Associates and Joint Venture

IFRS 11

Nguyen Quoc Nhat

IFRS Primer
Chapter 6

Consolidated and Separate

Financial Statements

 Related standards
 IFRS 11
 Current GAAP comparisons
 IFRS financial statement disclosures
 Looking ahead
 End-of-chapter practice

Related Standards

 APB 18 The Equity Method of Accounting for

Investments in Common Stock

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 Related Standards

 SIC 13 Jointly Controlled Entities—

Non-monetary Contributions by Venturers
 IAS 27 Consolidated and Separate Financial
Statements
 IAS 28 Investments in Associates

IAS 31 – Overview

 Objective and scope

 Joint ventures
 Jointly controlled operations and jointly
controlled assets
 Jointly controlled entities
 Disclosure

IAS 31 – Objective and Scope

 Joint venture - a contractual arrangement where two or more parties
share in an economic activity over which they have joint control

 Joint control - regardless of actual ownership rights, the strategic

financial and operating decisions, by contract, require unanimous
consent of the venturers
– control in this IFRS has the same meaning as in other related IFRSs

 Venturer - an entity that has joint control over a joint venture

 Investor in a joint venture - a party to the venture without joint

control

 Exceptions to IAS 31
– venturers’ interests in jointly controlled entities held by venture capital
organizations or mutual funds, unit trusts, and similar organizations that
6 are accounted for at FVTPL

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 IAS 31 – Joint Ventures
 Variety of forms - jointly controlled operations, assets, or entities

 Joint control by at least two parties must be contractually established

– may be set out in the articles of incorporation or bylaws of the joint
venture
– less formally through documentation of meetings between the venturers

 Contractual agreement:
– usually in writing
– sets out the governance structure of the joint venture
– the capital to be supplied by each venturer
– how the output, income, and expenses will be shared
– the purpose and duration of the venture

IAS 31 – Jointly Controlled Operations

and Jointly Controlled Assets
 Jointly Controlled Operations
– no separate entity established to conduct joint activities
– a venturer enters into an agreement with one or more venturers to produce, market,
and distribute a specific product
– each venturer provides its specific operating expertise
– used to take advantage of the resources and abilities of the individual venturers
 each may agree to use their own assets, incur their own expenses and liabilities, and
finance their own requirements

 Joint venture agreement

– sets out how revenue from the sale of the product worked on together is shared
– how shareable costs are to be allocated to venturers

 Recognized in the venturer’s financial statements

(a) the assets that it controls and the liabilities it incurs
(b) the expenses incurred and share of income earned from sale of goods or services by
joint venture

8  The venturer prepares no investment-related adjustments

IAS 31 – Jointly Controlled Operations

and Jointly Controlled Assets
 Jointly Controlled Assets
– each party to agreement takes a share of the output from the asset and pays an
agreed share of costs incurred to operate it
– each venturer has control over its share of future economic benefits through its
share of the asset
– no legal or other entity is formed separately from the venturers themselves

 Accounting for this form of joint venture is consistent with its economic substance and
usually the legal form of the joint venture

 Recognized in the venturer’s financial statements

(a) its share of specific jointly controlled assets and of liabilities incurred
jointly with other venturers
(b) liabilities incurred on its own
(c) income from the sale or use of its share of the output of the venture
along with its share of expenses incurred by the venture
9 (d) expenses it has incurred relative to its interest in the venture

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 IAS 31 – Jointly Controlled Entities
 Jointly controlled entities
– may be a corporation, a partnership, or other form of organization
– separate entity controls assets of the joint venture, incurs
liabilities and expenses, and earns income
– each venturer usually has an ownership interest in the venture
and is entitled to a share of its profits or output
– when organized, the individual venturers contribute cash or other
assets in return for an ownership interest
 contributions are recognized by each venturer as an investment
in the joint venture
 Jointly controlled entity records receipt of assets
contributed to it and prepares and presents financial
statements on the results of its operations and financial
10 position

IAS 31 – Jointly Controlled Entities

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IAS 31 – Jointly Controlled Entities

Venturer’s accounting
 Choice of 2 methods to account for its investment
– proportionate consolidation (the preferred approach)
– equity method

 Entities that meet one of the following three conditions are excluded from
applying one of the two methods:
1. Interest in the jointly controlled entity is classified as “held for sale” under
IFRS 5
2. Venturer meets exception in IAS 27.10 that qualifies parent with an
interest in a jointly controlled entity not to present consolidated financial
statements
3. All of the following apply:
(a) venturer is a wholly owned subsidiary or partially owned subsidiary
whose other owners have been informed and do not object to the
venturer not applying the proportionate consolidation or equity method
(b) venturer does not have publicly traded debt or equity instruments
(c) the venturer’s ultimate or intermediate parent produces consolidated
financial statements for public use that comply with IFRSs
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 IAS 31 – Jointly Controlled Entities

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IAS 31 – Jointly Controlled Entities

Proportionate Consolidation
 inter-entity transactions, balances, unrealized profits, and losses are
eliminated in proportion to the venturer’s interest
 preferred method because it reflects the “substance and economic
reality of a venturer’s interest in a jointly controlled entity . . . and
control over the venturer’s share of the future economic benefits”
 netting of assets and liabilities or income and expenses is not
permitted unless legal right of offset exists and asset and liability are
expected to be realized and settled, respectively
 choice of reporting formats
– Option 1: venturer’s share of each line item on venture’s financial
statements is added to venturer’s line item on its financial statements
– Option 2: venturer’s share of each major classification of assets,
liabilities, income, and expenses is identified as a separate line item
within the same classification on venturer’s financial statements
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IAS 31 – Jointly Controlled Entities

