Joint Arrangements

ACC 311
Joint Arrangements

• PFRS 11 and PAS 28

• An arrangement of which two or more parties have joint control.
• Characteristics
• The parties are bound by a contractual arrangement
• The contractual arrangement gives two or more of those parties joint
control of the arrangement
• Types
• Joint Operation
• Joint Venture
Contractual arrangement

• Existence of contractual agreement for sharing joint control over

an investee.
• Could be evidenced by a contract between parties or minutes of
discussions between parties.
• Deals with such matters
• The activity, duration and reporting obligation of the arrangement
• The appointment of the board of directors or equivalent.
• Capital contribution by the parties
• The sharing by the parties of the output, income, expense or results.
Joint Control

• 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
• This exists when all of the parties to the contractual arrangement
act collectively in directing the activities that significantly affect
the returns of the arrangement.
• Joint arrangement could still exists even if not all of the parties
have joint control.
Distinguishment of Investments

Nature of Types of Interest in Applicable Accounting

relationship Investment voting rights of reporting treatment for
with investee investee standard investment
Regular Investor Investment in Less than 20% PFRS 9 Fair Value
FVPL or FVOCI
Significant Investment in 20% to 50% PAS 28 Equity Method
Influence Associate
Control Investment in 51% to 100% PFRS 3 and PFRS Consolidation
Subsidiary 10
Distinguishment of Investments
Nature of Types of Interest in Applicable Accounting
relationship Investment voting rights of reporting treatment for
with investee investee standard investment
Recognize own
assets,
liabilities,
revenues and
expenses plus
a. Joint PFRS 11 ad other
share in the
Operation Contractually relevant PFRSs
Joint Control assets,
agreed liabilities,
revenues and
expenses in the
joint operation
PFRS 11 and PAS
b. Joint Venture Equity Method
28
Illustrations

• A, B and C establish an arrangement whereby A has 50% of the

voting rights in the arrangement. B has 30% and C has 20%. The
contractual arrangement between A, B and C specifies that at
least 75% of the voting rights are required to make decisions about
the relevant activities of the arrangement.

• A and B has joint control

Illustration

• A, B and C establish an arrangement whereby A has 50% of the

voting rights in the arrangement. B has 25% and C has 25%. The
contractual arrangement between A, B and specifies that atleast
75% of the voting rights are required to make decisions about the
relevant activities of he arrangement.

• A and B or A and C has joint control.

Illustration

• Assume an arrangement of which A and B each have 35% of the

voting rights in the arrangement with the remaining 30% being
widely dispersed. Decisions about the relevant activities require
approval of a majority of the voting rights.

• A and B has joint control only if the contractual arrangement

specifies that decisions about the relevant activities of the
arrangement require both A and B agreeing.
Types of Joint Arrangement

• PFRS 11 requires an entity to determine the type of joint

arrangement in which it is involved. The following are the types of
joint arrangement under PFRS 11.
• Joint Operation – is a joint arrangement whereby parties that have joint
control of the arrangement have the rights to the assets, and obligations for
the liabilities relating to the arrangement. Those parties are called joint
operators.
• Joint Venture – is a joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net assets of the
arrangement. Those parties are called joint venturers.
Joint Operation

• Financial Reporting by joint operators

• A joint operator shall recognize in relation to its interest in a joint
operation:
• Its assets, including its share of any assets held jointly
• Its liabilities, including its shale of any liabilities incurred jointly.
• Its revenue from the sale of its share of the output arising from the joint
operation
• Its share of the revenue form the sale of the output by the joint operation
• Its expenses, including its share of any expenses incurred jointly.
Illustration 1

• A and B agreed to combine their operations, resources and

expertise to manufacture, market and distribute jointly a
particular product. Different parts of the manufacturing process
are carried out by each of the joint operators. Each joint operator
bears its own costs and takes a share of the revenue from the sale
of the product equally. The joint operation was complete and thus
terminated during the year. The following were the transactions
during the year.:
• A incurred total costs of P100, assumed obligations amounting to P20 and
made sales amounting to P200
• B incurred total costs of P80 and made sales amounting to P150.
Illustration 1

