ACCT7104 Corporate Accounting: Topic 7: Accounting For Joint Arrangements

ACCT7104
Corporate Accounting
Topic 7: Accounting for Joint Arrangements
1
Seminar Objectives
• Understand the nature of joint arrangements, with a focus on joint operations.
• Identify the chief characteristics of a joint arrangement.
• Understand the difference between joint operations and joint ventures and how they
fit into AASB 11 Joint Arrangements.
• Be able to apply the line-by-line method of accounting for investments in joint
operations.
• Be able to prepare the relevant disclosures required by AASB 12 Disclosure on
Interests in Other Entities.
Topic 7 - Accounting for Joint Arrangements 2

Seminar Reading and set work
Reading:
• Arthur et al Chapter 8;
• AASB 11 Joint Arrangements
Lecture exercises from Arthur et al:

• E8.5, (Doctor Ltd and Nurse Ltd adapted from E8.7 of an earlier text version)
• Worked Example PJW Ltd
Workshop questions:
• Q8.2, Q8.3, Q8.6, Q8.7, E8.1, E8.8
• Self review question E8.6
Seminar Outline
1. Two types of joint arrangements
 Joint operations
 Joint venture
 Difference between a JO and a JV
2. Joint operations
 Characteristics of a joint operation
 Advantages of a joint operation
3. Accounting for joint operations
 Key terminologies
 Depreciations
 Contributions to joint operation
 Management fees
4. Comprehensive exercises
 E8.5
 Doctor and Nurse (adapted from E8.7)
4
Revision: The concept of control
• Control is defined as (AASB 10A.6):
“ An investor controls an investee when it is exposed, or has rights, to variable
returns from its involvement with the investee and has the ability to affect those
returns through its power over the investee.”
• In simplest case,
50+% voting rights or control of relevant activities results in groups and subsidiaries.
20% - 50% voting rights and/or significant influence results in associates.
<20% voting rights results in financial assets and/or investments.
• The concept of control is based on the substance over the form

Joint control
Joint control is defined as (AASB 11.7):
• 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.
A joint arrangement is defined as (AASB 11.4):
• an arrangement of which two or more parties have joint control.

Joint arrangement
• Joint arrangements are used across all sectors of the economy and on any scale
because they can be an effective way to raise capital and spread risk.
• A joint arrangement has the following characteristics (AASB 11.5):

a) The parties are bound by a contractual arrangement (see paragraphs B2-B4).
b) The contractual arrangement gives two or more of those parties joint control of
the arrangement (see paragraphs 7–13).

AASB 11.6
• A joint arrangement is either a joint operation or a joint venture.
AASB 11.14 Types of joint arrangement

• An entity shall determine the type of joint arrangement in which it is involved. 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.

Two types of joint arrangements: Joint operations
AASB 11.15
• 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 operation:
• is not a legal entity.
• cannot own assets or incur liabilities.
• cannot run its own bank account.
• does not have permanent, separately reportable books of account.
• is recognised as an interest by the joint operators.
Two types of joint arrangements: Joint ventures
AASB 11.16
• 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.
A joint venture
• has a separate identity from its separate joint venturers (e.g. a partnership, trust or company)
• maintains its own books.
• is recognised as an investment by the joint venturers
• only distinguishing feature from usual company, trust or partnership is existence of the JV
contract.

Two types of joint arrangements: The difference
Whether a Joint Venture (JV) or a Joint Operation (JO) is determined on more than just
whether a separate legal vehicle used:
AASB 11.B19:
• 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.

Difference between a JV and a JO
AASB 11.B21:
…when the parties have structured a joint arrangement in a separate vehicle, the
parties need to assess whether the legal form of the separate vehicle, the terms of the
contractual arrangement and, when relevant, any other facts and circumstances give
them:
a) rights to the assets, and obligations for the liabilities, relating to the arrangement
(i.e. the arrangement is a joint operation); or
b) rights to the net assets of the arrangement (i.e. the arrangement is a joint
venture).
1. Does the legal form of the separate vehicle give the parties rights to the assets, and
obligations for the liabilities, relating to the arrangement?
YES = JO, NO = next question.
2. Do the terms of the contractual arrangement specify that the parties have rights to
the assets, and obligations for the liabilities, relating to the arrangement?
YES = JO, NO = next question.

