Advanced Financial

Accounting II
CHAPTER ONE-JOINT ARRANGEMENTS
Instructor: Kirubel W. (MSc & MBL)
 Table: Types of interest in other entities 1

Subsidiary Associate Joint Investment

Interest Interest Arrangement Interest

Ownership >50% 20% - 50% Joint < 20%

Accounting IFRS 3 and IAS 28 IFRS 11 IFRS 9

Standards IFRS 10

Accounting Control = Significant Joint operation At fair value.

Treatment Consolidatio influence = = in accordance Separate
n Equity method with relevant financial
IASs/IFRSs; statements are
Joint venture = not required.
equity method.
 Joint arrangements (IFRS 11) 2
• A joint arrangement is an arrangement over which two or more
parties have joint control with all of the following
characteristics
► The parties are bound by a contractual arrangement
Contractual arrangements define :
o The purpose, activity and duration of joint arrangement
o The decision making process
o Capital or other contributions required of the parties
o How the parties share assets, liabilities, revenues, expense or
profit/loss relating to joint arrangements

► That contractual arrangement gives two or more of those parties

joint control of the arrangement
 JOINT CONTROL
3

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.
 JOINT ARRANGEMENTS: JOINT
CONTROL 4

Does the contractual arrangement give all

the parties (or a group of the parties)
control of the arrangement collectively? No
Not in
yes scope of
Do the decisions about the relevant activities IFRS 11
require the unanimous consent of all the
parties that collectively control the No
arrangement?
yes
Joint operation

Joint Arrangement
Joint venture
 Example 5

 Assume that three parties establish an

arrangement: A has 50 per cent of the voting rights
in the arrangement, B has 30 per cent and C has
20 per cent. The contractual arrangement between
A, B and C specifies that at least 75 per cent of the
voting rights are required to make decisions about
the relevant activities of the arrangement.
Classification of a joint arrangement 6

• Joint arrangement is classified as a joint operation or

a joint venture depending on the assessment of the
rights and obligation of the parties to the arrangement.
 Joint Operation is joint arrangements where parties
with joint control have the rights to assets & obligation
for liabilities, relating to the arrangements.
 Joint Venture is joint arrangements where parties with
joint control have the right to net asset of the
arrangements
 Cont…. 7
 Jointoperation is established as unstructured
separate form
 Jointventure is established through structured
separate form.
 Legal form of the separate vehicle
 The terms of the contractual arrangements
Joint Operations 8

– No separate entity is established to conduct joint

activities
– a joint operator enters into an agreement with one or
more joint operator to produce, market, and distribute
a specific product
– each joint operator provides its specific operating
expertise
– each may agree to use their own assets, incur their
own expenses and liabilities, and finance their own
requirements
 Joint Operations 9

• Joint venture agreement

– Income sharing
– how shareable costs are to be allocated to joint
operators
 FS of parties to a joint arrangement 10

• A joint operator shall recognize in relation to its

interest in joint Operation :
a) Its asset, including its share of any assets held jointly
b) Its liabilities, including its share of any liabilities incurred
jointly.
c) Its revenue from the sale of its share of the output arising
from joint operation
d) Its expense, including its share of any expense incurred
jointly.
NB: The above are accounted for in accordance with the applicable
IFRSs
 Example 11
 A & B successfully tendered jointly for a contact to give consultancy
services for a large corporation in return for Br3 million.
Contractual arrangement between A & B:
 each uses its own finances, facilities and employees in the
consultancy activity
 A designed the accounting, finance and IT systems and prepares the
related manuals at a cost of Br800,000.
 B designs the operations, HRD, and marketing systems and
prepares the related manuals at a cost of Br1 million.
 A & B share equally in the Br3 million billed & received jointly to
the corporation.
Jointly Controlled Entities (JOINT
VENTURE) 12

– This may be a corporation, a partnership, or

other form of organization
– separate entity controls assets of the joint venture,
incurs liabilities and expenses, and earns income
– each venturer usually has an ownership interest in
the venture and is entitled to a share of its profits or
output
 Jointly Controlled Entities (JV)
13

05/05/2023
A and B enter into a contract to acquire and operate a
shopping centre
 A and B set up X to own the shopping centre
 Legal form of X is such that X has rights to the assets and
liabilities for the obligations (not A and B)
 Activities include: rental of retail units, managing the car
park, maintaining the centre and its equipment (such as
lifts), and building the reputation and customer base
 Jointly Controlled Entities (JV)
14

 The parties are not liable for the debts or liabilities of X

05/05/2023
(liability limited to unpaid capital contribution)
 A and B have the right to sell or pledge interests in X
 A and B receive share of the net rental income
 APPLICATION OF JOINT VENTURE 15

Joint
 Venturers Account for their interest in a JV as an
investment and is required to account it using equity
method.

