IFRS 11 & Proc. No.

25/1992

Accounting for Investment in Joint

Arrangements ( Joint Venture &
Joint Operation )
and Accounting for Ethiopian Public
enterprise
This material is the property of Department of Accounting and Finance, CoBE, AAU.
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Permission must be obtained from the Department prior to reproduction

 Learning Objectives

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

 Defines joint control , Associate and Subsidiary
 Determine the type of joint arrangement(JV /JO)
 Understand how to account for the investment in a joint
arrangement
 Understand how to account for the investment in associate

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List of Applicable Standards

Topic List Standards

Joint Arrangement IFRS 11
Investment in Associates and Joint Ventures IAS 28
Financial Instruments IFRS 9
Consolidated Financial Statement IFRS 10
Disclosure of Interest in Other Entities IFRS 12

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 Choosingappropriate Investment
IFRS standard

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 Investment
 An entity may conduct its business through strategic investments in
other entities.
 IFRS broadly distinguishes three types of such strategic investment:
 The investor entities controls the investee company

 The investor entities jointly control the investee company with

one or more third parties; and
 The investor entities has significant influence over investee
company

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Determining the accounting for interests in other
entities
(Interaction of IFRS 9, 10, 11, 12 and IAS 28)

Outright control?

Yes No

Consolidation (IFRS 10) Joint control?

Yes No

Determine type of joint Significant influence?

arrangement (IFRS 11)
Yes No

Joint Operation Joint Venture

Financial asset
Account for assets, liabilities, Equity accounting accounting
revenues and expenses (IFRS 11) (IAS 28) (IAS 39/IFRS 9)

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IFRS 12 IFRS 7
©2013 Grant Thornton International Ltd. All rights reserved. 4
Degree of influence over ‘investees’
& the relevant IFRS standards
Degree of influence IFRS accounting

Unilateral Control Account for investment according to IFRS

10( Consolidated Financial Statements)

Joint operation: Account for assets and

liabilities using IFRS 11 Joint Arrangements.
Joint control (joint
arrangements) Joint venture: Account for investment using
the equity method in accordance with IAS 28

Significant influence Account for investment using the equity

method in accordance with IAS 28
Less than significant Account for investment using the fair value
model in accordance with IFRS 9
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, and
 Exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing
control.
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 Joint arrangement cont…
 Unanimous consent: means that any party within the
arrangement can prevent other party from making unilateral
decisions without its consent.
 Contractual arrangement: are enforceable agreements reached
among the parties which are often in writing.
 This agreement may be:
 Signed between parties and explicitly stated in the joint
arrangement or
 Derived from :

 documented minutes of discussion

 the articles of association and bylaws .

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Testing Existence of Joint control
 The existence of joint control may:
 Explicitly stated in the contract or
 Implied in the article of association and needs our judgment to
determine weather there exist a joint control.
Example 1: Three Firms Belayab , Lifan and Marathon Motors have
established A Tyre mfg Factory with a capital of ETB 500 million
Belayab has 55%, Lifan has 15% and Marathon has 30% ownership
rights in the new factory.
 The contractual arrangement reached between the owners shows
that unanimous consent of all the parties is required to make
decisions about the new factories relevant activities .
 Required: Assess the existence of joint control
 By which standard should the three firms accounts 12
their
The existence of joint control ( unanimous consent)
is not explicitly stated.
 Example 2: Assume the previous data that the new factory is
established between Belayab and Lifan and each has 50% of the
voting rights ( equivalent power) over the investee’s 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 entity’s relevant activities.
Required:
 Assess the existence of joint control

 Which standard should be used by the two to account their

investment ?
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The existence of joint control ( unanimous consent)
is not explicitly stated.

 Example 3: Three enterprises (Belayab , Lifan and Marathon

Motors ) have established the factory with ownership interest of
 Belayab 50% , Lifan 30% and Marathon 20% . Their article of
association indicate that at least 75% of the voting rights are
required to make decisions about the entity’s relevant activities.
 Required: Assess existence of a joint control?
 Which relevant standard is used to account investment made by
the three firms?

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 The existence of joint control ( unanimous
consent) is not explicitly stated.
Example 4
 What if

 Belayab50% , Lifan 25% and Marathon 25% , . Their article of

association indicate that at least 75% of the voting rights are
required to make decisions about the entity’s relevant activities.
 Required: Assess existence of a joint control?

 Which relevant standard is used to account investment made by the

three firms?