3. Have the parties designed the arrangement so that:
a) its activities primarily aim to provide the parties with an output (i.e. the parties
have rights to substantially all the economic benefits of the assets held in the
separate vehicle); and
a) it depends on the parties on a continuous basis for settling the liabilities relating
to the activity conducted through the arrangement?
YES = JO, NO = JV

AASB 11.B24:
The assessment of the rights and obligations conferred upon the parties by the legal
form of the separate vehicle is sufficient to conclude that the arrangement is a joint
operation only if the parties conduct the joint arrangement in a separate vehicle whose
legal form does not confer separation between the parties and the separate vehicle (ie
the assets and liabilities held in the separate vehicle are the parties’ assets and
liabilities).
i.e. substance over form

JV or JO? Why does it matter
AASB 11 Joint Arrangements states that
• A joint operator must use the line-by-line method to account for its interest in a joint
operation (AASB 11.20)
• A joint venturer must recognise its interest in a joint venture as an investment and
must account for that investment using the equity method in accordance with AASB
128 Investments in Associates and Joint Ventures.
We will cover equity accounting in the next seminar.
For now, we will focus on accounting for joint operations and application of the line-by-line
method.
2. Characteristics of joint operations
• Joint operations are
Unincorporated and not partnerships
Not an investment but an interest
Interest shown via disclosures in the joint operators’ individual financial reports
Provide legal flexibility and possibly taxation benefits to joint operators
Allow individual joint operators to maintain the accounting policies in their own
individual separate books of accounts
• Joint operators share output and related costs &/or view JO dedicated assets as
tenants in common.
• Joint operators do NOT share profit
Characteristics of joint operations
1. Joint Operation agreement:
Usually a written contract setting out the rights and obligations of the joint
operators as well as the objectives and duration of the joint operation, how the
joint operation is to be managed, voting rights and the means of settling
disputes. Often a ‘boiler plate’ contract where joint operations are prevalent, for
example, in minerals exploration.

2. Management agreement:
Joint Operations usually require a manager (which can be one of the joint
operators). The management agreement sets out the manager’s powers,
rewards and responsibilities.

3. Parties (joint operators)
Parties to the joint operation agreement are known as joint operators. There
may also be other investors who play no part in the control of the joint
operation. There must be at least 2 joint operators. Most joint operations have a
small number of joint operators.

4. Contributions
• Each joint operator in the joint operation contributes resources. These can
take the form of cash, operating assets, intangible assets such as patented
technology, or management skills. A joint operator’s contribution usually
determines their share in the venture.
• Joint Operators usually arrange their own finance unless there is a special
arrangement for joint financing.

5. 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 (AASB 11.7).
Although joint operators have overall control of the joint operation, the day-to-
day operating decisions will usually be made by the joint operation manager.
Must be aware of any agency/moral hazard issues.

6. Finite Life
The joint operation is often established to pursue a specific economic activity

(such as a mine). As such, the joint operation usually ends when the economic
activity comes to an end.

Joint operator’s joint operation interest
The substance of the interests of joint operators and partners is the same although the
legal rights differ.
• Each partner or joint operator in an undertaking has an interest in the jointly
controlled assets and liabilities of the undertaking.
• The partner or joint operator cannot dispose of its ‘specified proportion’ without the
consent of the others.
• A partner or joint operator can therefore control its specified interest in each asset,
as well as its share of the output generated by the undertaking’s activity.

