IFRS 11

JOINT ARRANGEMENTS
 IFRS 11
JOINT ARRANGEMENTS
GS – Volume 2 – Chapter 12
DA – Chapter 29
SAICA HANDBOOK – IAS 28: Investment in
Associates and Joint ventures
SH – IFRS 11 – Joint Arrangements
3 OUTCOMES
• Joint arrangement can either be a joint venture OR joint operation = Distinguish
between joint ventures and joint operations in terms of accounting standards (IFRS
11);
• Correctly account for interests in joint ventures/joint operations in the financial
statements of the investor company;
• Prepare and correctly process all journal entries for the correction of any inter-company
transactions; and
• Apply the disclosure requirements that apply to joint ventures/joint operations
+ IFRS APPLICABLE
o IAS 27 Separate AFS - Investment in Joint Operation (JO) in separate financial statements
o IAS 28 Investment in Associates and Joint ventures - Accounting for Joint Venture (JV)
in groups books
o IFRS 11 Joint arrangements - Is a Joint Arrangement a JO or JV? How to account for a JO
o IFRS 12 Disclosure of interests in other entities
4
Types of Investments
SUBSIDIARY ASSOCIATE JOINT ARRANGEMENT

CRITERIA CONTROL SIGNIFICANT JOINT CONTROL

INFLUENCE
SHARE >50% 20%-50% 1%-99%
EQUAL
ACCOUNTING ACQUISITION METHOD EQUITY METHOD Depends on Type
(FULL Joint Venture
CONSOLIDATION) OR
Joint operation
STANDARD IFRS 3, IFRS 10 IAS 28 IFRS 11/IAS 28
5
WHAT IS IFRS 11 JOINT
ARRANGEMENTS?
 To establish principles for financial reporting
OBJECTIVE by entities having an INTEREST
Joint IN JOINT ARRANGEMENTS
arrangements  This is in contrast to CONTROL that is established
between a parent and a subsidiary in terms of IFRS
10 Consolidated Financial Statements
= Defines
joint control = Have to determine the TYPE OF JOINT
ARRANGEMENT
Type will determine ACCOUNTING treatment
 IFRS 11 Definitions
 A joint arrangement is an arrangement in which two or more parties have
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.
 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, (not on net basis) relating to the arrangement.
 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.
7
BASIC CONCEPTS
Does the contractual arrangement give the parties all
control of the arrangement COLLECTIVELY? No Outside the
scope of IFRS
Yes 11 (not a joint
arrangement)ch
Do the decisions about the relevant activities require the No eck if IFRS 10 or
UNANIMOUS CONSENT of all the parties that another
collectively control the arrangement? standard
applies.
Yes

JOINT ARRANGEMENT
EXAMPLE:EXISTENCE OF a JA
+ A joint arrangement is established between 3
parties and the contractual terms state that 75%
of the voting rights are required to make
decisions about relevant activities. 2 scenarios
exit :
+ Scenario 1= A with 50% ,B with 30% and C
20%
+ Scenario 2 =A with 50% ,B with 25% and C
with 25%.....Rqd: assess existence of a JA in
each of the scenarios above
solution
Scenario 1 Scenario 2

Does collective control exist? yes yes

If yes which parties must act together to A&B A&B or A&C

direct the relevant activities
Does unanimous consent exist? *Yes **NO

Does joint control exist Yes No

Does a JA exist Yes No

Solution continues
+ * No decisions can be made if A&B do not
agree unanimously
+ ** The contractual arrangements between
parties must specify which combination of
parties is required to agree unanimously to
decisions. If no contractual arrangement exists
between A&B or A&C joint control does not
exist. It can not be either or but specific.
11 TYPES OF JOINT ARRANGEMENTS
 Ito IFRS 11 - A joint arrangement can either be a

Joint Venture or a Joint

Operation
 The following CHARACTERISTICS are present in both (IFRS 11.5):
 1) Two or more parties are bound by a contractual arrangement;
and
Joint control  CONTRACTUALLY agreed sharing of control, of an
 2) The contractual arrangement establishes joint control.
arrangement, which exists only when decisions about the relevant activities
require the UNANIMOUS CONSENT of the parties sharing control (IFRS 11.7)
12
CLASSIFICATION
General rule: rights and obligations
 Joint venture: Arrangement structured through separate legal entity (like a
company) – in most cases Joint venture (consider legal form, contractual
terms and other facts and circumstances (refer diagram below).
 If NOT structured through separate vehicle then DEFINITELY NOT joint venture
but joint operation
 Joint operation: If the arrangement creates joint control over a group of assets
and liabilities not held in a separate legal entity or they are not the only assets
and liabilities of the legal entity
13
CLASSIFICATION
General rule: assess rights and obligations of
Structure of the joint arrangement
parties. (IFRS 11.B21)

Considerations
NOT structured through a illustrated on
Structured through a separate vehicle:
separate vehicle JV/JO next slide
Considerations:
1.Legal form of vehicle
2.Terms of the contractual arrangement
3.Other facts and circumstance

Joint OPERATION
Joint venture
14
Classification: JO or JV???
Legal form: Does
the legal form of • Yes: Joint
Operation SAICA Handbook
separate vehicle
give the parties IFRS 11 B33
rights to A/L?

