ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-13
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ

JOINT ARRANGEMENTS
I. Definitions
Joint arrangement An arrangement of which two or more parties have joint control
The contractually agreed sharing of control of an arrangement, which exists only when
Joint control decisions about the relevant activities require the unanimous consent of the parties sharing
control
A joint arrangement whereby the parties that have joint control of the arrangement have
Joint operation
rights to the assets, and obligations for the liabilities, relating to the arrangement
A joint arrangement whereby the parties that have joint control of the arrangement have
Joint venture
rights to the net assets of the arrangement
Joint venture A party to a joint venture that has joint control of that joint venture
Party to a joint An entity that participates in a joint arrangement, regardless of whether that entity has joint
arrangement control of the arrangement
A separately identifiable financial structure, including separate legal entities or entities
Separate vehicle
recognized by statute, regardless of whether those entities have a legal personality
II. The Concept of Joint Control
A joint arrangement is an arrangement of which two or more parties have joint control.
A joint arrangement has the following characteristics:
• the parties are bound by a contractual arrangement, and
• the contractual arrangement gives two or more of those parties joint control of the arrangement.
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.
Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the
parties, or a group of the parties, control the arrangement (in accordance with the definition of control in PFRS 10
Consolidated Financial Statements).
After concluding that all the parties, or a group of the parties, controls the arrangement collectively, an entity shall
assess whether it has joint control of the arrangement. Joint control exists only when decisions about the relevant
activities require the unanimous consent of the parties that collectively control the arrangement.
The requirement for unanimous consent means that any party with joint control of the arrangement can prevent
any of the other parties, or a group of the parties, from making unilateral decisions (about the relevant activities)
without its consent.
A joint arrangement is either a joint operation or a joint venture.
III. Types of Joint Arrangements
Joint arrangements are either joint operations or joint ventures:
• A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint
operators.
• A 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.
Correlation of PFRSs 9, 10, 11, 12 and PAS 28

Control alone?
yes no

Consolidation in Joint Control?

accordance with PFRS 10
yes no
Disclosures in accordance
with PFRS 12

Define type of joint

arrangement in Significant
accordance with PFRS 11 influence?
Joint Operations Yes - Associate no
Joint Venture

Account for assets, liabilities, Investment in accordance

PFRS 9
revenues and expenses with PAS 28 – equity method

Disclosures in accordance Disclosures in accordance

with PFRS 12 with PFRS 12

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JOINT ARRANGEMENTS AFAR-13
IV. Classifying joint arrangements
The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and
obligations of the parties to the arrangement. An entity determines the type of joint arrangement in which it is
involved by considering the structure and form of the arrangement, the terms agreed by the parties in the
contractual arrangement and other facts and circumstances.
Regardless of the purpose, structure or form of the arrangement, the classification of joint arrangements depends
upon the parties' rights and obligations arising from the arrangement.
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle
can be either a joint venture or a joint operation.
A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, the
contractual arrangement establishes the parties' rights to the assets, and obligations for the liabilities, relating to
the arrangement, and the parties' rights to the corresponding revenues and obligations for the corresponding
expenses.

V. Financial Statements of Parties to a Joint Arrangement

A. Joint Operations
A joint operator recognizes in relation to its interest in a joint operation:
• its assets, including its share of any assets held jointly;
• its liabilities, including its share of any liabilities incurred jointly;
• its revenue from the sale of its share of the output of the joint operation;
• its share of the revenue from the sale of the output by the joint operation; and
• its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint
operation in accordance with the relevant PFRSs.
A party that participates in, but does not have joint control of, a joint operation shall also account for its
interest in the arrangement in accordance with the above if that party has rights to the assets, and
obligations for the liabilities, relating to the joint operation.
Accounting for Joint Operations – Partnership in Nature
It involves the computation of the following data:
1. Joint Operations Profit or Loss
a. Completed Joint Operation
b. Uncompleted Joint Operation
2. Cash settlement to participants

Joint Operation Profit or Loss

The Joint Operation account is debited for all costs and expenses and is credited for all incomes recognized.
The following should be considered in computing profit or loss:

1. If the joint venture is completed, the balance of the Joint Operation account represents the profit or loss.
A credit balance represents profit and a debit balance represents loss.