Advantages of Joint Operations
• Effective means of pooling resources
• Cost and risk sharing
• Flexibility in legal requirements
• Individual liability and financing
• Opportunity for investment in foreign countries
Compared to other joint entities (for example, a partnership) a joint operation:

• Avoids the unlimited liability and mutual agency disadvantages of a partnership.
• Removes the joint operators from joint and several liability for the debts of the joint
operation.
• In normal circumstances, a joint operator is not bound by the actions of its co-joint
operators.
Seminar Outline
 Joint venture
2. Joint operations
 Depreciations
 Management fees
 E8.5
26
The joint operator shall recognise in both its separate and consolidated financial
statements in relation to its interest in a joint operation:
1. its assets, including its share of any assets held jointly ;

2. its liabilities, including its share of any liabilities incurred jointly;
3. its revenue from the sale of its share of the output arising from the joint operation;
4. its share of the revenue from the sale of the output by the joint operation; and
5. its expenses, including its share of any expenses incurred jointly.

Accounting for joint operations
• At the beginning of a financial year/JO, each joint operator provides inputs to the
joint operation.
• Throughout the year, the operators account for their contribution to the JO through
the one line item, “Interest in joint operation”
• Periodically, the joint operation manager supplies management accounts to the joint
operators (JOMA).
• The joint operation itself has no permanent financial accounts, and therefore cannot
hold any financial account balances at the end of the year.
• All financial changes are therefore reflected in the books of the separate joint
operators.

Accounting for joint operations
Income of a joint operation
• Joint operation results may include items of revenue and expense – arising, for example,
from the investment of surplus funds.
• In a joint operation, revenues and expenses are incidental to the operation and not the
purpose of the operation (remember that joint operators share output)
• If JO revenues and expenses are shared, ATO may deem a business exists, and will
therefore try to tax the joint operation rather than the individual joint operators.

Accounting for joint operations – Key terminologies
Individual Joint Operators’ Separate Books of Accounts
• The accounting system of each of the operators, which will follow accounting
policies that are optimal for each separate operator, which may be different to each
other.
Joint Operation’s Management Accounts (JOMA)

• The account that records activities and movements in resources that occur during
an accounting period. This account will be reduced to zero at the end of each
accounting period, as all balances will have been allocated to the individual joint
operators, and it is not permitted to have balances remaining in the JOMA at an
accounting period end.

– Key terminologies
• JOMA will not always perfectly reflect what is in the individual joint operators’
accounts.
• Most notably, individual joint operators may use the cost method to value non-
current assets, while the JOMA always records at fair value.
• Both sets of accounts have different purposes and will not always be obviously
reconcilable.
• It is important to accept this difference and use the figures provided as necessary.
• Examples of differences will be shown later when considering the effects in joint
operation accounting when FV does not equal CV.
• In this course, preparation of the JOMA is not extensively covered BUT
practical interpretation of year end JOMA’s will be required.
– Key terminologies
Tenants in common
• Once each individual joint operator has contributed to the joint operation, each
becomes a tenant in common of all the contributions made, not just of its own.
• In other words, each individual joint operator has an ownership interest in every
contributed asset and every liability incurred.

– Key terminologies: Example 1
Example
Bob & Edna are in 50:50 joint operation as tenants in common. Bob contributes
$80,000 cash to the joint operation, Edna contributes Land with FV $80,000.
Immediately after contribution, JOMA shows:
Cash $80,000 & Land $80,000
BUT Bob’s interest in the Joint Operation is comprised of Cash $40,000 & Land
$40,000 (as, indeed, is Edna’s).
In effect, Bob has “sold” a 50% interest in his cash to the Edna and has “bought” a 50%
Interest of Edna’s Land at FV
– Depreciations
Quick reminder of cost accounting principles:
• Depreciation cannot be charged if production has not commenced

• Once production starts, depreciation is an operating/manufacturing overhead
• Needs to be allocated across all forms of output
• Includes WIP & Finished Goods

– Depreciations
In joint operations, there is a choice as to where to initially account for depreciation:
• Either in the JO Management Accounts (JOMA).
• Or in the individual joint operators’ separate books of account.
In this course, always account for depreciation in the individual joint operators’
separate books of account.
• This avoids difficulties in adopting different methods of depreciation, and gives the
individual joint operators the ability to account for depreciation consistently in their
own accounts without adjustments.