Equity Method

 IASB Exposure Draft ED 9 Joint Arrangements issued in 2007

– if the proposals are retained in the final standard, equity method will be
the only method permitted
– many believe that having joint control is more similar to having
significant influence than having control
 this supports the use of the equity method

 Survey of companies reporting in accordance with IFRSs in 2005

– 144 companies reporting investments in jointly controlled entities were
equally split in use of proportionate consolidation and equity method
– significant country-specific differences in the use of each method
 strongly influenced by the methods required by national reporting
standards prior to adoption of IFRS
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 IAS 31 – Jointly Controlled Entities
Joint Control Is Lost

 When venturer no longer has joint control and the investment has not
become a subsidiary or associate
– account for remaining investment under IAS 39 from date joint control was lost
 If the investment becomes a subsidiary
– investor accounts for this as a business combination under IFRS 3 and prepares
consolidated financial statements according to IAS 27
 If investment becomes an investment in an associate
– the investor applies IAS 28
 When joint control is lost, any remaining investment is measured at its fair
value and a gain or loss on disposal is recorded
 The gain or loss is the difference between
– carrying amount of investment when joint control is lost
– total of the fair value of retained investment and proceeds of disposal on the
portion disposed of
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IAS 31 – Jointly Controlled Entities

Separate Financial Statements
 are those where subsidiaries and investments in associates and
jointly controlled entities are accounted for on the basis of the direct
equity interest - not on a basis related to investor’s interest in
investee’s net assets and reported results
– IAS 27 helps determine the accounting for an interest in a jointly
controlled entity for separate financial statements

 In effect, the investment is accounted for at cost or in accordance with IAS 39

Investments without Joint Control

 If an investor has an equity interest in a joint venture but is not a venturer
– investor applies IAS 28 if significant influence in the joint venture
– otherwise, it applies IAS 39

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IAS 31 – Jointly Controlled Entities

Transactions between a Venturer and a Joint Venture

 Accounted for as if venturer conducts transactions in part with the other non-
related venturers and in part internally
 Transaction is assumed to take place with other venturers at arm’s-length
– the venturer recognizes that portion of the transaction and any associated gain or
loss
 To extent the venturer is dealing with its own ownership interest
– that portion of the transaction and gain or loss is eliminated
 Requirements
– when a venturer contributes or sells assets to a joint venture, the
venturer recognizes only the portion of any gain or loss that is associated
with the other venturers’ interests
- as the joint venture realizes the gain in its dealings with outside parties, the
venturer then recognizes its portion of any gain or loss as realized

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 IAS 31 – Jointly Controlled Entities
Transactions between a Venturer and a Joint Venture

 Requirements (continued)
– If a loss is evidence of a decline in the asset’s net realizable value
or an impairment, then full loss is recognized immediately

– When joint venture sells assets to a venturer and reports a gain

on the sale, the venturer does not recognize its share of the gain
until it has sold the asset in turn to a third party
- the venturer recognizes its share of any gain as it is realized

Operators of Joint Ventures

 When a venturer acts as an operator or manager of a joint venture, it
is usually paid a fee for these services
– the joint venture recognizes the fee paid as an expense and the venturer
refers to IAS 18 to determine how to account for the fee received
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IAS 31 – Disclosure
Disclosures for Consolidated Financial Statements

 Explanations of why an entity is a subsidiary when investor does not

own more than half the voting power
 Information about date of a subsidiary’s financial statements if
different from the date of parent company’s statements
 Information about any significant restrictions on ability of subsidiary
to pay cash dividends and to transfer funds to parent to repay
loans/advances
 Effects of changes in parent’s ownership interest in a subsidiary that
do not result in a loss of control
 Gain or loss recognized on the loss of control of a subsidiary

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IAS 31 – Disclosure
 A venturer reports information about its joint ventures
 description of the interest
 proportion of ownership interest held
 method it uses to recognize this interest

 Totals reported by venturer that relate to its joint venture interests if line-by-
line proportionate consolidation or the equity method is used
– amount of current assets
– long-term assets
– current liabilities
– long-term liabilities
– income
– expenses
 Other venturer disclosures
– potential obligations associated with contingent liabilities
– commitments of joint ventures separately from those of venturer itself
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 Current GAAP Comparisons

Page 64 of 164 of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement

Disclosures
BP plc
http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/set_bran
ch/STAGING/common_assets/downloads/pdf/ara_2007_annual_report_and_
accounts.pdf

Group Income Statement page 98 of 212

Interests in joint ventures note page 102 of 212
Investments in jointly controlled
entities note page 136 of 212
Subsidiaries, jointly controlled entities
23 and associates note page 170 of 212

Looking Ahead
 Accounting for investments in joint ventures
– originally a part of the IASB’s short-term convergence project with FASB
– IASB now conducts the joint ventures project alone

 Objective of the joint ventures project

– to eliminate the choice now allowed in IAS 31
– to clarify the definitions of joint assets and joint operations

 IASB
– reviewing the responses to its 2007 Exposure Draft, ED 9 Joint Arrangements
– expects to issue a final IFRS entitled Joint Arrangements in late 2009

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 Looking Ahead
Tentative decisions exposed in ED 9, Joint Arrangements
• Types of interests parties could have in a joint arrangement
o direct interests (interests in joint operations or joint assets)
o indirect interests (interest in a joint venture)

• A party to a joint arrangement should recognize its contractual rights and

obligations according to applicable IFRSs
• A party should recognize its interest in a joint venture using the equity
method
o proportionate consolidation not allowed

• Disclosures aligned with those required for investments in associates

 Except for the elimination of the use of proportionate consolidation,

these changes are not expected to result in significant differences in
the profit or loss and financial position of parties to these joint
25 arrangements

End-of-Chapter Practice

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End-of-Chapter Practice

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