• Yes: Joint
No Other facts & circumstances:
Operation
Designed arrangement so that
(a) Economic benefits (rights)
(b) Duty to settle liabilities
• Yes: Joint
Operation
No •
Terms of contractualNo: Joint
arrangement: Do termsVenture
allow rights to A/L?
Example on classification of JA
+ Rain and Snow Ltd contractually agreed to have
joint control over Ice Ltd, a newly formed
company. Rain Ltd and Snow Ltd each hold
50% of equity shares of Ice Ltd. Rain and Snow
have to collectively act together in the relevant
activities of Ice Ltd(there is need for unanimous
consent). Ice Ltd is a separate entity
incorporated in terms of the companies Act and
it is the legal owner of its assets and responsible
for its liabilities. Classify the JA.
 SOLUTION
+ Considerations :
+ 1) the structure of the arrangement; It is structured
through a separate vehicle i.e Ice Ltd and can be
classified as either a JO/JV
+ 2) The legal form: Ice Ltd is a company thus a separate
legal persona. The assets and liabilities of Ice Ltd are its
own and not the assets and liabilities of the parties.
Hence Rain and Snow owns equity interests in Ice Ltd.
Solution (cont)
+ Contractual terms:
the contractual terms did not modify the rights and
obligations of the parties as determined by the legal
form of Ice Ltd.
Other facts and circumstance:
 Solution (cont)
+ Other facts and circumstances
There is no indication that the output is all consumed by
the parties hence the parties are not responsible for Ice’s
liabilities so these do not give Rain and Snow rights to
assets and obligations for liabilities of Ice Ltd .
In conclusion the joint arrangement is therefore
classified as a joint venture.
19

ACCOUNTING
JOINT
JO: No difference in
recognising the JO in
the entity’s separate

JOINT VENTURE OPERATION FS and the entity’s

consolidated FS

IFRS 11.24 (IAS 28) IFRS 11.20

SEPARATE AFS
 Cost or
 Financial Asset (IFRS 9)
CONSOLIDATED AFS
Equity Method
 (IAS 28) (as with associates
just REPLACE associate
with JOINT VENTURE)
SEPARATE AFS
+ Recognise own assets/liabilities and
transactions INCLUDING your
share of jointly incurred
assets/liabilities
CONSOLIDATED AFS
+ Recognise own assets/liabilities and
transactions INCLUDING your
share of jointly incurred
assets/liabilities
Joint operator will recognise
% interest of:
a) ASSETS + share of
assets held jointly
b) LIABILITIES + share of
liabilities held jointly
c) REVENUE from sale of
its share of output
ARISING from the JO.
d) Share in the REVENUE
from sale of the output by
the JO
e) EXPENSES + share of
expenses incurred jointly
AND eliminate intergroup
transactions
20
 Joint Venture
Joint Ventures
 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.
A joint venture exists where 2 or more investors (called “venturers”) have “joint
control” over another entity (called the “joint venture”)
The % of control over the joint venture can be anything from 1% to 99% (it is
contractually determined)
A joint venture is also accounted for in accordance with the EQUITY
METHOD (SAME as for Associates)
It is therefore no different to an associate, except that the names of accounts
will change (e.g. we will speak of “share of profit of joint venture” instead
of “share of profit of associate)
21
CLASS EXAMPLE GS Example 12.1
 On 2 Jan 2015 P acquired 40% of issued shares of J for N$100 000.
 Equity of J on 1 Jan 2012
Share Capital N$200 000
Retained Earnings N$50 000
 P exercises joint control over the financial and operating policy decisions of J in
terms of a joint arrangement.
 Tax 30%.
 The joint arrangement is accounted for as follows:
a) Assume that, joint arrangement is classified as joint operation. The contractual
arrangement specifies all revenues, expenses, assets and liabilities are allocated
according to the respective interests held by the operators
b) The joint arrangement is classified as a joint venture
22
23

Journal
24
Required (i) – The joint arrangement is classified as a JOINT OPERATION (JO)

(i) How do you account for a Joint Operation? RECAP…

 Recognise H's % share of jointly incurred assets/liabilities, revenue & expenses
 "Proportional consolidation on a line by line basis"
 Discuss – Difference between Sub and JO?
 Sub = 100% consolidation on a line-by-line basis
 JO = Proportional consolidation on a line-by-line basis
 Therefore END RESULT of consolidation = H + 40% of JO
 Swap out investment in JO for:
 40% of A + L
 PLUS: 40% of since earnings (RE + CY Profit)
 LESS: Dividend received