– Depreciations
• In joint operations, the Joint Operation Management Accounts (JOMA) must be zero
at the end of an accounting period.
• The joint operation will either distribute Finished Goods to the individual joint
operators before the period end, or there will be Finished Goods &/or WIP remaining
in the JOMA that will be allocated to the individual joint operators.
• As these balances will be re-allocated back to the individual joint operators at period
end, the allocation of depreciation to WIP, undistributed Finished Goods &
distributed Finished Goods is easier in the individual joint operators’ separate
accounts.

– Contributions to joint operation
• The JO Management Accounts (JOMA) values assets and liabilities at fair values
only.
• Under “tenants in common” above, the example showed what happened when cash
and assets at FV were used to value contributions to the joint operation.
Bob’s initial contribution would be recorded in his separate books as:

Dr Interest in JO $80,000
Cr Cash $80,000
As CV Cash = FV Cash, no difficulties arise with valuations and thus no gain on sale
can have been created.
– Contributions to joint operation
• However, if the individual joint operators’ contributions to the JO are measured at
cost in their own books and this is different to fair value, there will need to be an
adjustment made to reflect the fair value transferred to the JO.
• This is not similar to previous FVAs, but requires the recognition of a gain on a
partial “sale” of the individual joint operators’ contributed asset to the JO.
• That is, in a 50:50 JO, each joint operator will “sell” 50% of its contributed asset to
the JO, thus keeping 50% interest for itself, but will also have to account for a gain
on sale where FV > CA.

– Contributions to joint operation: Example 2
Example
Max & Jess are in 50:50 joint operation as tenants in common. Both use the cost
method to value non-current assets. Max contributes $80,000 cash to the JO and Jess
contributes plant with cost $100,000, accumulated depreciation $40,000 & FV $80,000.
In effect, Jess has “sold” a 50% interest in her plant to Max, but also has to account for
her share (50%) in the gain on sale.

Example (continued):
Gain on sale = FV – CV = FV – (Cost – Acc.Depn.)
= 80,000 – (100,000 – 40,000)
= $20,000
Jess records this contribution in her own books as:

Dr Interest in JO 70,000
Dr Accumulated depreciation 40,000
Cr Plant (@ cost) 100,000
Cr Gain on sale to JO 10,000


Cash (FV) $80,000
Plant (FV) $80,000
BUT Jess’s interest in the Joint Operation is comprised of:

Cash (50% CV) $40,000
Plant (50% CV) $30,000

– Unequal contributions to JO
• Joint Operations are not always 50:50
• The percentages will be determined by negotiation and will be explicitly detailed in
the Joint Operation Agreement.
• The element of risk taken by the individual joint operator is a key determinant.
• If the risk is unevenly spread &/or the benefits of output are skewed towards a
particular joint operator, this will be reflected in the percentages
• The levels of contribution will normally reflect these percentages.
• For example in a 60:40 Joint Operation, the 60% joint operator will contribute
approximately 60% funding, will receive 60% output, and will also assume 60% of
the risk.

– Unequal contributions to JO: Example 3
Example
Inez & Jim are in 30:70 joint operation as tenants in common. Both use the cost
method to value non-current assets. Inez contributes plant with cost $400,000,
accumulated depreciation $200,000 & FV $300,000 to the JO and Jim contributes
$700,000 cash.
In effect, Inez:
1. “Sold” a 70% interest in her plant to the JO;
2. Has to account for her share (70%) of the gain on sale;
3. Maintains a 30% interest at CV in her plant; and
4. Has acquired a 30% interest in Jim’s contributed cash.
Gain on sale = FV – CV = FV – (Cost – Acc.Depn.)
= 300,000 – (400,000 – 200,000)
= $100,000
Inez records this contribution in her own books as:

Dr Accumulated depreciation 200,000
Cr Plant (@ cost) 400,000
Cr Gain on sale to JO (70%) 70,000


Cash (FV) $700,000
Plant (FV) $300,000
BUT Inez’s interest in the JO is comprised of:

Cash (30% CV) $210,000
Plant (30% CV) $ 60,000

Example (continued)
For Jim, there is no gain on sale as FV Cash = CV Cash
Jim records this contribution in his own books as:
Cr Cash 700,000


Cash (FV) $700,000
Plant (FV) $300,000
BUT Jim’s interest in the JO is comprised of:

Cash (70% CV=FV) $490,000
Plant (70% CV=FV) $210,000

– Management fees
• The manager of a JO will receive a fee.
• The JO Manager can be one of the joint operators.
• Management fee forms part of costs of JO.
• However, JO manager cannot transact with itself, therefore cannot recognise its
proportionate share of either revenue or expense.
• Only recognise revenue to extent of other joint operators’ interests, that is, the FV of
external transactions.
• When JO Manager records own share of revenue, it exactly offsets own share of
costs.
• No need for any adjustment if JO manager is independent (not one of the joint
operators)
– Management fees: Example 4
Example:
Paul & Julie were in a 20:80 Joint Operation, where Paul received an annual
management fee as Joint Operation Manager of $400,000. During year, Paul receives
payment, but can only reflect external proportion in his separate books, that is,
$400,000 x 80% = $320,000, with the balance offsetting the charge for the fee he will
also incur from the Joint Operation:
Dr Cash 400,000
Cr Management Fee Revenue 320,000
Cr Cost of Production – Management Fee Costs 80,000

– Management fees: Example 4
At accounting period end, JOMA shows $400,000 management fee to be allocated,

thus the allocation to Paul is $400,000 x 20% = $80,000, being:
Dr COP - Management Fee Costs 80,000

Cr Interest in Joint Operation 80,000
Thus, the effect on Paul’s COP from the Management Fee is zero

Seminar Outline
 Joint venture
2. Joint operations
 Depreciations
 Management fees
 E8.5
51
E8.5 Worked Example
52
4. Comprehensive exercise - E8.5
Danny Ltd and Candy Ltd entered into an agreement to form a joint operation on 1 July
20X9. The joint operation was established to manufacture and market a chemical
compound originally created by Danny Ltd.
As detailed below, Danny Ltd contributed equipment and a patent, and Candy Ltd
contributed $17 million in cash.
The joint operation agreement stated that each joint operator would share output,
assets, liabilities and future contributions in equal proportions.

E8.5
The following information has been extracted from the joint operation agreement in
relation to Danny Ltd’s contribution:
Carrying Value ($000) Fair Value ($000)

Patent 6,700 7,000
Equipment 9,700 10,000
The joint operation manager has provided the joint operation’s management accounts
below to Danny Ltd and Candy Ltd so they can finalise their respective financial
statements for the year ended 30 June 20X0:

E8.5
Management financial statements for the year ended (JOMA) 30 June 20X0
Statement of production costs: $000
Production costs (10,000)
Statement of financial position:
Cash and cash equivalents 9,000
Patent 7,000
Equipment 10,000
Total assets 26,000
Trade payables (2,000)
Net assets 24,000
Joint operators’ capital accounts:
Danny Ltd 12,000
Candy Ltd 12,000
Total 24,000

E8.5
Additional information:
• The remaining useful life of the assets contributed by Danny Ltd at 1 July 20X9 are: Patent
(10 years) and Equipment (5 years)
• Both Danny Ltd and Candy Ltd have adopted the straight line method of depreciation for all
assets.
Required:
a) Prepare the journal entries at 1 July 20X9 to record the contribution of assets to the joint
operation in the books of
I. Danny Ltd
II. Candy Ltd
b) Prepare the journal entries in the books of Danny Ltd to account for its investment in the
joint operation as at 30 June 20X0.
E8.5 (Solution)
(a) I. Initial contribution – Danny Ltd 1 July 20X9 ($000)
Cr Patent 6,700
Cr Equipment 9,700
Cr Gain on sale of non-current assets 300
Gain on sale of non-current assets calculated as follows:

$000 Carrying value Fair value Gain 50% Gain
Patent 6,700 7,000 300 150
Equipment 9,700 10,000 300 150
Total 300
E8.5 (Solution)
(a) II. Initial contribution – Candy Ltd 1 July 20X9 ($000)
Cr Cash 17,000

E8.5 (Solution)
(b) Danny Ltd journals at 30 June 20X0 ($000)
Dr Production cost 5,000

Dr Cash and cash equivalents 4,500
Dr Patent 3,350
Dr Equipment 4,850
Cr Trade payables 1,000
Cr Interest in JO 16,700
(Disaggregation of JOMA at period end)

E8.5 (Solution)
(b) Previous entry is based on the JOMA prepared by the joint venture manager. Calculations of
amounts are as follows:
JOMA Danny Ltd 50%

Share
$000 $000
Production costs 10,000 5,000
Cash and cash equivalents 9,000 4,500
Patent 6,700 3,350
Equipment 9,700 4,850
Trade payables 2,000 1,000

E8.5 (Solution)
(b) Danny Ltd journals at 30 June 20X0 ($000) (continued)
Record depreciation on 50% interest in JO equipment:

Dr Depreciation expense 970
Cr Accumulated depreciation - equipment 970
(Record depreciation 4,850/5 = $970)
Record amortisation on 50% interest in JO Patent:

Dr Amortisation expense 335
Cr Accumulated amortisation - Patent 335
(Record amortisation 3,350/10 = $335)

Comprehensive Worked Example
CRICOS code 00025B 62

Process…
1. Calculate initial contribution – beware of FV assets
2. Review for additional contributions
3. Record any Management Fees received
4. Deal with Costs of Production during period (including Management Fees)
5. Disaggregate end of period Joint Operation’s financial
6. Deal with depreciation/amortisation charges in individual joint operators’ separate books
7. Record sales of products produced in individual joint operators’ separate books
8. Calculate total costs of production, then allocate over WIP & FG in individual joint operators’
separate books
9. Re-instate balances to JOMA at start of subsequent year – ignore depreciation/amortisation
Topic 7 - Accounting for Joint Arrangements CRICOS code 00025B 63

Joint Operations: Comprehensive Example
On 1 June 2020, Doctor Ltd and Nurse Ltd entered into a joint operation agreement as
tenants in common to produce specialty medical instruments. The following contributions
were made.
Assets Doctor Ltd Nurse Ltd

Agreed Agreed
Value Cost Value Cost
$ $ $ $
Cash 600,000 600,000
Plant 600,000 500,000
Less acc depreciation (80,000)
Total 600,000 420,000 600,000 600,000
• The plant is expected to have a 5 year useful life in JO production with no residual
value.

Comprehensive Example (cont.)
• A joint operation manager was appointed and provided the following
information for the month of June 2020:
 Cash costs of production for the month ended 30 June 2020 are
$200,000.
 All of the production remains on hand with the manager as
inventory.
 The remaining cash on hand at 30 June 2020 is $400,000.
Required:
Based on the information provided, prepare the general journal
entries for Doctor Ltd to record its interest in the joint operation as at
30 June 2020, using the line-by-line method of AASB 11.

Recall the Process

8. Calculate total costs of production, then allocate over WIP & FG in individual joint operators’ separate
books

Recall the details of the question…
On 1 June 2020, Doctor Ltd and Nurse Ltd entered into a joint operation agreement as tenants
in common to produce specialty medical instruments. The following contributions were made.

