
    760,000
    800,000
    520,000

    28

    Working paper for combined


    financial report
    Meta
    company

    Income
    statement
    Sales
    Investment
    income
    Costs and
    expense

    share in
    XYZ JO

    4,000,000

    Eliminati
    on

    800,000

    (200,000)

    (2,200,000)

    (600,000)

    Net income
    Balance sheet

    2,000,000

    200,000

    Current assets
    Investment in xyz
    JO

    1,280,000

    640,000

    520,000
    2,000,000

    (520,000)

    200,000

    Total

    4,800,00
    0
    0
    2,800,00
    0
    2,000,0
    00

    1,920,00
    0
    0 29
    2,960,00

    ASSUMTION 2: XYZ is joint


    venture(Plc)
    To record investment made in XYZ investments
    January 1,2006. Investment in XYZ Company
    320,000
    Cash
    320,000
    To record earnings in a joint operation
    Dec, 31,2006
    Investment in XYZ Company
    200,000
    Investment income
    200,000

    The venturer companys interest in the joint venture is


    presented in its own report using single account called
    Investment in joint venture, not on a line by lines base as
    follows:
    30

    Metehara Company , Statements


    Income statement
    Sales
    4,000,000
    Investment income
    200,000
    Costs and
    expenses
    (2,200,000)
    Net income
    2,000,000
    Balance sheet

    Current assets
    1,280,000
    Investment in XYZ
    JV
    520,000
    2,000,000
    Other assets
    Total assets
    3,800,000
    Current liability
    500,000
    Long term liability
    1,800,000
    Dec31,06,capital
    1,500,000

    31

    Company
    )
    JO
    Sales

    JV

    4,800,000

    Investment income

    Costs and expense

    2,800,000

    Net income

    2,000,000

    Balance sheet
    Current assets
    Investment in xyz JO

    Sales
    Investment income

    4,000,000
    200,000

    Costs and expense


    Net income

    (2,200,000)
    2,000,000

    Balance sheet
    1,920,000
    0

    Current assets
    Investment in xyz JO

    Other assets

    2,960,000

    Other assets

    Total assets

    4,880,000

    Total assets
    Current liability
    Long term liablity
    Dec31,06,capital
    Total lia & capital

    Current liability

    820,000

    Long term liablity

    2,560,000

    Dec31,06,capital
    Total lia & capital

    1,500,000
    4,880,000

    1,280,000
    520,000
    2,000,000
    3,800,000
    500,000
    1,800,000
    1,500,000
    3,800,000
    32

    Parties
    in
    a
    joint
    arrangement but doesnt
    have joint control

    A party that participates in, but does not have


    joint control over a joint venture is required to
    account for its interest in the arrangement in
    accordance:

    With IFRS 9 financial instruments if it has no


    significant influence, or
    In accordance with IAS 28( equity method) if
    it has significant influence over the joint
    venture.

    33

    Joint operator's transactions


    with its joint operation

    Discussion
    Compare commercial code JV with IFRS
    joint arrangement definition and
    classification.

    35

    The End

    36

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