Journal
25
What will be the journal in the consolidated AFS
to account for a JO?
JOINT OPERATION
Description Debit Credit • Recognise your share of
PPE R 120 000 jointly incurred
Inventory R 80 000 assets/liabilities
Long-term loans R 40 000 • "proportional consolidation
Profit after tax R 144 000
on a line by line basis"
Dividends Received R 120 000
• H + 40% of JO
Retained Earnings R 36 000
• Swap out investment for
Investment in J R 100 000
40% of A + L &
Accounting for joint operation at acquisition
40% of since earnings
Eliminate div received
Can there be NCI?
(don’t bring in 40%
Can there be goodwill? div paid)
26

100%
= [300 000 x 40%]
100%
= [200 000 x 40%]

Share capital ONLY H

(like always)
RE carried fwd from SoCE

100%
= [100 000 x 40%]
27 = [R600 000 x 40%]
= [R240 000 x 40%]

P = 100%

Dividends
ONLY P
= [R140 000 (BOY) – R50 000 (AT)
= R90 000 x 40%]

Carried fwd from SoPL

28

How would you have treated this joint

arrangement if it was classified as a
Joint Venture?

+ DO THIS ON YOUR OWN SAME

TREATMENT AS AN ASSOCIATE.
29
HOW DO YOU DEAL WITH INTRAGROUP
TRANSACTIONS (management fees, loans, unrealised
profits etc)

(i) JOINT OPERATION?

(ii) JOINT VENTURE ?
30
INTRAGROUP TRANSACTIONS
 Joint Venture
 Just like Associates = ONLY unrealised Profits
 Do NOT adjust the Analysis
 All amounts in the PFJEs must be ONLY THE PORTION RELATING TO H LTD’S
INTEREST IN JV (for example MULTIPLY everything with 40%)
 If JV Ltd is the selling company (JV Ltd’s P/L is affected; H Ltd’s SoFP is affected):
 Do the journals the same as you would have done them for a subsidiary, but for
all accounts affecting P/L, CHANGE TO “share of profit of joint venture”
 If H Ltd is the selling company (JV Ltd’s SoFP is affected; H Ltd’s P/L is affected):
 Do the journals the same as you would have done them for a subsidiary, but for
all accounts affecting the SoFP, CHANGE TO “investment in joint venture"
 Except for inventory, then split profit between revenue and COS, refer associate
slides
31
INTRAGROUP TRANSACTIONS

 Joint Operation
 Account for % interest of JO's assets, liabilities and since acquisition reserves (RE + Profits –
Dividends received)
 Intragroup transactions – Eliminate % interest (Account descriptions SAME as subsidiary –
just REMEMBER to multiply with %)
32 GS EXAMPLE 12.3 – INTERCOMPANY LOANS, INTEREST AND
MANAGEMENT FEES
 On 1 Jan 2018 P acquired 40% equity interest in J for N$150 000.
 In terms of a contractual arrangement, P Ltd exercises joint control over the economic activities of J (Pty) Ltd (joint
arrangement).
We will ONLY do
joint operation (Joint
venture JUST like
associate: Self-study)

Eliminate 40% of
Loan and interest to
JO
Total or R600 000
borrowed
R400 to P and R200
to other
Both @ 40%
 Eliminate 40% of
interest and
33
management fee
34 SOLUTION – Joint OPERATION
journals to account for intragroup
How will you prepare the main journal to ACCOUNT of the JO?
J1a
JOURNAL
Only include 40% of J's
ASSETS + LIAB
The amount loaned to J
ASSETS P Group J Ltd J Ltd
PPE 1 400 000 450 000 180 000
R600 000.
Investment in J 150 000 - - P ONLY loaned J R400
Loan to J 400 000 - - 000. (This is intragroup
Inventories 450 000 550 000 220 000 loan + interest)
Total Assets 2 400 000 1 000 000 400 000
R200 000 relates to
EQUITY AND LIABILITIES other operators. You still
Share Capital 500 000 200 000 - account for 40% liability,
RE 1 000 000 200 000 - but don’t eliminate as its
NCI 350 000 - - not intragroup
240 000
(split 400 000 x 40% (P) = R160
000 and 200 000 x 40% (Other) =
Shareholders loan - 600 000 R80 000)
Other Loan 550 000 - -
Total equity and liabilities 2 400 000 1 000 000 240 000
35 SOLUTION – Joint OPERATION journals to account for intragroup
How will you prepare the main journal to ACCOUNT of the JO?
JOURNAL
J1b Only include 40% of J
(CY Profits)
P Group J Ltd J Ltd
Revenue 3 600 000 2 400 000 960 000
Cost of sales -1 800 000 -1 200 000 -480 000
Gross Profit 1 800 000 1 200 000 480 000
Other expenses -448 000 -252 000 -100 800
Income from JO:
Management fee received 48 000 -
Interest receveid 60 000 -
Dividends received 160 000 -
Expenses
Interest paid -160 000 -90 000 -36 000
Management fee paid - -48 000 -19 200
Profit before tax 1 460 000 810 000 324 000
Income Tax -520 000 -310 000 -124 000
Profit for the year 940 000 500 000 200 000
36 SOLUTION – Joint OPERATION journals to account for intragroup
 How will you prepare the main journal to ACCOUNT of the JO?