• A – recognizes total costs of P100 and liability of P20 along side its
regular accounts and a share in the join operation’s sales of P175
((200+150)/2). A recognizes profit in the joint operation of P75
(175 sales – 100 costs)
• B – recognizes total costs of P80 and a share in the joint
operation's sales of P175 ((200 + 150)/2). B recognizes profit in the
joint operation of P95 (175-80).
Illustration 2

• A, B and C each engaged in the extraction of oil, agreed to

acquire and jointly operate an oil pipeline. Each party will use the
pipeline to transport its own product in return for which it bears
an agreed proportion of the expenses of operating the pipeline. A,
B and C agreed to share equally on the cost of acquiring the
pipeline and the expenses of operating it. Total acquisitions cost
of the pipeline is P150M and the total expenses relating to the
operation of the pipeline during the period.
Accounting for Joint Operations

• Separate accounting records may or may not be required for the

joint operation itself and financial statements may or may not be
prepared for the joint operation.

• If no separate records are maintained, joint operators may

prepare management accounts to assess the performance of the
joint operation.
Management Accounts

JOINT OPERATION
Merchandise contributions XX XX Merchandise withdrawals
Purchases and Freight In XX XX Purchase returns, discounts and
allowances
Sales Return, discounts, and XX XX Sales and other item of income
allowances
Expenses XX XX Unsold merchandise, if any
LOSS XX XX PROFIT
Illustrations No separate books maintained

• A, B and C agreed to form a joint operation. Profit or loss of the

joint operation shall be divided equally. The following were the
transactions during the year:
• Inventory costing P100 was sent by A to B
Books of A Books of B Books of C
Joint Operation 100 Joint Operation 100 Joint Operation 100
Inventory 100 Payable to A 100 Payable to A 100
• Freight paid by A on the inventories sent to B amounted to P5
Books of A Books of B Books of C
Joint Operation 5 Joint Operation 5 Joint Operation 5
Cash 5 Payable to A 5 Payable to A 5
Illustrations No separate books maintained

• Cash of P200 was sent by C to B to be used to purchase additional

inventory.
Books of A Books of B Books of C
Joint Operation 200 JO – Cash 200 Joint Operation 200
Payable to C 200 Payable to C 200 Cash 200

• B purchased additional inventory amounting to P250, P50 of which

were made on account B.
Books of A Books of B Books of C
Joint Operation 50 Joint Operation 250 Joint Operation 50
Payable to B 50 JO-Cash 200 Payable to B 50
A/P 50
Illustrations No separate books maintained

• Cash sales made by B amounted to P800

Books of A Books of B Books of C
Receivable from B 800 JO – Cash 800 Receivable from B 800
Joint Operation 800 Joint Operation 800 Joint Operation 800

• Operating expenses amounting to P55 were paid by B using the

own cash.
Books of A Books of B Books of C
Joint Operation 55 Joint Operation 55 Joint Operation 55
Payable to B 55 Cash 55 Payable to B 55
Illustrations No separate books maintained

• Unsold inventory at year-end amounted to P30

JOINT OPERATION
Merchandise contributions 100 0 Merchandise withdrawals
Purchases and Freight In 5 0 Purchase returns, discounts and
allowances
Sales Return, discounts, and 250 800 Sales and other item of income
allowances
Expenses 55 30 Unsold merchandise, if any
420 PROFIT
Illustrations No separate books maintained

• Assume in the previous illustration that the joint operation is

liquidated and C is charged the unsold inventory at cost. The
entries to record the distribution and cash settlement among the
joint operators are as follows:
Books of A Books of B Books of C
Payable to C 30 Payable to C 30 Inventory 30
Joint Operation 30 Joint Operation 30 Joint Operation 30

Books of A Books of B Books of C

Joint Operation 420 Joint Operation 420 Joint Operation 420
Payable to B 140 Payable to A 140 Payable to A 140
Payable to C 140 Payable to C 140 Payable to B 140
Share in profit 140 Share in profit 140 Share in profit 140
Illustrations No separate books maintained

Books of A Books of B Books of C

Payable to B 245 Payable to B 245 Payable to A 245
Payable to C 310 Payable to C 310 Payable to B 245
Cash 245 Cash 245 Cash 310
Receivable from B 800 JO – Cash 800 Receivable from B 800
Separate records are maintained