2. If Joint Operation is uncompleted, meaning there is still unsold merchandise, the profit or loss is squeeze
figure between the balance of the Joint Operation account and the profit distribution and the cost of the
unsold merchandise (the required debit balance of the Joint Venture account after profit or loss
distribution).

Cash Settlement
This is the cash due or from the participant upon completion of the Joint Operation undertaking. The following
should be observed:

1. The participants’ balances are initially determined.

2. If there is a credit balance in the participants’ account, he/she will receive cash equal to his/her credit
balance.
3. If there is a debit balance in the participant’s account, he/she will pay cash equal to his/her debit balance

B. Joint Ventures – refer to Equity method in Financial Accounting and Reporting (Pract. 1) for problems
A joint venturer recognizes its interest in a joint venture as an investment and shall account for that investment
using the equity method in accordance with PAS 28 Investments in Associates and Joint Ventures unless the
entity is exempted from applying the equity method as specified in that standard.

A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the
arrangement in accordance with PFRS 9 Financial Instruments unless it has significant influence over the joint
venture, in which case it accounts for it in accordance with PAS 28 (as amended in 2011).

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JOINT ARRANGEMENTS AFAR-13
Accounting for Joint Operations – Partnership in Nature
I – Completed Joint Operations
K and L form a joint arrangement for the sale of certain merchandise. The joint operators agree to the
following: K shall be allowed a commission of 10% on his net purchases; the joint operators shall be allowed
commissions of 25% on their respective sales; and K and L shall divide the profit or loss 60% and 40%,
respectively. Joint arrangements transactions follow:

Dec. 1: K make cash purchase of P57,000.

3: L pays joint arrangement expenses of P9,000.
5: Sales are as follows: K, P48,000; L,P36,000. The operators keep their own cash receipts.
7: K returns unsold merchandise and receives P15,000 cash.
15: The operators make cash settlement.
Required:
1. In the distribution of the balance in net profit of the joint arrangement, the shares of K and L:
K L K L___
a. P 4,260 P 3,230 c. P4,820 P 3,430
b. 4,680 3,120 d. 4,840 4,230

2. In the final cash settlement, L would pay K the amount of:

a. P14,100 c. P15,100
b. P14,880 d. P15,890
II
The joint operations accounts in the books of the operators, X, Y and Z, show the balances below, upon
termination of the joint arrangement and distribution of the profits:
Accounts X Y Z
with Dr(Cr) Dr(Cr) Dr(Cr)
X - P 2,500 P2,500
Y P 4,000 - 4,000
Z (6,500) (6,500) -
Final settlement of the joint operations will require payments as follows:
a. X pays P2,500 to Z, and Y pays P4,000 to Z c. Y pays P6,500 to X, and Z pays P2,500 to Y
b. Z pays P2,500 to X, and P4,000 to Y d. None of these
III – Completed Joint Operations
The following information is available:
Investment in Joint Operations
20x8
Nov. 6 Merchandise –Jose P 8,500 Nov .20 Cash Sales – Ampon P20,400
8 Merchandise –Deyro 7,000 12 Cash Sales – Ampon 4,200
10 Freight paid –Ampon 200 28 Merchandise – Deyro 1,210
12 Advertising –Ampon 150
Dec. 8 Purchase –Ampon 3,500
14 Selling expense –Ampon 400
The joint arrangement provided for the division of gains and losses among Jose, Deyro and Ampon in the
ratio of 2:3:5. The arrangement was to close as of December 31, 20x8.
Required:
1. The total gain from the joint arrangement amounted to:
a. P 6,060 c. P18,180
b. P12,120 d. None
2. As final settlement, Jose received in cash:
c. P 6,060 c. P8,080
d. P 7,608 d. P9,712
IV – Uncompleted Joint Operations
Soriente, Santos, and Salazar formed a joint operations, Soriente has been designated as manager of the
arrangements, for which he is to receive a bonus of 15% of the profit after deduction of the bonus as an
expense. The net profit, after bonus, has been agreed to be divided as follows: Soriente, 25%; Santos, 40%;
and Salazar, 35%.
After 5 months, the joint arrangement is terminated as of May 31, 2019. On this date, the trial balance kept
by Soriente contains the following balances:
Debit Credit
Investment in Joint Arrangement P9,000
Santos P 500
Salazar P2,000