RETAINED EARNINGS
JOURNAL
Only include 40% of J
(Since RE – Div rec)
J1c
P Group J Ltd J Ltd
Balance at 1 Jan 2018 420 000 100 000 ** See note
Changes in equity for 2018
Dividends -300 000 -400 000 -160 000
Total comprehensive income
Profit for the year 880 000 500 000 Already incl
Balance at 31 Dec 2018 1 000 000 200 000
** We do not account for any movement in RE (At acquisition LESS BOY) as J was acquired at the beginning of the
current year

J1
Summary
of journal
J1a,b,c
37 SOLUTION – Joint OPERATION journals to account for intragroup
 We have now accounted for the main journal on recording the investment in JO! Now lets look at the intragroup journals to
ELIMINATE the loans, interest paid and management fees.
 Journals + Calculations
 J Ltd = Management fee paid R48 000
 Eliminate 40% of intragroup transaction = R48 000 x 40% = R19 200

J2a

 J Ltd = Interest paid according to p/l = R90 000. Do all of the R90 000 relate to intragroup? Discuss in 2's!
 No = Total loans payable by J Ltd = R600 000. Only R400 000 relates to H Ltd and 40% of that must be eliminated (R160 000) &
therefore ONLY 40% of the interest on the R400 000 to be eliminated. The other R200 000 relates to other operators.
 R400 000/R600 000 x R90 000 = R60 000 x 40% = R24 000

J2b,c
38
SOLUTION EX 12.3 – CONSOLIDATED AFS
JOURNALS
CONSOLIDATED
Only include AFS
40% of J's Intragroup 31 Dec 2018
ASSETS P Group J Ltd assets + liab Elimination
1 580
PPE 1 400 000 450 000 180 000 000

Investment in J 150 000 - -150 000 -

240
Loan to J 400 000 - - -160 000 000
670
Inventories 450 000 550 000 220 000 000
30
Goodwill - - 30 000 000
Total Assets 2 400 000 1 000 000 280 000 -160 000 2 520 000

EQUITY AND LIABILITIES

500
Share Capital 500 000 200 000 - 000
1 040
RE 1 000 000 200 000 40 000 000
350
NCI 350 000 - - 000

Shareholders loan - 600 000

J1
240 000
J2
-160 000 000
80

550
 SOLUTION EX 12.3 – CONSOLIDATED AFS
39 JOURNALS
Intragrou CONSOLIDATED
p AFS
Only include 40% Eliminati 31 Dec 2018
of J's CY profit on
P Group J Ltd J Ltd P Group P Group
Revenue 3 600 000 2 400 000 960 000 4 560 000
Cost of sales -1 800 000 -1 200 000 -480 000 -2 280 000
Gross Profit 1 800 000 1 200 000 480 000 2 280 000
Other expenses -448 000 -252 000 -100 800 -548 800
Income from JO:
Management fee received 48 000 - -19 200 28 800
Interest receveid 60 000 - -24 000 36 000
Dividends received 160 000 - -160 000 -
Expenses
Interest paid -160 000 -90 000 -36 000 24 000 -172 000
Management fee paid - -48 000 -19 200 19 200 -
Profit before tax 1 460 000 810 000 164 000 1 624 000
Income Tax -520 000 -310 000 -124 000 -644 000
Profit for the year 940 000 500 000 40 000 980 000

Total income
attributable to: 940 000 500 000 40 000 980 000
Owners of the parent 880 000 500 000 40 000 920 000
Non-controlling interest 60 000 - 60 000

J1 J2
40

Example - Unrealised profits - GS Example 12.4

 On 1 Jan 2017 P acquired 40% interest in J on incorporation. In terms of contractual agreement
P exercises joint control over the economic activities of J
 —Tax 28% and CGT 0% NAMIBIAN perspective.
 In terms of agreement P transferred land with fair value of R200 000 to the jointly controlled
entity in consideration for equity interest obtained. The land was shown as R50 000 in records
of P
 Since Jan 2017 J has sold inventories to P at profit mark-up of 40% on selling price. During
20.17 these sales amounted to R200 000. At Dec 2017 P still had some inventories on hand, at a
cost of R75 000.
 We will only deal with a joint operation and NOT joint venture. Recap on joint ventures as
part of SU 15 - Associates
41
 JOURNALS
Only include 40% of J's
ASSETS P Group J Ltd assets + liab Journal #
PPE 1 700 000 550 000 220 000 J1
Investment in J 200 000 - -200 000 J1
Inventories 500 000 668 000 267 200 J1
Deferred Tax - -
Total Assets 2 400 000 1 218 000 287 200

