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Chapter 34

Accounting for interests in joint ventures


34.1

A joint venture is defined in AASB 131 as a contractual arrangement whereby two or more
parties undertake an economic activity that is subject to joint control. The contractual
arrangement between the parties establishes the operation and management of the joint
venture. The economic activity being undertaken by the entity is the subject of joint control
(if one organisation controlled the venture then it would not be classified as a joint venture).
In relation to joint control, paragraph 3 of AASB 131 states:
Joint control is the contractually agreed sharing of control over an economic activity
and exists only when the strategic financial and operating decisions relating to the
activity require the unanimous consent of the parties sharing control (the venturers).
Joint ventures can be established through the creation of a separate entitya jointly
controlled entity. Joint ventures can also exist when a separate entity has not been established
but where the arrangement involves the shared used of assets, other resources and expertise
of the venturerssuch joint ventures are referred to as jointly controlled operations. Where
the joint venture simply involves the joint control of one or more assets then such an
arrangement is referred to as jointly controlled assets. As AASB 131 states:
Joint ventures take many different forms and structures. This Standard identifies three
broad typesjointly controlled operations, jointly controlled assets and jointly
controlled entitiesthat are commonly described as, and meet the definition of, joint
ventures. The following characteristics are common to all joint ventures:
(a) two or more venturers are bound by a contractual arrangement; and
(b) the contractual arrangement establishes joint control.

34.2

Joint ventures can take many different forms and structures, such as partnerships, trusts, and
incorporated entities. Where a separate entity is formed, the joint venture is referred to as a
joint venture entity. Joint ventures can also exist even when a separate joint venture entity has
not been established. In such a situation the joint venture can simply involve the shared use of
assets and other resources of the venturers. Such a joint venture would be referred to as a
joint venture operation. The accounting treatment required for a joint venture entity is
different from that required for a joint venture operation. In relation to a joint venture
operation, paragraphs 13 and 14 of AASB 131 state:
13. The operation of some joint ventures involves the use of the assets and other
resources of the venturers rather than the establishment of a corporation, partnership
or other entity, or a financial structure that is separate from the venturers
themselves. Each venturer uses its own property, plant and equipment and carries its
own inventories. It also incurs its own expenses and liabilities and raises its own
finance, which represent its own obligations. The joint venture activities may be
carried out by the venturers employees alongside the venturers similar activities.
The joint venture agreement usually provides a means by which the revenue from the
sale of the joint product and any expenses incurred in common are shared among the
venturers.
14. An example of a jointly controlled operation is when two or more venturers combine
their operations, resources and expertise to manufacture, market and distribute

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jointly a particular product, such as an aircraft. Different parts of the manufacturing


process are carried out by each of the venturers. Each venturer bears its own costs
and takes a share of the revenue from the sale of the aircraft, such share being
determined in accordance with the contractual arrangement.
In relation to a jointly controlled entity, paragraphs 24 and 25 of AASB 131 state:
24. A jointly controlled entity is a joint venture that involves the establishment of a
corporation, partnership or other entity in which each venturer has an interest. The
entity operates in the same way as other entities, except that a contractual
arrangement between the venturers establishes joint control over the economic
activity of the entity.
25. A jointly controlled entity controls the assets of the joint venture, incurs liabilities
and expenses and earns income. It may enter into contracts in its own name and
raise finance for the purposes of the joint venture activity. Each venturer is entitled
to a share of the profits of the jointly controlled entity, although some jointly
controlled entities also involve a sharing of the output of the joint venture.
34.3

The accounting treatment required for a joint venture operation is different to the treatment
required for a joint venture entity. Where a joint venture operation exists, the venturer must
recognise the assets it controls, liabilities and expenses it incurs, and revenues from its share
of the output of the joint venture. As paragraph 21 of AASB 131 states, a venturers interests
in joint venture operations must be recognised in the venturers own financial report by
including in its respective classification categories:
(a) its share of the jointly controlled assets, classified according to the nature of the
assets;
(b) any liabilities that it has incurred;
(c) its share of any liabilities incurred jointly with the other venturers in relation to the
joint venture;
(d) any income from the sale or use of its share of the output of the joint venture,
together with its share of any expenses incurred by the joint venture; and
(e) any expenses that it has incurred in respect of its interest in the joint venture.
The recognition of the above items is subject to the usual requirements pertaining to
measurability and probability.
In relation to accounting for an interest in a joint venture entity, AASB 131 requires that a
venturer that prepares consolidated financial reports will recognise its investment in a
venturer by using the equity method in its consolidated reports. A venturer that is not
required to prepare a consolidated financial report will recognise its investment in the
associate by using the equity method of accounting in its own financial report. As paragraph
38 of AASB 131 states:
A venturer shall recognise its interest in a jointly controlled entity using the equity
method.