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 Types of Joint Arrangement
 IFRS11 identifies two types of joint arrangements :
1. Joint operations

2. Joint ventures.
 The key distinction between the two forms is the owners’ rights and
obligations under the joint arrangement .
 Joint Operation: is a joint arrangement whereby the parties in the
joint control have rights to the assets, and obligations for the
liabilities of the arrangement.
 Joint Venture: is a joint arrangement whereby the parties in the joint
control of the arrangement have rights to the net assets of the
arrangement.
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Types of Joint Arrangement cont..

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Determination of separate entity as joint operation
or joint venture

 Example 1: Berta and Satcon construction have jointly formed a

new company ( KK Construction) to undertake a government project
( Addis Abeba – Nairobi railway). Both have 50% ownership interest
and the major decision requires a 50+1% vote.
 KK company has General partnership legal form .
 Required:
a. Determine weather the new entity is joint operation or joint
venture?
b. Which standards are used by Berta and Satcon to account their
investment in KK Construction?

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Example 2: Sunshine real estate and China construction company have
set up a new company (SUCH Company) which manufactures
constriction materials in Oromia special zone. Both have 50%
ownership interest and the major decision requires a 50+1% vote
 SUCH has Plc legal form.

a. Determine weather the new entity is joint operation or joint

venture?
b. Which standards are used by the two to account their investment in
SUCH Company?

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 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 in the assets of joint operation

 Its liabilities, including its share in the liabilities of joint

operation
 Its revenue , including its share in the revenue of the joint
operation
 Its expenses, including its share in the expenses of the joint
operation 21
 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 investor’s share in profit or loss of the investee,
 the investor’s 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.

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Example :
 GIK Tyres factory is a company formed between Belayab and
Marathon motors on Jan. 1, 2006 by investing ETB. 320,000
each for a 50% interest in the factory . After operating for a
year, GIK has summarized the following financial statements.
Their agreement requires at least 51% vote on decision of
relevant activities and the two parties share
Assets ,liabilities ,revenues and expense based on their level of
ownership interest.
GIK / P&L 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 :
Belayab 200,000 23
 GIK /Statement change in equity
For the Year Ended December 31, 2006
Belay Ab Marathon Combined

Investment on January 1 Br320000 Br320000 Br640000

Add: Net Income 200,000 200,000 400,000
Jointventurers’(operator) capital, Dec31, Br520,000 Br520,000 Br1,040,000
GIK Company/Balance Sheet
December 31, 2006
Assets
Current Assets Br1,280,000
Other Assets 1,920,000
Total Assets Br3,200,000
Liabilities & Venturers’ Capital
Current Liabilities Br640,000
Long-Term Liabilities 1,520,000
Total Liabilities Br 2,160,000
Venturers’(oporators) Capital:
Belayab Br.520,000
Marathon 520,000 1,040,000
Belayab ’s separate Financial statements.
Belayab /P &L 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
Belay Ab S. Financial Position 12/31/2006
Assets
Current Assets Br1,200,000
Investment in GIK Co. 520,000
Other Assets 2,080,000
Total Assets Br3,800,000
Liabilities & owners equity
Current Liabilities Br500,000
Long-Term Liabilities 1,800,000
Total Liabilities 2,300,000
Dec31,2006,Capital: 1,500,000
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Total Liabilities & owners equity Br 3,800,000
ASSUMTION 1: GIK Co. is joint Operation(partnership)
 To record investment made in GIK investments
January 1,2006. Investment in GIK Co. 320,000
Cash 320,000
 To record earnings in a joint operation
Dec, 31,2006 Investment in GIK Co. 200,000
Investment income 200,000
 Investors( joint operators) account line-by-line their 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 320,000
Long-term Debt 760,000
Revenue 800,000
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Investment in GIK Co. 520,000
Working paper for combined financial report
Belayab share in GIK
company JO Elimination Total
P & L statement
Sales 4,000,000 800,000 4,800,000
Investment income 200,000 (200,000) 0
Costs and expense (2,200,000) (600,000) (2,800,000)
Net income 2,000,000 200,000 2,000,000
S. Financial Position
Current assets 1,280,000 640,000 1,920,000
Investment in GIK Co. 520,000 (520,000) 0
Other assets 2,000,000 960,000 2,960,000
Total assets 3,800,000 1,600,000 4,880,000
Current liability 500,000 320,000 820,000
Long term liablity 1,800,000 760,000 2,560,000
Dec31,06,capital 1,500,000 520,000 (520,000) 1,500,000
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Total lia & capital 3,800,000 1,600,000 4,880,000

