Ch 15. Joint Arrangements and Group Disclosures

Question 1

Define:

• Joint Arrangments
• Joint Operations
• Joint Ventures

Answer 1

Joint arrangements are defined

‘as arrangements where two or more parties have JOINT CONTROL’

This will only apply if the relevant activities require unanimous consent of those who collectively control the arrangement.

Joint arrangements may take the form of either:

• Joint operations
• Joint ventures

The key distinction between the two forms is based upon the parties rights and obligations under the joint arrangement.

Joint operations - defined as joint arrangements where:-

‘the parties that have JOINT CONTROL have rights to the assets and obligations for the liabilities

Normally, there will NOT be a separate entity established to conduct joint operations.

Example of a joint operation
A and B decide to enter into a joint operation to produce a new product.

A undertakes one manufacturing process and B undertakes the other.

A and B have agreed that decisions regarding the joint operation will be made unanimously and that each will bear their own expenses and take an agreed share of the sales revenue from the product.

Joint ventures:- are defined as joint arrangements where:-

‘the parties have joint control of the arrangement and have rights to the net assets of the arrangement’

This will normally be established in the form of a separate entity to conduct the joint venture activities.

• *Example of a joint venture**
• *A and B decide to set up a separate entity, C**,
• to enter into a joint venture. A will own 55% of the equity capital of C, with B owning the remaining 45%.

A and B have agreed that decision-making regarding the joint venture will be unanimous.

Neither party will have direct right to the assets or direct obligation for the
liabilities of the joint venture; instead, they will have an interest in the net assets
of entity C set up for the joint venture.

Question 2

What is the accounting treatment for joint Operation?

Answer 2

• *If the joint operation meets the definition of a ‘business’ then the principles in IFRS 3 Business Combinations apply when an interest in a joint operation is
  acquired: **
• Acquisition costs are expensed to profit or loss as incurred.
• The identifiable assets and liabilities of the joint operation are measured at fair value
• The excess of the consideration transferred over the fair value of the net assets acquired is recognised as goodwill.

At the reporting date, the individual financial statements of each joint operator
will recognise:

• Statement of Financial Position
  
  • its share of assets held jointly
  • its share of liabilities incurred jointly
• Statement of Profit and Loss and other comprehensive income
  
  • its share of the revenue from the joint operation
  • its share of expenses from the joint operation

The joint operator’s share of the income, expenses, assets and liabilities of the joint operation is included in its individual financial statements and so they will automatically flow through to the consolidated financial statements.

Question 3

How are Joint Ventures accounted for?

Answer 3

Accounting treatment
In the individual financial statements, an investment in a joint venture can be accounted for:

The treatment of a joint venture is identical to the treatment of an associate.

• at cost
• in accordance with IFRS 9 Financial Instruments, or
• by using the equity method.

In the consolidated financial statements, the interest in the joint venture entity
will be accounted for using the equity method in accordance with IAS 28
Investments in Associates and Joint Ventures.

Question 4

What are the types of disclosures required for Consolidated accounts/Group accounts?

Answer 4

Disclosures to evaluate the nature of, and risks associated with, interests in other entities:

• The significant judgements and assumptions in determining control, joint control or significant influence
• Composition of the group
• ​The nature, extent and financial effects of interests in joint arrangements and associates
• The nature and extent of interests in unconsolidated structured entities
• The nature and extent of significant restrictions on the entity’s ability to access or use assets and settle liabilities
• The nature of, and changes in, the risks associated with the entity’s interests in consolidated structured entities, Joint ventures, Associates and unconsolidated Structured entities
• Consequences of changes in the entity’s ownership of a subsidiary that does not result in loss of control
• Consequences of losing control of a subsidiary

Structured entity: An entity that has been designed so that voting or similar rights are not the dominant factors in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.