34.5 The answer to this question depends upon whether the joint venture is a joint venture entity,
or a joint venture operation. If it is a joint venture operation, AASB 131 requires that a
venturers interest in joint ventures shall be brought to account by including, in their
respective asset classification categories, the amount of the venturers share in each of the
individual assets employed in the joint ventures. As paragraphs 15 and 16 of AASB 131 state:
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15.

In respect of its interests in jointly controlled operations, a venturer shall recognise


in its financial statements:
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from the
sale of goods or services by the joint venture.

16.

Because the assets, liabilities, income and expenses are recognised in the financial
statements of the venturer, no adjustments or other consolidation procedures are
required in respect of these items when the venturer presents consolidated financial
statements.

The method required by AASB 131 is frequently referred to as the line by line method.
Applying this method will result in the assets in the balance sheet including both those assets
that are controlled by the entity, and those that have been contributed to the joint venture
(and hence are under joint control).
If the joint venture is a joint venture entity then the equity method of accounting shall be
applied. This method of accounting does not involve the separate disclosure of the venturers
share of the various assets and liabilities of the joint venture.
34.6

This will occur when a venturer has an interest in a joint venture operation. Whether it is
appropriate to mix a venturers proportional share of the net assets of a joint venture
operation with its other assets is a matter of opinion. Obviously those responsible for
developing the Accounting Standard believe it to be appropriate. An issue is, however, the
level of control the reporting entity has over the assets contributed to the joint venture. If the
entity does not have control (and control relates to the capacity of the entity to benefit from
the asset in the pursuit of its objectives and to deny or regulate the access of others to that
benefit) then perhaps, conceptually, it should not include the assets in the balance sheet. Can
an entity have differing levels of control? Is it appropriate to combine the assets where there
are differing levels of control?

34.7

(Appreciation to Peter Keet for supplying this question)


(a)The venture between Simon Ltd and Anderson Ltd is a joint venture, because:
The oil exploration and development venture is jointly controlled by Simon and
Anderson:
Simon and Anderson jointly make all decisions relating to the exploration and
development venture. [AASB 131.3, definition of joint control];
There is a contractual arrangement between Simon and Anderson, the joint venture
agreement; and
The oil exploration and development venture is an economic activity.
[AASB 131.3, definition of Joint Venture].
The Joint Venture between Simon Ltd and Anderson Ltd is a joint venture, involving jointly
controlled assets, because it is not a Joint Venture Entity. [AASB 131.18 to.20].
The oil exploration and development joint venture has not been incorporated as a
company, nor established as a trust.
The oil exploration and development joint venture is not a partnership because:

The joint venture does not have a profit objective, (a view to profit):

The venturers, (Simon and Anderson), will each receive an agreed share of any output
produced.

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The oil exploration and development joint venture will not derive any revenue,
because it does not sell any output.

Therefore the oil exploration and development joint venture is incapable of earning
profits.

The joint venture is not a business in common:

The venturers, (Simon and Anderson), will sell their share of the output individually.

The venturers are conducting their individual businesses.

The oil exploration and development joint venture is merely a cost sharing venture.
[The Partnership Act defines a partnership as a business in common with a view to profit.]
(b) Simon Ltd is required by AASB131.21 to account for its investment in the oil exploration
and development joint venture, involving jointly controlled assets, by using the line by line
method, in its own financial report, and if Simon is a parent entity, it is also required to use
the line by line method in its consolidated financial report, whereby:

Simons share of each joint venture asset will be included in the relevant asset account
in Simons accounts, e.g. Simons share of joint venture inventory will be included in
Simons inventory account. Note that Simon may own 100% of some joint venture
assets, may jointly own some joint venture assets, (in specified proportions with other
Venturers), and may have no interest in some other joint venture assets, as specified in
the Joint Venture Agreement.
Simons share of each joint venture liability will be included in the relevant liability
account in Simons accounts.
Usually each venturer individually raises the funds required for its contributions to joint
venture resources. Therefore, usually each venturer is individually responsible for
particular joint venture liabilities, (as contracted with lenders/credit providers).
Often the venturers will be jointly responsible, with other venturers, (in specified
proportions), for liabilities such as trade creditors, accrued expenses.
Simons share of each joint venture expense will be included in the relevant expense
account in Simons accounts.
The revenues that Simon (individually) derives by selling or using its share of the output
produced by the joint venture, will be included in the relevant revenue account in
Simons accounts.
[AASB131.21]
34.8