EQUITY AND LIABILITIES

Share Capital 500 000 500 000 -
RE 1 000 000 118 000 47 200
NCI 350 000 - -
Long-term Loans 550 000 600 000 240 000 J1
Total equity and liabilities 2 400 000 1 218 000 287 200

JOURNALS
Only include 40% of J's
CY profit Journal #
P Group J Ltd J Ltd
Revenue 3 600 000 2 400 000 960 000 J1
Cost of sales -2 100 000 -1 500 000 -600 000 J1
Gross Profit 1 500 000 900 000 360 000
Profit on transfer of land 150 000 - -
Dividends received from J 160 000 - -160 000 J1
Other expenses -200 000 -30 000 -12 000 J1
Profit before tax 1 610 000 870 000 188 000
Income Tax -520 000 -352 000 -140 800 J1
Profit for the year 1 090 000 518 000 47 200
 Solution – Provide the journal entries to account for the JO
43

J1

• Intragroup transaction - Sale of Inventories CP + Profit = Selling Price

• Total Sales = R200 000 x 40% = R80 000 60 40 100

• Closing Balance Inventories = R75 000 x 40/100 x 40% = R12 000

• Tax on above = R12 000 x 28% = R3 360
J2
J3
J4
 Solution – Provide the journal entries to account for the JO
44
• Intragroup transaction – Transfer of Land
• Profit on transfer = R150 000 (see P/L OR R200 000 – R50 000) x 40% = R60 000
• Tax on above = attracts CGT and Namibia 0% CGT rate s n DT hence ignore J6

J5
J6
Refer to the consolidated financial statements
that includes the effect of J1-J6 on the next 2
slides
 JOURNALS
CONSOLIDATED
Only include 40% AFS
of J's assets + Intragroup 31 Dec 2017
ASSETS P Group J Ltd liab Journal # Elimination Journal #
PPE 1 700 000 550 000 220 000 J1 -60 000 J5 1 860 000
Investment in J 200 000 - -200 000 J1 -
Inventories 500 000 668 000 267 200 J1 -12 000 J3 755 200
Deferred Tax - - 3 360 J4/6 3 360
Total Assets 2 400 000 1 218 000 287 200 68 640 2 618 560

EQUITY AND LIABILITIES

Share Capital 500 000 500 000 - 500 000
RE 1 000 000 118 000 47 200 -68 640 J2-6 978 560
NCI 350 000 - - 350 000
Long-term Loans 550 000 600 000 240 000 J1 790 000
Total equity and liabilities 2 400 000 1 218 000 287 200 -68 6 2 618 560
JOURNALS
CONSOLIDATED
AFS
Only include 40% Intragroup 31 Dec 2017
of J's CY profit Journal # Elimination Journal #
P Group J Ltd J Ltd P Group P Group
Revenue 3 600 000 2 400 000 960 000 J1 -80 000 J2 4 480 000
Cost of sales -2 100 000 -1 500 000 -600 000 J1 68 000 J2/3 -2 632 000
Gross Profit 1 500 000 900 000 360 000 -12 000 1 848 000

Profit on transfer of land 150 000 - - -60 000 J5 90 000

Dividends received from J 160 000 - -160 000 J1 -

Other expenses -200 000 -30 000 -12 000 J1 -212 000
Profit before tax 1 610 000 870 000 188 000 -72 000 1 726 000
Income Tax -520 000 -352 000 -140 800 J1 3 360 J4/6 -657 440
Profit for the year 1 090 000 518 000 47 200 -68 640 1 068 560

Total income attributable to: 1 090 000 518 000 47 200 -68 640 1 068 560
Owners of the parent 1 030 000 518 000 47 200 -68 640 1 008 560
 Additional things to Take NOTE of:

For Associates and Joint Ventures (Goodwill/Gain on bargain)

 When it is NOT goodwill (which is absorbed into the initial cost of the
investment) BUT a Gain on Bargain purchase. You have to also do this journal:
 Dr Investment in JV/Associate
 Cr Share of profit from JV/Associate
 You are writing investment up to the fair value of net assets
 Descriptive accounting Example 20.6 (same as accounting for associate)
Cumulative preferences shares
 Treat the same as for subsidiaries (deduct from profit to ordinary shareholders)
 See Example 12.5 in GS
47
DISCLOSURE REQUIREMENTS AS PER
IFRS 12.20-23
For both joint operations and ventures. Disclose separately that is material:
o The name of joint arrangement
o Nature of entity's relationship with the joint arrangement
o The principal place of business
o Proportion of ownership interest , or participating share and if different, the proportion
of voting rights held
Joint Ventures (JV) page 158 GS V 2 17th editin
o Whether using equity method or fair value
o Summarised financial information of JV
Refer additional disclosure requirements in IFRS 12
48
CONCLUSION AND HOMEWORK
 HOMEWORK
 Self study example 11.3 in Accounting standards (Joint operation)
 Self study GS self assessment question back of Chapter 12
 RECAP – JOINT ARRANGEMENTS
49
Provide the journal to account for the following investment in the joint arrangement:
 P Ltd acquired a 20% interest in J Ltd on incorporation for R100 000. The contractual arrangement of P
Ltd, together with other operators, exercises joint control of the economic activities of J Ltd
 Asses, Liabilities and Since RE as follows:

