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J o i n t Ve n t u r e A c c o u n t i n g o n t h e M o v e
Robert Kirk outlines the requirements of IAS 31.
Proportionate consolidation
This is a method of accounting and reporting whereby a
venturer’s share of each of the assets, liabilities, incomes
and expenses of a jointly controlled entity are combined
on a line-by-line basis with similar items in the venturer’s
financial statements or reported as separate line items.
Equity method
Initially the investment is carried at cost by a venturer
and adjusted thereafter for the post acquisition change
in the venturer’s share of net assets of the jointly
controlled entity. The income statement reflects the
venturer’s share of results of operations of the jointly
controlled entity.
IAS 31 at present favours proportionate consolidation
but permits equity accounting as an acceptable second
best solution when accounting for jointly controlled
entities.
IAS 31 identifies three broad types of joint venture
activity:
* jointly controlled operations
* jointly controlled assets; and
* jointly controlled entities
They all have the common characteristics of having
two or more joint venturers bound under contract and
establishing joint control.
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Financial Repor ting Joint Venture
Effectively an entity is adopting proportionate consolidation and liabilities into a jointly controlled entity or it could be a
for such relationships. joint venture by establishing a joint entity with a foreign
government.
Jointly Controlled Assets In substance they are often similar to jointly controlled
Some joint ventures involve joint control by the venturers operations or jointly controlled assets. However, it does
over one or more assets which are dedicated for the maintain its own accounting records and prepares its
purposes of the joint venture. Each venturer may take a financial statements in the same way as other normal
share of the output and bear an agreed share of the entities in conformity with appropriate national regulations.
expenses incurred.
Each venturer usually contributes cash or other resources
No corporation, however, is established. Many activities in to the jointly controlled entity. These contributions are
oil and gas and mineral extraction involve jointly controlled included in the accounting records of the venturer and
assets e.g. an oil pipeline. Another example is the joint recognised in its financial statements as an investment in
control of property, each taking a share of the rents received the jointly controlled entity.
and bearing a share of the expenses.
Again, a venturer should recognise in its financial Financial Statements of a Venturer
statements: Under IAS 31, a venturer should report its interest in a
jointly controlled entity using one of two reporting formats
(a) its share of jointly controlled assets, classified according
for proportionate consolidation or using the equity method.
to their nature;
(b) any liabilities it has incurred; It is essential that a venturer reflects the substance and
economic reality of the arrangement. The application of
(c) its share of any liabilities jointly incurred with other
proportionate consolidation means that the consolidated
venturers;
balance sheet of the venturer includes its share of the
(d) any income from the sale or use of the share of the assets it controls jointly and its share of the liabilities for
output of the joint venture together with its share of which it is jointly responsible. The consolidated income
any expenses incurred; statement includes the venturer’s share of the income and
(e) any expenses incurred re its interest in the joint expenses of the jointly controlled entity. Many of the
venture. procedures are similar to consolidation procedures set out
in IAS 27.
The treatment of jointly controlled assets should reflect
their substance and economic reality and usually the legal There are different reporting formats to give effect to
form of the joint venture. Separate accounting records for proportionate consolidation but the most popular is to
the joint venture may be limited to those expenses incurred combine a venturer’s share of each of the assets, liabilities,
in common. Financial statements may not be prepared for income and expenses of the jointly controlled entity with
the joint venture but management accounts may be similar items in the consolidated statements on a line by
needed to assess performance. line basis. e.g. its share of inventory with inventory of the
consolidated group.
Proportionate consolidation can only be adopted from
“Proportionate consolidation can only be the date the entity acquires joint control and it should be
discontinued from the date on which it ceases to have joint
adopted from the date the entity acquires joint control over a jointly controlled entity. This could happen
control and it should be discontinued from the when the venturer disposes of its interest or when external
restrictions mean that it can no longer achieve its goals.
date on which it ceases to have joint control
As an alternative, a venturer may report its interest in a
over a jointly controlled entity.” jointly controlled entity using the equity method as per IAS
28 Accounting for associates. The equity method is
supported by those who argue that it is inappropriate to
Jointly Controlled Entities combine controlled items with jointly controlled items.
The main type of joint venture is a jointly controlled entity. Originally, the standard took the view that it should not
In this case a corporation is established and operates as per recommend the use of the equity method because
other legal entities except that there is a contractual proportional consolidation better reflects the substance
arrangement between the venturers that establishes joint and economic reality of a venturer’s interest in a jointly
control over the economic activity of the entity. controlled entity. However, the latest exposure draft
(October 2007) has now decided to recommend the
A jointly controlled entity controls the assets of the joint demise of proportionate consolidation and has opted for
venture, incurs liabilities and expenses and earns income. It equity accounting only. As with proportionate consolidation
may enter contracts in its own name and raise finance for a venturer should discontinue the use of the equity method
itself and each venturer is entitled to a share of the results from the date it ceases to have joint control.
of the jointly controlled entity.