 ASSUMTION 2: GIK is joint venture(Plc)

 To record investment made in GIK investments

January 1,2006. Investment in GIK Company 320,000
Cash 320,000
 To record earnings in a joint operation

Dec, 31,2006 Investment in GIK Company 200,000

Investment income 200,000

 The venturer company’s 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:
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 Belayab , Financial 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 GIK Co. 520,000
Other assets 2,000,000
Total assets 3,800,000
Current liability 500,000
Long term liability 1,800,000
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Dec31,06,capital 1,500,000
Comparison(Belayab )
JO JV
Sales 4,800,000 Sales 4,000,000
Investment income 0 Investment income 200,000
Costs and expense (2,800,000) Costs and expense (2,200,000)
Net income 2,000,000 Net income 2,000,000

Balance sheet Balance sheet

Current assets 1,920,000 Current assets 1,280,000
Investment in GIK JO 0 Investment in GIK JV. 520,000
2,000,000
Other assets 2,960,000 Other assets
Total assets 4,880,000 Total assets 3,800,000
Current liability 820,000 Current liability 500,000
Long term liability 2,560,000 Long term liablity 1,800,000
Dec31,06,capital 1,500,000 Dec31,06,capital 1,500,000
Total lia & capital 4,880,000 Total lia & capital 30
3,800,000
1
Discussion
 Compare commercial code JV with IFRS joint
arrangement definition and classification.

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 Investments in Associates(IAS 28)

 Associate: is an entity over which an investor has significant influence and that is
not a subsidiary or a joint venture.
 Significant influence: is the power to participate in the operating and financial
policy decisions of an entity; but is not control or joint control over those policies.
 Any of the following items are considered to be evidence of significant influence:
 Board of directors representation

 Management personnel swapping or sharing

 Material transactions with the investee

 Policy-making participation

 Technical information exchanges

 IAS 28 states that significant influence is presumed to exist if an entity holds 20%
or more of an entity’s voting power, unless it can be clearly demonstrated this
is not the case.
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 Equity Method
 IAS 28 specifies that an investor must use the equity
method to account for its associates or joint ventures.

 Equity Method: The Standard defines the equity

method as a method of accounting whereby the
investment is:
 Initially recognized at cost and
 Adjusted thereafter for the post-acquisition change in the
investor’s share of net assets of the investee
This material is the property of Department of
Accounting and Finance, CoBE, AAU. Permission must
be obtained from the Department prior to reproduction
 Example
 Belay Ab Motors has acquired 25,000 of the 100,000 ,Br 1
ordinary shares of Lifan Motors for Br 60,000 on 1 January 20X8.
In the year to 31 December 20X8, Lifan earns profits after tax of
Br 24,000, from which it pays a dividend of Br 6,000.the
necessary journal entries recorded in the book of investor
Belayab Motors under equity method will be as follows:
January1, 20X8. Investment in associates 60,000
cash 60,000
December 31,20X8 Investment in associates 6,000
Investment Income 6,000
Cash 1,500
Investment in associates 1,500
 The asset 'Investment in associates' is then stated at Br 64,500,
being cost plus the group share of post-acquisition34 retained
Equity Method cont… loss
 loss: An associate may incur a substantial losses and the
investor’s share of the loss may equals or exceeds its
investment in the associate.
 If so, the investor immediately stops recognizing its share of
any further losses.
 If the associate subsequently reports profits, then the
investor resumes its recognition of the associate’s profits, but
only after its share of the profits equals the share of losses
that it previously did not recognize.

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Equity Method cont…
 Loss of significant influence or joint control: An investor
discontinues equity accounting from the date that it ceases to
have significant influence over an associate and accounts for
the investment in accordance with IFRS9(financial instrument)
prospectively.

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Presentation and Disclosure

Presentation
 Investments in associates and joint ventures are classified as
non-current assets.
 The investor's share of investee's profit /loss is recognized in
its profit /loss and
 it’s share in investee's other comprehensive income is
included in the investor's other comprehensive income

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 Presentation and Disclosure

 Disclosures in relation to IAS 28 would include:

 Significant judgments and assumptions made in determining
whether or not there is significant influence over an investee .
 The fair value of investments in associates for which there are
quoted market prices .
 the reporting date of an associate if different from that of the
investor and reasons for using the different date.

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