PPE R 500 000

Inventory R 100 000
LT Liabilities R -75 000
Revenue R -250 000
Cost of Sales R 120 000
Income Tax R 65 000
Dividends paid R 40 000
Assume
The JA is classified as a JOINT VENTURE
The JA is classified as a JOINT OPERATION
50
a) JOINT VENTURE
Joint Venture
Dt Investment in J Ltd R 5 000
Dt Dividends Received R 8 000
Ct Share in Profit of Joint Venture R -13 000
Accounting for investment in J Ltd according to equity method
b) JOINT OPERATION
Joint Operation
Dt PPE R 100 000
Dt Inventory R 20 000
Dt Dividends Received from J Ltd R 8 000
Dt Cost of Sales R 24 000
Dt Income Tax R 13 000
Ct LT liabilities R -15 000
Ct Revenue R -50 000
Ct Investment in J Ltd R -100 000
Accounting for joint operation in J Ltd
51 QUESTION 70: Exotic African Wildlife Conservationists (EAWC)
Talana Manzi Zoo (Pty) Ltd
o Talana Manzi Zoo (Pty) Ltd (‘Talana Manzi’) is a private zoo nestled in the heart of Groot Marico region in the North-West
Province. Talana Manzi was incorporated on 1 July 2014 with the main purpose of providing students studying zoology and
related courses at the North West University with experimental learning in exotic animals.
o The company has an issued share capital of 200 000 ordinary shares.
o On 1 July 2014 EAWC and Pretoria Zoo and Exotic Sanctuary Ltd (‘PZES’) (an unrelated third party) each subscribed
for 100 000 ordinary shares in Talana Manzi. EAWC and PZES also entered into a strategic agreement on the same date,
which governs the operations of Talana Manzi. The main features of the strategic agreement are as follows:
 Shareholders holding at least 51% of Talana Manzi’s voting rights are required to approve decisions about which exotic
animals to purchase and at what prices the sourced animals would be sold by Talana Manzi. Voting rights are awarded in
proportion to ownership of shares in Talana Manzi.
 Exotic animals sourced by Talana Manzi are purchased by EAWC and PZES in a ratio of 50:50. Talana Manzi may
not sell any of the exotic animals to third parties. EAWC and PZES may sell their share of the exotic animals to
international sanctuaries for sales outside South Africa.
 Exotic animals are priced to ensure that the expenses incurred by Talana Manzi are covered. These include all direct
costs associated with sourcing exotic animals as well as all administrative expenses of Talana Manzi
Required
o Draft an email to the group financial accountant of EAWC in which you discuss, in accordance with the International
financial reporting standards (IFRS), the appropriate classification and measurement of EAWC’s interest in Talana Manzi in
EAWC’s consolidated financial statements for the financial year ended 31 December 2014
 Question 70 – Part A Solution First discuss
AND conclude
From: CA@gmail.com CLASSIFICATIO
To: Student@Yahoo.co.za
Subject: Recognition and measurement of EAWC’s interest in Talana Manzi in EAWC’s consolidated
N
1
financial statements
Dear Sir

IFRS 11 sets out the types of joint arrangements and how to classify and measure them Identify 0.5

Def 0.5
1. A joint arrangement is an arrangement in which two or more parties have joint control. (IFRS 11.4)

2. Joint control is the contractually agreed sharing of control, which exists only when decisions about the Def 0.5
relevant activities require unanimous consent of the parties sharing such control. (IFRS 11.7)
App 0.5
a) A contract/agreement exists between EAWC and PZES.

b) It would appear that the relevant activities of Talana Manzi are those relating to the sourcing and pricing of App 0.5
exotic animals, as these determine the returns of the entity.

c) However, each investor holds 50% of the shares and of the voting rights. This means that the shareholders App 0.5
must be in agreement in order to come to a decision. Therefore unanimous consent is required because
shareholders holding at least 51% must make decisions.
CONCLUSION 1 – CLASSIFICATION
3. Therefore EAWC and PZES have joint control over Talana Manzi and a joint arrangement exists. 1P
 Question 70 – Part A Solution
A joint arrangement can either be a joint venture or a joint operation (IFRS 11.6) Def 0.5
4. An entity shall determine the type of joint arrangement in which it is involved. The classification of a joint arrangement
Def 0.5
depends upon the rights and obligations of the parties to the arrangement. (IFRS 11.14)
5. A joint operation is a joint arrangement whereby the parties that have joint control have rights to the assets and (give 0.5
obligations for the liabilities relating to the arrangement, whereas a joint venture is a joint arrangement whereby the mark for each
definition: JO 1
parties that have joint control have rights to the net assets of the arrangement. (IFRS 11.15/16) and JV)
6. As Talana Manzi is a separate legal entity (separate vehicle), it may represent either of these two types of joint
arrangements. (IFRS 11.B19) App 1