Agreed Agreed
$ $ $ $
Cash 600,000 600,000
Plant 600,000 500,000
Total 600,000 420,000 600,000 600,000
• The plant is expected to have a 5-year useful life in JO production with no residual value.
• A joint operation manager was appointed and provided the following information for the
month of June 2020:
 Cash costs of production for the month ended 30 June 2020 are $200,000.
 All of the production remains on hand with the manager as inventory.

Comprehensive Example Solution
JO’s Memorandum Account as at 1 June 2020
Cash (at FV) $600,000
Property, plant and equipment (at FV) 600,000
Joint operation ‘equity’ $1,200,000
Doctor Ltd’s interest in the JO is comprised of:

Cash (50% x FV $600,000) $300,000
Plant (50% x CV $420,000) $210,000 $510,000
Nurse Ltd’s interest in the JO is comprised of:
Cash (50% x CV $600,000) $300,000
Plant (50% x FV $600,000) $300,000 $600,000

Solution (cont.)
Gain on sale = FV – CV = (600,000 – 420,000) = $180,000.
Doctor Ltd’s Separate Books
Date Details DR CR
1/6/2020 Interest in JO 510,000
Accumulated depreciation 80,000
Plant – at cost 500,000
Gain on sale of Plant (50%) 90,000


Agreed Agreed
$ $ $ $
Cash 600,000 600,000
Plant 600,000 500,000
Total 600,000 420,000 600,000 600,000
month of June 2020:

Recall the Process

books

Solution (cont.)
JO’s Memorandum Account as at 30 June 2020

Cash $400,000
Inventories (costs of production) 200,000
Property, plant and equipment 600,000
Costs of production $200,000
Each joint operator will recognise their share.

Solution (cont.)
Doctor Ltd will recognise their share:
JO’s Memorandum Account as at 30 June 2020 Calcs for Doctor Ltd

Cash $400,000 *50% 200,000
Inventories (costs of production) 200,000 *50% 100,000
Property, plant and equipment 600,000


Solution (cont.)

Cash $400,000 *50% 200,000
Property, plant and equipment 600,000 at 50% of cost


Solution (cont.)

Cash $400,000 *50% 200,000
Property, plant and equipment 600,000 50% of $420,000

* Note: Plant was recorded at FV in the JOMA at period end, but, because Doctor Ltd uses a cost
method of valuation for non-current assets, Doctor Ltd can only recognise 50% of the original
carrying value in its separate books of accounts - $420,000 @ 50%

Solution (cont.)

Cash $400,000 *50% 200,000
Property, plant and equipment 600,000 210,000
Joint operation ‘equity’ $1,200,000 Balancing amount


Solution (cont.)
Disaggregation
Doctor Ltd will recognise JO interest in assets and liabilities.
Date Details DR CR
Again, start by inputting

information you know…

Solution (cont.)
Disaggregation
Date Details DR CR
30/6/2020 PPE – at cost 210,000
Cash 200,000
Inventories 100,000

Solution (cont.)
Disaggregation
Date Details DR CR
30/6/2020 PPE – at cost 210,000
Cash 200,000
Inventories 100,000
Interest in Joint Operations 510,000

Recall the Process

books


Agreed Agreed
$ $ $ $
Cash 600,000 600,000
Plant 600,000 500,000
Total 600,000 420,000 600,000 600,000
month of June 2020:

Solution (cont.)
• Plant has just been recorded at CV $210,000 in Doctor Ltd’s books
• Estimated useful life is estimated 5-year life, no residual
• The JO began on 1 June 2020, and we are recording Doctor Ltd’s interest in
the joint operation as at 30 June 2020
Therefore:
depreciation for a one-month period
$210,000 / 60 months
= $3,500 / month

Solution (cont.)
Therefore:
$210,000 / 60 months
= $3,500 / month
Date Details DR CR
30/6/2020 COP – depreciation expense 3,500
Accumulated depreciation P&E 3,500

