(Joint Operation – Contributions of Assets to a Joint Operation)

Lapis Company and Happy Inc. formed a joint operation on March 1, 20x9 to produce special plastic sheets they each
need in their respective manufacturing operations. They contractually agreed for equal sharing of control and output.
Lapis Company contributed cash of P1,000,000 while Happy Inc. contributed equipment with a carrying value of
P800,000 and a fair value of P1,000,000. The equipment has a remaining useful life of 5 years.

Required:
1. What amount of equipment will be shown in Lapis’s books at December 31, 20x9?
A. P320,000 B. P333,334 C. P416,667 D. P400,000

2. What amount of equipment in JO will be shown in Happy’s Books at December 31, 20x9?
A. P320,000 B. P333,334 C. P416,667 D. P400,000

Lapis Happy
Dr. C ash-JO 1,000,000
C r. C ash 1,000,000

Dr. Equipment - JO 1,000,000

C r. Equipment 800,000
C r. Gain on sale 100,000
C r. Unrealized gain 100,000

Dr. Equipment - JO 500,000 Dr. C ash-JO 500,000

C r. C ash - JO 500,000 Cr. Equipment - JO 500,000

Dr. Unrealized gain 100,000

Cr. Equipment - JO 100,000

Equipment- JO 1,000,000
C r. Equipment - JO (600,000)
C ost 400,000

Compound Entry: (Lapis) Compound Entry: (Happy)

Dr. C ash-JO 500,000 Dr. Equipment - JO 400,000
Equipment- JO 500,000 Dr. C ash-JO 500,000
C r. C ash 1,000,000 C r. Equipment 800,000
C r. Gain on sale 100,000

Dr. Depreciation 83,333 Dr. Depreciation 66,667

C r. Accumulated Depreciation 83,333 C r. Accumulated Depreciation 66,667
(500,000 /5 ) x 10/12 (400,000 /5 ) x 10/12

C ost 500,000 C ost 400,000

C r. Accumulated Depreciation (83,333) C r. Accumulated Depreciation (66,667)

416,667 333,333

Equipment - JO 500,000
Depreciation (83,333)
Unrealized gain (100,000)
Realized gain 16,667
333,334
See the decision tree below (more discussion follows):

Classification of joint arrangement structured through separate vehicle

When the legal form of a separate vehicle effectively means that the assets and liabilities held there are the assets
and liabilities of the separate vehicle and not the assets and liabilities of the parties, then the analysis of the legal
form indicates that the arrangement is a joint venture. However, the terms of the contractual arrangement and other
relevant facts and circumstances, can override this preliminary conclusion (IFRS 11.B23).

On the other hand, when a legal form of a separate vehicle does not confer separation between the parties and the
separate vehicle (i.e. the assets and liabilities held in the separate vehicle are the parties’ assets and liabilities), the
joint arrangement is a joint operation (IFRS 11.B24).

A separate vehicle is defined as a separately identifiable financial structure, including separate legal entities or entities
recognised by statute, regardless of whether those entities have a legal personality (IFRS 11.Appendix A).
Assessing the terms of the contractual arrangement
There may be instances where the parties sign an additional arrangement that modifies the rights and obligations
resulting from the legal form of the separate vehicle in which the arrangement has been structured (IFRS 11.B26).
Paragraph IFRS 11.B27 compares terms of the contractual arrangement in a joint operation and a joint venture.

Assessing other facts and circumstances

OVERVIEW OF ASSESSMENT OF OTHER FACTS AND CIRCUMSTANCES

IFRS 11.B30: A joint arrangement might be structured in a separate vehicle whose legal form confers separation
between the parties and the separate vehicle. The contractual terms agreed among the parties might not specify the
parties’ rights to the assets and obligations for the liabilities, yet consideration of other facts and circumstances can
lead to such an arrangement being classified as a joint operation. This will be the case when other facts and
circumstances give the parties rights to the assets, and obligations for the liabilities, relating to the arrangement.
This is the part of the assessment where many of joint arrangements, which seem to be joint ventures at first,
become joint operations. For example, IFRS 11 makes it clear that a joint arrangement which is primarily designed
for the provision of output to the parties is a joint operation, even if it’s structured in a separate vehicle. See
paragraphs IFRS 11.B29-B32 for more discussion and a decision tree in paragraph IFRS 11.B33.

In March 2015, the IFRS Interpretations Committee published useful agenda decisions relating to assessing other
facts and circumstances. There were several specific fact patterns discussed by the IFRIC, the most useful are
summarised below.

OUTPUT SOLD AT A MARKET PRICE

IFRIC discussed whether the fact that the output from the joint arrangement is sold to the parties of the joint
arrangement at a market price prevents the joint arrangement from being classified as a joint operation, when
assessing other facts and circumstances.

IFRIC observed that the sale of output from the joint arrangement to the parties at market price, on its own, is not
a determinative factor for the classification of the joint arrangement. It noted that the parties would need to consider,
among other things, whether the cash flows provided to the joint arrangement through the parties’ purchase of the
output from the joint arrangement at market price, along with any other funding that the parties are obliged to
provide, would be sufficient to enable the joint arrangement to settle its liabilities on a continuous basis.

FINANCING FROM A THIRD PARTY

IFRIC discussed whether financing from a third party prevents a joint arrangement from being classified as a joint
operation.

The IFRIC noted that if the cash flows to the joint arrangement from the sale of output to the parties, along with any
other funding that the parties are obliged to provide, satisfy the joint arrangement’s liabilities, then third-party
financing alone would not affect the classification of the joint arrangement, irrespective of whether the financing
occurs at inception or during the course of the joint arrangement’s operations. It was noted that in this situation, the
joint arrangement will, or may, settle some of its liabilities using cash flows from third-party financing, but the
resulting obligation to the third-party finance provider will, in due course, be settled using cash flows that the parties
are obliged to provide.