7. Other facts and circumstances will need to be considered (IFRS 11.B29-B33) as the legal form and the terms of the Def 0.5
contractual arrangement are not clear.
8. Talana Manzi will sell all of its output to EAWC and PZES at a price determined in order to cover the expenses incurred
by Talana Manzi. This indicates that that PZES and EAWC have rights to substantially all the economic benefits of the
assets of Talana Manzi and are, in substance, responsible for the settlement of the liabilities of Talana Manzi.
Talana Manzi does not appear to have any other sources of income, as it appears that EAWC and PZES are each obligated App 3
to purchase 50% of the output of Talana Manzi. Therefore the cash flows from EAWC and PZES in substance satisfy the
obligations of Talana Manzi. (IFRS 11.B31/B32) Refer application example 5 (under par B32)
CONCLUSION 2: Classification of the joint arrangement
9. Based on the above, in my opinion EAWC and PZES have rights to the assets and obligations for the liabilities of Talana App 1P
Manzi and therefore Talana Manzi meets the definition of a JOINT OPERATION.
 Then discuss AND

Question 70 – Part A Solution conclude

MEASUREMENT

CONCLUSION 3 - Measurement
10. Therefore, EAWC should recognise 50% of the assets, liabilities, revenue and expenses of Talana Manzi 1P
(proportionate consolidation), which it has held, earned and incurred jointly with PZES in its separate and
consolidated financial statements for the 2014 financial year.
Regards
CA Student
 QUESTION BANK
QUESTION 73: Game of Thrones Part C (House Lannister)
Game of Thrones acquired a 50% equity interest in Lannister on 1 July 2014 for R800 000 when Lannister had a net asset value of
R1 168 648. The assets and liabilities were fairly valued at acquisition apart from land that was undervalued by R100 000. Lannister sold
this land on 15 October 2014 for an amount equal to its cost.
+ In accordance with the contractual arrangement, Game of Thrones, together with House Khaleesi Ltd (“Khaleesi”) (an independent
operator), exercises joint control over the economic activities of Lannister. The contractual agreement also confirms that Game of
Thrones and Khaleesi share in assets, liabilities, income and expenses equally.
+ In terms of the contractual arrangement, Game of Thrones and House Khaleesi must also each contribute and additional R850 000 to
Lannister to provide finance for some of Lannister’s activities:
+ Game of Thrones – 10% R1 preference shares – R850 000; and
+ House Khaleesi – 15% shareholders loan – R850 000.
+ On 1 July 2014, Lannister bought equipment to the value of R900 000 from Game of Thrones. The equipment was classified as
inventories in the records of Game of Thrones and property, plant and equipment in the records of Lannister. In terms of the contractual
agreement, a profit of 20% was charged on the cost price.
+ It is the policy of the Game of Thrones group to depreciate property, plant and equipment at 10% per year on the straight-line method.
+ The previous accountant correctly determined that the 50%-equity investment in Lannister was a joint operation, constituting a
business as defined in IFRS 3 Business Combinations.
+ The cost of this investment is equal to its fair value as at 30 June 2015.
+ The entry below is the only entry that the accountant of Game of Thrones recorded so far with regard to Lannister:
Dr Investment in House Lannister – ordinary shares (SoFP) R800 000
+ Dr
. Investment in House Lannister – preference shares (SoFP) R850 000
Cr Bank (SoFP) R1 650 000
 MARKS
REQUIRED:
Subtotal Total
(c) Prepare the journal entries necessary to record House Lannister Ltd in the records of
Game of Thrones for the year ended 30 June 2015. Journal narrations are not
required. 15 15
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED
30 June 2015
Game of House Stark House
Thrones Ltd Lannister
Ltd Ltd
R R R
Revenue 10 510 000 6 594 000 1 585 000
Cost of sales (4 985 000) (3 895 000) (413 000)
Gross profit 5 525 000 2 699 000 1 172 000
Other income 2 300 000 400 000 -
Interest received 650 000 - -
Other income 825 000 400 000 -
Ordinary dividends received 825 000 - -
Preference dividends received 85 000 - -
Other expenses (1 625 800) (650 000) -
Finance cost (825 000) (240 000) (125 000)
Profit before taxation 5 374 500 2 209 000 1 047 000
Income tax expense (2 012 000) (352 000) (159 000)
Profit for the year 3 362 200 1 857 000 888 000
Other comprehensive income that will not be reclassified to profit or loss 917 965 - -
Fair value adjustment on investments in equity shares 885 000 - -
Taxation on investments in equity shares (165 035) - -
Total comprehensive income for the year 4 082 165 1 857 000 888 000
EXTRACT FROM STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 June 2015
Retained earnings
Game of Thrones House Stark House Lannister
Ltd Ltd Ltd
R R R
Balance at 1 July 2014 9 280 035 1 088 800 -
Ordinary dividends paid – 30 November (512 200) (300 000) (200 000)
Preference dividends paid - - (85 000)
Total comprehensive income for the year 4 082 165 1 857 000 888 000
Balance as at 30 June 2015 12 850 000 2 645 800 603 000