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The joint operations has still some undisposed merchandise, which Soriente agreed to purchase at its cost
of P2,500. The bonus of Soriente has not yet been taken up.
Required:
1. The net profit of the joint arrangement, after bonus to Soriente is:
a. P 1,500 c. P10,000
b. P 9,000 d. P11,500
2. The share of Santos in the joint arrangement is:
a. P 3,500 c. P4,000
b. P 3,600 d. P4,600
3. The cash settlement received by Santos and Salazar is:
a. Santos – P4,000; Salazar – P3,500 c. Santos – P4,000; Salazar – P6,500
b. Santos – P3,500; Salazar – P3,500 d. Santos – P3,500; Salazar – P5,500
V – Uncompleted Joint Arrangement
On July 1, 20x9, Andres, Bantug and Carlos formed a joint arrangement for the sale of the merchandise,
Andres was designated as the managing joint operator. Profits or losses are to be divided as follows: Andres
50%; Bantug 25%; and Carlos 25%. On October 1, 20x9, though the joint arrangement was still uncompleted,
the operators agreed to recognize profits or loss on the venture to date. The cost of inventory on hand was
determined at P25,000. The joint arrangement account has a debit balance of P15,000 before distribution
of profit and loss. No separate book is maintained for the joint arrangement and the joint operators record
in their individual books all joint arrangement transactions.
Required:
1. The joint arrangement profit or loss on October 1, 20x9 is:
a. P10,000 profit c. P15,000 loss
b. P25,000 profit d. No profit or loss
2. The distribution of the arrangement profit or (loss) on October 1, 20x9 to the operators shall be as
follows:
a. Andres P5,000; Bantug P2,500; and Carlos P2,500
b. Andres P12,500; Bantug P6,250 and Carlos P6,250
c. Andres P7,500; Bantug (P3,750) and Carlos (P3,750)
d. No distribution yet because venture is uncompleted

VI – Uncompleted Joint Arrangement

Reyes and Santos formed a joint arrangement to acquire and sell a particular lot of merchandise. Reyes
was to manage the arrangement and to furnish the capital, and the operators were to share equal in any
gain or loss. On June 10, 20x9, Santos sent Reyes P10,000 cash, which was immediately used to purchase
merchandise which cost P10,000. Reyes paid freight of P240 on the merchandise purchased. On June 24,
one half of the merchandise was sold for P7,200 cash. Reyes paid the cost of delivering merchandise to
customers, which amounted to P260. No further transactions occurred on June 30, 20x9.
Required:
1. The profit (loss) of the arrangement s for the period June 10 – June 30, 20x9 is:
a. P1,820 c. P(1,700)
b. b. P1,950 d. Some other answer
2. On June 30, 20x9 after recognizing the profit (loss) on the uncompleted joint arrangement the
account of Santos on the books of Reyes will show a debit (credit) balance of:
a. (P10,910) c. P10,850
b. (P10,975) d. some other answer
VII – Joint Venture
Ace Company purchases 40% of Basket Company on January 1 for P500,000 that carry voting rights at a
general meeting of shareholders of Basket Company. Ace Company and Blake Company immediately
agreed to share control (wherein unanimous consent is needed to all the parties involved) over Basket
Company. Basket reports assets on that date of P1,400,000 with liabilities of P500,000. One building with a
seven-year life is undervalued on Basket’s books by P140,000. Also Basket’s book value for its trademark (10-
year life) is undervalued by P210,000. During the year, Basket reports net income of P90,000, while paying
dividends of P30,000.
Required:
1. What is the Investment in Basket Company balance (equity method) in Ace’s financial records as of
December 31?
a. P504,000 c. P513,900
b. P507,600 d. P516,000
2. The Income from Investment in Basket Company in Ace’s financial records as of December 31?
a. P36,000 c. P12,000
b. P19,600 d. P 7,600