Under
 the equity method, on initial recognition the investment
in a joint venture is recognized at cost, and the carrying
amount is increased or decreased to recognize the investor’s
share of the profit or loss of the investee after the date of
acquisition. The investor’s share of the investee’s profit or loss
is recognized in the investor’s profit or loss. Distributions
received from an investee reduce the carrying amount of the
investment.
EQUITY METHOD 16
 Initial Investment --Investment in JV….xx
Cash/other assets….xx

 Net Income -----Investment in JV….xx

Income from JV…….xx

 Net Loss --------Loss from JV……...xx

Investment in JV…...xx

 Dividend ---Dividend receivable/ cash...xx

Investment in JV…….…...xx
 EQUITY METHOD 17

Equity accounting for a JV ’s losses continues until the

investment is reduced to zero. Additional losses may
be recognized as a liability if an entity has a legal or
constructive obligation or made payments on behalf
of the associate or joint venture Recognition of future
share of profits only after share of profits equals
losses.
 EXAMPLE 18

 Arthur Company and Beatrice Company each

invested Br 400,000.00 for a 50% interest in ARBE
joint venture on January 1, 2019. At December 31,
2019, ARBE reported a Net Income of Br
300,000.00 and also on December 21, 2019 it
declared a dividend of Br 100,000.00.
 19
Solution
For Arthur and Beatrice personal account
January 1: Investment in ARBE……..400,000.00
Cash…………..…………400,000.00

December 31: Investment in ARBE..150,000.00

Income from ARBE………150,000.00

December 21: Dividend receivable..50,000.00

Investment in ARBE……..50,000.00
 20
Example
 On 1/3/2020 KEY buys 30% of Entity B for Br120 million
(Assume through this interest KEY gained Joint control over
B).
 Entity B’s profit = Br 80 million for the year ended 31/12/2020
(including Br66.67million from March to Dec). On 20/12/2020
Entity B declared a dividend of Br100 million. The fair value of
KEY`s share in B at December 31,2020 is Br 115,000,000.00.
 Entity B reported loss of Br400 million for year ended
31/12/2021 and declared no dividend. It also reported profit of
Br300 million for year ended 31/12/2022 and declared no
dividend.
 21
Solution
For EEP personal account
1/3/2020-------Investment in B....120,000,000.00
Cash...............120,000,000.00

31/12/2020----Investment in B....20,000,000.00
Income from B....20,000,000.00
(66,666,666.66*0.3)
20/12/2020----Dividend receivable…..30,000,000.00
Investment in ARBE….30,000,000.00
(100,000,000.00*0.3)
 22
Solution
31/12/2021-----Loss from B……120,000,000.00
Investment in B…110,000,000.00
Liability to B……....10,000,000.00
(400,000,000.00*0.3)
31/12/2012---Investment in B……..80,000,000.00
Liability to B……….10,000,000.00
Income from B….90,000,000.00
(300,000,000.00*0.3)
 23

End of
Chapter one

24
 Exercises of Chapter one 24

1.EntitiesA and B own 55 per cent and 10 per cent respectively of the ordinary
shares that carry voting rights at a general meeting of shareholders of entity Z.
Strategic decisions in entity Z require approval by investors holding more than
60 per cent of the voting power. Is there a Joint control? Discuss.

2. Entity A researches and develops drugs. Entity B manufactures drugs and

promotes them commercially. Entities A and B enter into a contractual
arrangement whereby they equally participate in the results of research and
development and the commercial promotion of a particular drug that is yet to
be invented. In accordance with the contractual arrangement entity A
undertakes the research and development activities and entity B undertakes the
manufacturing and commercial activities. The entities share all costs and
revenues. Identify this example as JO or JV? Clearly state your reasons.
 25
Cont….
3. On 1 January 20X1 entities A and B each acquired 30 per
cent of the ordinary shares that carry voting rights at a
general meeting of shareholders of entity Z for Br 300,000.
Entities A and B immediately agreed to share control over
entity Z. For the year ended 31 December 20X1 entity Z
recognized a profit of Br 400,000. On 30 December 20X1
entity Z declared and paid a dividend of Br 150,000 for the
year 20X1. At 31 December 20X1 the fair value of each
venturer’s investment in entity Z is Br 425,000. However,
there is no published price quotation for entity Z.
 26
Cont….
4. A joint venture is:
(a) an entity whose equity is owned in equal shares (i.e. 20 per
cent each) by five investors.
(b) an entity whose equity is owned in equal shares (i.e. 25 per
cent each) by four investors.
(c) a contractual arrangement whereby two or more parties
undertake an economic activity.
(d) a contractual arrangement whereby two or more parties
undertake an economic activity that is subject to joint control.
 27
Cont….
5. Joint control is:
(a) the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over
those policies.
(b) active participation in the financial and operating policy
decisions of the investee but is not control or joint control over
those policies.
(c) the power to govern the financial and operating policies of
an entity so as to obtain benefits from its activities.
(d) the contractually agreed sharing of control over an
economic activity.
 Cont….. 28

6. H Corporation and A company invested $200,000 and $300,000 Respectively in an

unincorporated joint venture on January 1, 2012. They agreed to share the profit or
loss of the joint venture in 2:3 ratio. Condensed financial statements for the joint
venture were as follows.
H and A Joint Venture
Income Statement
For year Ended December 31,2012
Revenue $1,250,000
Less: Cost and Expenses 937,5000
Net income $312,500
Division of Net income:
H Corporation $??? = (a)
A Company ??? = (b)
Total $312,500
 
 29
Cont…

(5 %) Submission date------April 30/2023