Additional information
• Game of Thrones accounts for all investments in associates in terms of the equity method in its consolidated financial statements.
• Game of Thrones made an election in terms of IFRS 9 Financial Instruments to account for its investments in subsidiaries and
associates at fair value and to recognise any fair value adjustments in the mark-to-market reserve (other comprehensive income).
• Game of Thrones further elected in terms of IFRS 9 Financial Instruments to realise any mark-to-market reserve to retained earnings
on disposal of the underlying investment.
• Fair value adjustments are accounted for at year-end and before any change in ownership take place.
• Game of Thrones elected to measure the non-controlling interest in accordance with the proportional method.
• The profit of the group accrued evenly except for the sale of land and dividends received.
• All dividends were declared and paid in full on 31 December 2014.
• Assume a normal tax rate of 28% and 66.6% of capital gains are taxed resulting in an effective capital gains tax rate of 18.648%.
STATEMENT OF FINANCIAL POSITION AS AT 30 June 2015
Game of House Stark House Lannister
Thrones Ltd Ltd Ltd
R R R
Non-current assets
Property, plant and equipment 15 380 778 7 120 000 3 066 000
Land 1 000 000 2 000 000 -
Investment in Lannister ordinary shares 800 000 - -
– at cost/fair value
Investment in Lannister – 10% R1 850 000 - -
preference shares
Current assets
Debtors 2 250 000 523 000 -
Inventory 1 650 000 697 000 467 000
Cash and cash equivalents 2 250 000 546 000 20 000
Short-term investments 1 587 334 - -
EQUITY AND LIABILITIES R R R
Equity
Ordinary share capital 7 500 000 5 000 000 1 250 000
10% R1 preference share capital - - 850 000
Retained earnings 12 850 000 2 645 800 603 000
Non-current liabilities
Long-term liabilities 8 645 000 650 000 -
15% loan: House Khaleesi Ltd - - 850 000
Current liabilities
Creditors 2 585 000 2 590 200 -
 Question 73 – Part c Solution
DR Property, plant and equipment (SoFP) 1 533 000 R3 066 000 x 50%
DR Inventories (SoFP) 233 500 R467 000 x 50%
DR Bank (SoFP) 10 000 R20 000 x 50%
DR Ordinary dividends received from Lannister ((p/l) 100 000 R200 000 x 50%
DR Preference dividends received from Lannister ((p/l) 42 500 R85 000 x 50%
DR Cost of Sales (P/L) 206 500 R413 000 x 50%
DR Financing Charges (P/L) 62 500 R125 000 x 50%
DR Income Tax (P/L) 79 500 R159 000 x 50%
CR Revenue (P/L) (792 500) R1 585 000 x 50%
To correct the journal that the accountant
CR Investment in House Lannister – ordinary shares (SoFP) (800 000) passed
R850 000 x 50% OR record the % liability
CR Preference shares asset (GoT) (SoFP) (425 000) here and write J2
R850 000 x 50%
CR Loan from Khaleeesi Ltd (SoFP) (425 000)
(800 000)-(50%*(1168
DR Goodwill (SoFP) 175 000 648+100000x81.352%))
 Question 73 – Part c Solution
DT Revenue (p/l) (GAME OF THRONES)
CR Cost of Sales (p/l) (GAME OF THRONES)
CR Equipment (SofP) (LANNISTER)
Elimination of intergroup sales
450 000 R900 000 x 50%
(375 000) R900 000 x 50% (0.5) X 100/120 (0.5)
(75 000) R900 000 x 50% (0.5) X 20/120 (0.5)

DT Dtax (SofP) 21 000 R75 000 x 28%

CR Income tax (p/l) (21 000) Account names + direction
Tax effect of Journal (2)

DT Acc depreciation (LANNISTER) (SoFP) 7 500 R75 000 X 10%

CR Depreciation (LANNISTER) (p/l) (7 500) Account names + direction
Realisation of unrealised gain included in equipment as a result of depreciation (R75
000 x 10%)

DT Income tax (p/l) 2 100 R7 500 X 10%

(2
CR Dtax (SofP) 100) Journal descriptions + direction