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VIII – Joint Venture or Associate?
Goldman Company reports net income of P140,000 each year and pays an annual cash dividend of
P50,000. The company holds net assets of P1,200,000 on January 1, 2019. On that date, Wallace Company
purchases 40 percent of the outstanding stock for P600,000, which gives it the ability to have joint control
with Zimmerman Company over Goldman. At the purchase date, the excess of Wallace’s cost over its
proportionate share of Goldman’s book value was assigned to goodwill.
Required:
1. On December 31, 2021, what is the investment in Goldman Company balance (equity method) in
Wallace’s financial records?
a. P600,000 c. P690,000
b. P660,000 d. P708,000

2. Assuming that Goldman Company’s ownership structure is as follows:

75% is needed to direct relevant activities;
50% ownership of Wallace Company;
30% ownership of Zimmerman Company; and
20% ownership of American Company

What is the amount of Income from the Income from Investment in Goldman’s Company in Wallace
financial records as of December 31, 2021?
a. P168,000 c. P70,000
b. P108,000 d. P56,000

3. Assuming that Goldman Company’s ownership structure is as follows:

75% is needed to direct relevant activities;
50% ownership of Wallace Company;
25% ownership of Zimmerman Company; and
25% ownership of American Company

What is the amount of Income from the Income from Investment in Goldman’s Company in Wallace
financial records as of December 31, 2021?
a. P168,000 c. P70,000
b. P108,000 d. P56,000

4. Assuming that Goldman Company’s ownership structure is as follows:

Majority vote to direct relevant activities;
35% ownership of Wallace Company;
35% ownership of Zimmerman Company; and
Not applicable – ownership of American Company
Widely dispersed – other companies

What is the amount of Income from the Income from Investment in Goldman’s Company in Wallace
financial records as of December 31, 2021?
a. P168,000 c. P70,000
b. P108,000 d. P49,000

Examples of Joint Arrangements under PFRS 11

Example 1 – Construction services
A and B (the parties) are two companies whose businesses are the provision of many types of
public and private construction services. They set up a contractual arrangement to work together
for the purpose of fulfilling a contract with a government for the design and construction of a
road between two cities. The contractual arrangement determines the participation shares of A
and B and establishes joint control of the arrangement, the subject matter of which is the
delivery of the road.
The parties set up a separate vehicle (entity Z) through which to conduct the arrangement. Entity
Z, on behalf of A and B, enters into the contract with the government. In addition, the assets
and liabilities relating to the arrangement are held in entity Z. The main feature of entity Z’s
legal form is that the parties, not entity Z, have rights to the assets, and obligations for the
liabilities, of the entity.

Analysis
The joint arrangement is carried out through a separate vehicle whose legal form does not confer
separation between the parties and the separate vehicle (i.e. the assets and liabilities held
in entity Z are the parties’ assets and liabilities). This is reinforced by the terms agreed by
the parties in their contractual arrangement, which state that A and B have rights to the assets,
and obligations for the liabilities, relating to the arrangement that is conducted through entity
Z. The joint arrangement is a joint operation.