Solution (cont.)
Therefore:
$210,000 / 60 months
= $3,500 / month
Date Details DR CR
30/6/2020 COP – depreciation expense 3,500
Accumulated depreciation P&E 3,500
Inventories 3,500
COP – depreciation expense 3,500
Solution (cont.)
• In this example, no Finished Goods have been produced and/or distributed to the individual
joint operators.
• The worked PJW Ltd Example will cover this, and also:
Cash/accrued costs of production
Sales/COGS of Finished Goods

That’s all for now – see you next week!
86

ACCT7104 Corporate Accounting: Topic 7: Accounting For Joint Arrangements

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ACCT7104 Corporate Accounting: Topic 7: Accounting For Joint Arrangements

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ACCT7104

Topic 7 - Accounting for Joint Arrangements 2

Lecture exercises from Arthur et al:

• The concept of control is based on the substance over the form

• The contractually agreed sharing of control of an arrangement, which exists only

A joint arrangement is defined as (AASB 11.4):

• an arrangement of which two or more parties have joint control.

Topic 7 - Accounting for Joint Arrangements 6

• A joint arrangement has the following characteristics (AASB 11.5):

Topic 7 - Accounting for Joint Arrangements 7

AASB 11.14 Types of joint arrangement

Topic 7 - Accounting for Joint Arrangements 8

Topic 7 - Accounting for Joint Arrangements 10

Topic 7 - Accounting for Joint Arrangements 11

YES = JO, NO = next question.

YES = JO, NO = next question.

Topic 7 - Accounting for Joint Arrangements 13

Topic 7 - Accounting for Joint Arrangements 14

i.e. substance over form

Topic 7 - Accounting for Joint Arrangements 15

We will cover equity accounting in the next seminar.

Topic 7 - Accounting for Joint Arrangements 18

Topic 7 - Accounting for Joint Arrangements 19

Topic 7 - Accounting for Joint Arrangements 20

Topic 7 - Accounting for Joint Arrangements 21

Joint control is the contractually agreed sharing of control of an arrangement,

Must be aware of any agency/moral hazard issues.

The joint operation is often established to pursue a specific economic activity

Topic 7 - Accounting for Joint Arrangements 23

Topic 7 - Accounting for Joint Arrangements 24

Compared to other joint entities (for example, a partnership) a joint operation:

1. its assets, including its share of any assets held jointly ;

Topic 7 - Accounting for Joint Arrangements 27

Topic 7 - Accounting for Joint Arrangements 28

Topic 7 - Accounting for Joint Arrangements 29

Joint Operation’s Management Accounts (JOMA)

Topic 7 - Accounting for Joint Arrangements 30

Topic 7 - Accounting for Joint Arrangements 32

• Depreciation cannot be charged if production has not commenced

Topic 7 - Accounting for Joint Arrangements 34

Topic 7 - Accounting for Joint Arrangements 35

Topic 7 - Accounting for Joint Arrangements 36

Bob’s initial contribution would be recorded in his separate books as:

Topic 7 - Accounting for Joint Arrangements 38

Topic 7 - Accounting for Joint Arrangements 39

Jess records this contribution in her own books as:

Topic 7 - Accounting for Joint Arrangements 40

Immediately after contribution, JOMA shows:

BUT Jess’s interest in the Joint Operation is comprised of:

Topic 7 - Accounting for Joint Arrangements 41

Topic 7 - Accounting for Joint Arrangements 42

Inez records this contribution in her own books as:

Topic 7 - Accounting for Joint Arrangements 44

Immediately after contribution, JOMA shows:

BUT Inez’s interest in the JO is comprised of:

Topic 7 - Accounting for Joint Arrangements 45

Jim records this contribution in his own books as:

Topic 7 - Accounting for Joint Arrangements 46

Immediately after contribution, JOMA shows:

BUT Jim’s interest in the JO is comprised of:

Topic 7 - Accounting for Joint Arrangements 47

Topic 7 - Accounting for Joint Arrangements 49

At accounting period end, JOMA shows $400,000 management fee to be allocated,