An example of both approaches is provided on the
An example is when two entities combine their activities following page:
in a particular line of business by transferring relevant assets
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Financial Repor ting Joint Venture
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Financial Repor ting Joint Venture
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Financial Repor ting Joint Venture
The Group’s share of the profits and losses after interest and tax of jointly Investments (continued)
controlled entities is disclosed as Share of Results from Joint Ventures in
the consolidated income statement. (c) Joint Ventures
Any goodwill arising on the acquisition of the Group’s interest in a jointly During the year ended 31 December 2006 there were two joint
controlled entity is accounted for in accordance with the Group’s venture companies, First Radio Sales Limited and Digital Space Limited
accounting policy for goodwill (see below). Where the Group transacts (2005: Absolute Radio (UK) Limited, Digital Space Limited and First
with its jointly controlled entities, unrealised profits and losses are Radio Sales Limited). The revenue, expenditure, asset and liability
eliminated to the extent of the Group’s interest in the joint venture. information relating to those joint ventures proportionately consolidated
in the Group accounts is disclosed below.
Aggregate amounts relating to Joint Ventures included in non-
current assets: The latest developments - ED 9 Joint
2006 2005 Arrangements (September 2007)
€’000 €’000
In September 2007 the IASB issued an exposure draft ED 9 Joint
Total Assets 99,125 74,153 Arrangements in which it proposes to eliminate the proportionate
Total Liabilities (91,693) (62,867) consolidation option.
Total Net Assets 7,432 11,286
ED 9 sets out requirements for recognition and disclosure of interests in
Net Interest in Joint Ventures 3,877 4,660
joint arrangements. Its objective is to enhance the faithful representation
of joint arrangement and it achieves this by requiring an entity:
Aggregate amounts relating to Joint Ventures included in Income
Statement: (a) to recognise its contractual rights and obligations arising from its joint
2006 2005 arrangement. The precise form of arrangement is no longer the most
€’000 €’000 significant factor in determining the appropriate accounting treatment;
and
Revenue 15,895 2,864
Expenses (14,098) (2,940) (b) to provide enhanced disclosures about its interest in joint
Profit / (Loss) 1,747 (76) arrangements.
Group’s Share of Profit / (Loss) 1,064 (21) It forms part of the short term convergence project currently being
undertaken by the IASB and American Financial Accounting Standards
Board (FASB) and will lead to current IAS 31 being superceded.
Interests in Joint Ventures
The Group has a number of joint venture entities which are used to Main features of ED 9
finance specific projects. A list of all significant joint ventures, including the The core principle of ED 9 is that all parties to a joint arrangement should
name, country of incorporation, proportion of ownership and nature of recognise their contractual rights and obligations arising from the joint
operations, is provided in note 46 on page 77. arrangement.
Details of land commitments held in joint ventures are provided in note The definitions are similar to IAS 31 in that a joint arrangement is a
41. contractual arrangement whereby two or more parties undertake an
economic activity together and share decision making relating to the
UTV Plc Year ended 31st December 2006 activity. There are still three types – joint operations, joint assets and joint
Investment in joint venture ventures.
A joint venture is an entity in which the Group holds an interest under ED 9 requires a party to recognise its contractual rights and obligations as
a contractual arrangement where the Group and one or more other assets and liabilities. Contractual rights to individual assets and contractual
parties undertake an economic activity that is subject to joint control. obligations for expenses represent interests in joint operations or joint
assets.
The Group’s interest in its joint ventures is accounted for by
proportionate consolidation, which involves recognising a proportionate The major recommendation is that an interest in a joint venture must use
share of the joint venture’s assets, liabilities, income and expenses with the equity method.
similar items in the consolidated financial statements on a line-by-line ED 9 also requires disclosure of a description of the nature of operations
basis. The reporting dates of the joint venture and the Group are identical it conducts through joint arrangements as well as a description of and
and both use consistent accounting policies. summarised financial information relating to its interests in joint ventures.
Attributable to Joint Ventures:
2006 2005 Conclusion
€’000 €’000 The latest exposure draft will certainly force many listed Irish companies
Revenue 1,268 978 to readdress the subject of joint venture accounting. A large number of
Operating costs (988) (1,011) companies such as UTV Plc have switched over from adopting equity
Finance income 15 3 accounting to proportionate consolidation on first adoption of
Profit / (loss) before tax 295 (30) international financial reporting standards but this process will inevitably
Taxation (6) (1) have to be reversed in the next two years. At this stage we are not sure
Profit / (loss) for the year 289 (31) when the revised standard will be published but is unlikely it would be
Current assets 546 365 adopted for any entities reporting before the end of 2009.
Current liabilities 156 106
Robert Kirk is a Professor of Financial Reporting at the University of
Non-current liabilities - -
Ulster.
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