Joint Ventures

Question 1

What are the major differences between U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) in accounting for joint ventures?

Answer 1

1. Contributions of nonmonetary assets:
   - U.S. GAAP at carrying value;
   - IFRS at FV for share not owned by contributing entity, with gain/loss recognized.
2. Methods of Reporting:
   - U.S. GAAP - primarily using equity method; partnership or full consolidation basis when appropriate;
   - IFRS - equity method or proportionate consolidation.

Question 2

In what forms may a joint venture be established?

Answer 2

1. By agreement or contract alone
2. As a corporation
3. As a partnership
4. As an undivided interest entity

Question 3

Under U.S. GAAP principles, what are the methods of accounting that may be used to report an investment in a joint venture?

Answer 3

Equity method or consolidation basis for a corporate joint venture. Partnership basis, with certain equity method-like adjustments, for a partnership

Question 4

What is a joint venture?

Answer 4

An association of two or more entities that exercise joint control over an undertaking for profit generally set up for a limited purpose, limited time, or both

Question 5

What is the difference between U.S. GAAP and IFRS in regards to how the formation of joint ventures are accounted for? Are there exceptions?

Answer 5

If an investor contributes non-monetary assets (eg. property, plant, or equipment), U.S. GAAP accounts for it at its carrying value, while IFRS records its fair value and recognizes the gain/loss to income

An exception to the gain/loss recognition is if the the significant risks and rewards to the G/L have not been transferred or if the gain or loss cannot be measured reliably

Question 6

What alternative accounting methods are allowed by IFRS to account for joint ventures?

Answer 6

Equity method and Proportionate Consolidation Method

*Whatever is used, the entity must use it consistently

Question 7

Why are corporate joint ventures not likely to be accounted for on a fair value basis?

Answer 7

Even though an investment in joint a venture is a financial asset, the fair value method is not an option available because:

• If the joint venture were to be consolidated, is it not eligible to use fair value
• Even if it wasn’t consolidated, the fact that joint ventures are not publicly traded securities, make their fair value not readily available