IFRS 11 and IAS 28

Joint Arrangements and

Investment in Associates

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 Learning Objectives
At the completion of studying this chapter, you will be
able to:
 Defines joint control;
 Determine the type of joint arrangement;
 Account for the investment in a joint arrangement

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List of Applicable Standards

Topic List Standards

Joint Arrangement IFRS 11
Investment in Associates and Joint Ventures IAS 28
Disclosure of Interest in Other Entities IFRS 12

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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 reporting entities controls the investee company

 the reporting entities jointly control the investee company

with one or more third parties; and
 the reporting entities has significant influence over
investee company

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Determining the accounting for interests in other
entities
(Interaction of IFRS 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)

IFRS 12 IFRS 7 5

©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 Arrangements(IFRS 11)
 The creation of joint arrangements ( corporation ,Plc 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 .

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 Marketing of the Joint Arrangement 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.

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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 or

 Derived from documented minutes of discussion, and

 From the articles of association, charters, bylaws and similar

mechanisms.

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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.
Testing Existence of Joint control
 The existence of joint control may explicitly stated in the contract
( usually of organized as partnership or Plc vehicle) Or It is implied
in the article of association and needs our judgment to determine
wether there exist a 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 among the parties specifies
that unanimous consent of all the parties is required to make
decisions about the entity’s relevant activities .
 Required: Assess the existence of joint control
 By which standard should the three accounts their investment? 11
The existence of joint control ( unanimous consent)
is not explicitly stated.
 Example 2: Assume the previous data that Shebelle Sugar factory is
established between Wanji and Mathara only and each has 50% of
the voting rights (and 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 ?

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 The existence of joint control ( unanimous 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 entity’s relevant
activities.
 Required: Assess existence of a joint control?
 Which relevant standard is used to account investment made
by the three factories?

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 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 entity’s relevant activities.
 Required: Assess existence of a joint control?

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

three factories?

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 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 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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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.

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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 (BS Construction) to undertake a government project (
Addis Abeba – Nairobi railway). The new company’s legal form is that
Berta and Satcon construction have rights to the assets, and
obligations for the liabilities of the entity
 Required:
a. Determine whether the new entity is joint operation or joint
venture?
b. Which standards are used by Berta and Satcon to account their
investment in BS Construction?

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Example 2: Sunshine real estate and China construction company,
have set up a separate vehicle (SRCCC Company) which
manufactures construction materials in Oromia special zone
 According to SRCCC ‘s legal form, SRCCC has rights to its own
assets, and obligations for its own liabilities, relating to the
arrangement.
a. Determine whether the new entity is joint operation or joint
venture?
b. Which standards are used by Sunshine and China construction
company to account their investment in SRCCC Company?

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 Accounting for Joint Arrangement
 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. (IFRS11)
If the arrangement is joint venture, the Joint ventures account for
their interest in the entity based on equity method of
accounting(IAS28).

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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 22
FS of a joint operator
 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 :
 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. Their contract indicates that the two parties share
Assets ,liabilities ,revenues and expense based on their level of
ownership interest.
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 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
XY Company/Balance Sheet
December 31, 2006
Assets
Current Assets $1,280,000
Other Assets 1,920,000
Total Assets $3,200,000
Liabilities & Venturers’ Capital
Current Liabilities $640,000
Long-Term Liabilities 1,520,000
Total Liabilities $2,160,000
Venturers’(oporators) Capital:
Meta $520,000

Finchia 520,000 $1,040,000

Meta Company ’s separate Financial
statements. 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
Mata B/Sheet 12/31/2006
Assets
Current Assets $1,200,000
Investment in XYZ Co. 520,000
Other Assets 2,080,000
Total Assets $3,800,000
Liabilities & owners equity
Current Liabilities $500,000
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 $3,800,000
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 thier 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 XYZ Company 520,000
Working paper for combined financial report
Meta company share in XYZ JO Elimination Total
Income 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 (200,000) 2,000,000
Balance sheet
Current assets 1,200,000 640,000 1,840,000
Investment in xyz JO 520,000 (520,000) 0
Other assets 2,080,000 960,000 3,040,000
Total assets 3,800,000 1,600,000 (520,000) 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
Total lia & capital 3,800,000 1,600,000 4,880,000
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 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 Venture

Dec, 31,2006 Investment in XYZ 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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 Meta 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
Other assets 2,000,000
Total assets 3,800,000
Current liability 500,000
Long term liability 1,800,000
Dec31,06,capital 1,500,000 31

Total lia & capital 3,800,000

Comparison(Metehara Company )
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 xyz JO 0 Investment in xyz 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 3,800,000
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Parties in a joint arrangement but
doesn’t 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.

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