• The joint operators may want to establish separate records for the
joint operation. One of the joint operators, normally the
appointed manager, shall keep the separate records.
• Each joint operator establishes an Interest in Joint Operations
account, which he will use to record his own investment,
withdrawals and share in profits or losses in the joint operation.
Separate records are maintained

Interest in Joint Operation

Contributions and investments xx xx Sales and other income received
Costs and expenses paid for the xx xx Withdrawals of contributions or
joint operation investments
Share in profit of joint operation xx xx Share in loss of joint operation
Illustrations: Separate books maintained

• A, B and C agreed to form a joint operation. Profit or loss of the

joint operation shall be divided equally. Separate books for the
joint operation shall be set up and maintained by B, the appointed
manager of the joint operation. The following were the
transactions during the year.
• a. Inventory costing P100 was set by A to B.
Books of A Books of B Books of C
Interest in JO 100 No entry No entry
Inventory 100
Illustrations: Separate books maintained

• b. Freight paid by A on the inventories sent to B amounted to P5

Books of A Books of B Books of C
Interest in JO 5 No entry No entry
Cash 5

• c. Cash of P200 was sent by C to B to be used to purchase

additional inventory.
Books of A Books of B Books of C
No entry No entry Interest in JO 200
Cash 200
Illustrations: Separate books maintained

• d. B purchased additional inventory amounting to P250. P50 of

which were made on account of B.
Books of A Books of B Books of C
No entry Interest in JO 50 No entry
A/P 50

• e. Cash sales made by B amounted to P800.

Books of A Books of B Books of C
No entry No entry No entry
Illustrations: Separate books maintained

• f. Operating expenses amounting to P55 were paid by B using its

own cash.
Books of A Books of B Books of C
No entry Interest in JO 55 No entry
Cash 55

• Unsold inventory at year end amounted to P30.

Illustrations: Separate books maintained

Separate books of Joint Operation

(a) Inventory 100
A, Capital 100
(b) Freight In 5
A, Capital 5
(c) Cash 200
C, Capital 200
(d) Purchases 250
Cash 200
B, Capital 50
(e) Cash 800
Sales 800
(f) Expenses 55
B, Capital 55
Illustrations: Separate books maintained

Sales 800
Cost of goods sold
Inventory, beg 100
Freight In 5
Purchases 250
Total Goods available for sale 355
Inventory, end (30) (325)
Gross Profit 475
Expenses (55)
Profit for the year 420
Illustrations: Separate books maintained

• Assume that the joint operation is liquidated and C is charged the

unsold inventory at cost. The entries to record the distribution of
profit and cash settlement among the joint operators are as
follows.
Books of A Books of B Books of C
Unsold inventory Interest in JO 140 Interest in JO 140 Interest in JO 140
Sh in profit 140 Sh in profit 140 Sh in profit 140
Share in profit No entry No entry Inventory 30
Intrst in JO 30
Cash settlement Cash 245 Cash 245 Cash 310
Intrst in JO 245 Intrst in JO 245 Intrst in JO 310
Joint Venture

• If the entity determines that is has an interest in a joint venture,

the entity shall recognize its interest at a investment and account
for its using the equity method accordance with PAS 28 Investment
in Associates and Joint Ventures.
• EQUITY METHOD – investment is initially recognized at COST and
subsequently adjusted for the investor’s share in the change in the
equity of the investee (e.g. profit or loss, dividends, results of
discontinued operation, and other comprehensive income)
Illustrations: Equity Method

• On January 1, 20x1, ABC Co. entered into a joint agreement

classified as a joint venture. For an investment of P500,000, ABC
Co. obtained 30% Interest in Joint Venture, Inc. During the year,
Joint Ventures, Inc reported profit of P1,000,000 and other
comprehensive income of P200,000, for a total comprehensive
income of P1,200,000. Joint Venture, Inc. declared dividends of
P600,000 during the year.
• Requirement: How much is the carrying amount of the investment
in joint venture on December 31, 20x1?
Illustrations: Equity Method

Investment in Joint Venture

Initial Investment 500,000 180,000 Dividends received
(600,000 x 30%)
Share in profit of joint venture 300,000
(1,000,000 x 30%)
Share in OCI of joint venture 60,000
(200,000 x 30%)
680,000