In the books of Goldey Ltd


Dr
Cr

Plant and machinery


Cash

4 000 000
4 000 000

(To recognise the contribution of cash to the joint venture and the proportional interest in the
plant and machinery contributed by Oiley Ltd.)
In the books of Oiley Ltd
Dr
Cr
Cr

Cash
Plant and machinery
Gain on disposal of machinery

4 000 000
3 000 000
1 000 000

(To recognise the contribution of machinery to the joint venture and the proportional interest
in the cash contributed by Goldey Ltd.)
Optional entry in Oileys books
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Dr
Cr

Machinery
Revaluation reserve

1 000 000
1 000 000

(To revalue the half interest in the machinery contributed to the joint venture. There has been
no adjustments to accumulated depreciation, because the question provides no information
about the balance of accumulated depreciation. To take into account the tax effect of the
revaluation there should also be a debit entry to revaluation reserve and a credit entry to
deferred tax liability however, this would require knowledge of the tax rate which is not
provided in this question)
34.9

(a)

1 July 2008
The journal entry to record the establishment of the joint venture would be:
in Toxic Ltds accounts:
Dr
Dr
Dr
Dr
Cr

Cash
Land
Loss on sale of machinery
Accumulated depreciation
Machinery

5 000 000
5 000 000
500 000
4 500 000
15 000 000

[To recognise Toxic Ltds share in the cash and land contributed by Sludge Ltd, and
to recognise Toxic Ltds contribution of machinery (fair value of $20 000 000; book
value of $21 000 000).]
Dr
Cr
Dr
Cr

Accumulated depreciation
Machinery
Loss on revaluation of machinery
Machinery

4 500 000
4 500 000
500 000
500 000

[To revalue Toxic Ltds own interest in the machinery, such that the revalued amount
will be $10 000 000 (50 per cent of the assets fair value of $20 000 000).]
Dr
Cr

Machinery
Cash

3 500 000
3 500 000

To recognise Toxic Ltds proportional interest in the acquisition of the machinery:


in Sludge Ltds accounts:
Dr
Cr
Cr
Cr

Machinery
Cash
Land
Profit on disposal of land

10 000 000
5 000 000
4 000 000
1 000 000

[To recognise Sludge Ltds contribution of cash ($10 000 000 was contributed, of
which Sludge Ltd has a 50 per cent interest) and contribution of land (the land has a
fair value of $10 000 000) and to recognise Sludge Ltds proportional interest (50 per
cent) in the machinery contributed by Toxic Ltd (fair value of $20 000 000).]
Dr
Cr

Land
Asset revaluation reserve

1 000 000

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1 000 000
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[To revalue Sludge Ltds own interest in the land, such that the revalued amount will
be $5 000 000 (50 per cent of $10 000 000). For the revaluations there should also be
a journal entry to take account of the tax effect of the revaluation a debit to
revaluation reserve and a credit to deferred tax liability however this would require
information about the tax rate which is not provided in the question]
Dr
Cr

Machinery
Cash

3 500 000
3 500 000

(To recognise Sludge Ltds proportional interest in the acquisition of the machinery.)
(b)

30 June 2009
AASB 131 requires that a venturer, in respect of its interests in jointly controlled
operations, shall recognise in its financial statements:
(i)
the assets that it controls and the liabilities that it incurs; and
(ii)
the expenses that it incurs and its share of the income that it earns from the
sale of goods or services by the joint venture.
Therefore, the following entries would appear in both Toxic Ltds and Sludge Ltds
accounts:
Dr
Cr
Cr

Mining assets under construction


Cash
Accounts payable

1 100 000
800 000
300 000

The above entries recognise, as a liability in each joint venturers own accounts, the
outstanding liabilities of the joint venture operation (which relate the excess of the
production costs incurred, being $2 200 000, over the actual payments made for these
costs, being $1 600 000).
The individual venturers will depreciate the machinery in their own accounts in a
manner consistent with their own accounting policies.

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