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Example 2 – Shopping centre operated jointly
Two real estate companies (the parties) set up a separate vehicle (entity X) for the purpose of
acquiring and operating a shopping centre. The contractual arrangement between the parties
establishes joint control of the activities that are conducted in entity X. The main feature of
entity X’s legal form is that the entity, not the parties, has rights to the assets, and
obligations for the liabilities, relating to the arrangement. These activities include the rental
of the retail units, managing the car park, maintaining the centre and its equipment, such as
lifts, and building the reputation and customer base for the centre as a whole.
Analysis
The joint arrangement is carried out through a separate vehicle whose legal form causes the
separate vehicle to be considered in its own right (ie the assets and liabilities held in the
separate vehicle are the assets and liabilities of the separate vehicle and not the assets and
liabilities of the parties). In addition, the terms of the contractual arrangement do not specify
that the parties have rights to the assets, or obligations for the liabilities, relating to the
arrangement. Instead, the terms of the contractual arrangement establish that the parties have
rights to the net assets of entity X. The joint arrangement is a joint venture. The parties
recognize their rights to the net assets of entity X as investments and account for them using
the equity method.
Example 3 – Joint manufacturing and distribution of a product
Companies A and B (the parties) have set up a strategic and operating agreement (the framework
agreement) in which they have agreed the terms according to which they will conduct the
manufacturing and distribution of a product (product P) in different markets.
Analysis
The framework agreement sets up the terms under which parties A and B conduct the manufacturing
and distribution of product P. These activities are undertaken through joint arrangements whose
purpose is either the manufacturing or the distribution of product P.
The parties carry out the manufacturing arrangement through entity M whose legal form confers
separation between the parties and the entity. In addition, neither the framework agreement nor
the contractual arrangement dealing with the manufacturing activity specifies that the parties
have rights to the assets, and obligations for the liabilities, relating to the manufacturing
activity. However, when considering the following facts and circumstances the parties have
concluded that the manufacturing arrangement is a joint operation.
Example 4 – Bank operated jointly
Banks A and B (the parties) agreed to combine their corporate, investment banking, asset
management and services activities by establishing a separate vehicle (bank C). Both parties
expect the arrangement to benefit them in different ways. Bank A believes that the arrangement
could enable it to achieve its strategic plans to increase its size, offering an opportunity to
exploit its full potential for organic growth through an enlarged offering of products and
services. Bank B expects the arrangement to reinforce its offering in financial savings and
market products.
Analysis
The joint arrangement is carried out through a separate vehicle whose legal form confers
separation between the parties and the separate vehicle. The terms of the contractual arrangement
do not specify that the parties have rights to the assets, or obligations for the liabilities,
of bank C, but it establishes that the parties have rights to the net assets of bank C. The
commitment by the parties to provide support if bank C is not able to comply with the applicable
legislation and banking regulations is not by itself a determinant that the parties have an
obligation for the liabilities of bank C. There are no other facts and circumstances that
indicate that the parties have rights to substantially all the economic benefits of the assets
of bank C and that the parties have an obligation for the liabilities of bank C. The joint
arrangement is a joint venture.

**Success does not depend on what you achieved but on how you achieved it.**
**Sail through the sands of the present time and savor present reality and pray the best in life will happen in the future.**
**We definitely reach new heights in conquering certain fears that hinders us from becoming battle-tested individuals, enough to
survive the wheels of life.
**Your mind was framed to succeed, Your hand was armed with skill,
Your face was the mould of great faith and courage, and your HEART with the throne of will.**
**It is the habit of a mind which attaches to abstractions with passion which gives vast results.**
**There are storms to be considered, problems to be reckoned with, crisis to be encountered, high seas to contend with, unfateful events
that should be hurdled and they are phenomenon to be shunned with great faith and courage.**
**We definitely reached new heights in conquering certain fears that hinders us from becoming battle-tested individuals, enough to survive
the wheels of life.**
**We tend to forget that life is a gift to be enjoyed to the fullest and not a burden**
**A DREAM UNREALIZED IS A DREAM IMPRISONED BY THAT ENEMY OF ALL ENEMIES THE FEAR OF FAILURE. SET THAT DREAM FREE BY
DETERMINING THAT YOU WILL MAKE IT HAPPEN
**Every great success was at the beginning impossible.**
**Opportunities are usually disguised as hard work, so most people don’t recognize them.**
**The only thing that stands between a man and what he wants from life is often merely the will to try it and the faith to believe that it is
possible.**
**A goal is nothing more than a dream with a time limit.**
****God’s LOVE is like a river that keeps on flowing…****

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