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Contents
15.2 Definition of joint ventures.
15.2.1 Extract from FRS 102: Section 15.2 – 15.3.
15.2.2.1 What forms of entities can be considered a joint venture.
15.2.2.2 What happens where one of the venturers manage the joint venture?
15.2.2.4 What types of joint ventures are there?
15.2.2.5 What is defined as the strategic, financial and operating decisions?
15.2.2.5.1 What is defined a control for the purpose of joint control?
15.2.2.6 What is meant by a contractual arrangement?
15.2.2.7 Is there a requirement for the same percentage holding to be held?
15.2.2.7.1 Determining if joint control exists.
15.3 Jointly controlled operations.
15.3.1 Extract from FRS102: Section 15.4 – 15.5.
15.3.2.1 Jointly controlled operations – Defined.
15.3.2.1.1 Example of a jointly controlled operation.
15.3.2.2 Accounting for a jointly controlled operation.
15.3.2.2.1 Loans to jointly controlled operations.
15.3.2.2.2 Accounting for a jointly controlled operation – worked example.
15.4 Jointly controlled assets.
15.4.1 Extract from FRS 102 15.6 – 15.7.
15.4.2.1 Jointly controlled assets – defined.
15.5 Jointly controlled entities.
15.5.1 Extract from FRS 102 15.8 – 15.9B.
15.5.2.1 Jointly controlled entities – defined.
15.5.2.2 Accounting for Jointly controlled entities.
15.5.2.2.1 Accounting policy choice.
15.6.1 Extract from FRS 102 15.10 – 15.11.
15.6.2.1.1 Definition of cost.
15.6.2.3 Deferred tax under the cost model.
15.6.2.4 Illustration of the cost model.
15.6.2.5 Recognition of Income.
15.7.1 Extract from FRS 102: Section 15.13, 15.16, 15.17 and extract from Section 14.8.
15.7.2.2 Application of equity accounting.
15.7.2.2.2 Worked example illustrating equity accounting requirements.
15.7.2.4 Transactions with joint venturers’.
15.7.2.4.1 Sales and purchases.
15.7.2.4.1.2 Elimination of profit where investor sells goods to joint venture.
15.7.2.4.1.3 Sale of assets to and from joint ventures.
15.7.2.5 Date of joint venture financial statements (Section 14.8(f) of FRS 102).
15.7.2.6 Uniform Accounting policies (Section 14.8 (g) of FRS 102).
15.7.2.7 Losses in excess of investment (Section 14.8(h) of FRS 102).
15.7.2.8 Deferred tax on unremitted earning in the consolidated financial statements.
15.7.2.8.2 Timing difference to reverse through sale.
15.7.2.8.3 Timing difference to reverse through receipt of dividends.
15.7.2.8.4 Example of deferred tax on unremitted earnings.
15.8 Discontinuing the equity method.
15.8.1 Extract from FRS102: Section 14.8(i) and section 15.18.
15.8.2.2.1 Full derecognition of joint venture due to sale.
15.8.2.2.2 Partial derecognition of joint venture due to sale but joint control still retained.
15.8.2.2.3 Transfer of joint venture as a result of loss of joint control due to sale.
15.8.2.2.4 Loss of joint control not due to sale.
15.10 Step increase in an existing joint venture.
15.11 Step increase from investment/financial asset to joint venture.
15.12 Fair value model for a jointly controlled entity.
15.12.1 Extracts from FRS102-Section 15.14-15.15A.
15.12.2.1 Fair value through other comprehensive income (OCI).
15.12.2.1.1 Measurement and recognition.
15.12.2.1.2 Treatment of transaction costs.
15.12.2.1.3 Frequency of valuations.
15.12.2.1.4 What happens when fair value cannot be measured reliably.
15.12.2.1.6 Example of application of Fair Value through Other Comprehensive Income model.
15.12.2.1.7 Recognition of income.
15.12.2.2 Fair value through the profit and loss.
15.12.2.2.1 Measurement and recognition.
15.12.2.2.2 Frequency of valuations.
15.12.2.2.3 What happens when fair value cannot be measured reliably?
15.12.2.2.4 Example of application of Fair Value through profit and loss model.
15.13 Disclosures in individual and consolidated financial statements.
15.13.1 Extracts from FRS102-Section 15.19 – 15.21A.
15.13.2.2 Consolidated financial statements.
15.13.2.2.1 Accounting policies – consolidated financial statements.
15.13.2.2.2 Notes to the financial Statements.
15.13.2.2.3 Consolidated profit and loss account showing share of joint venture interest.
15.13.2.3 Parent entity financial statements.
15.13.2.3.1 Accounting policies.
15.13.2.3.2 Notes to the financial statements.
15.13.2.3.3 Profit and loss account for entity that is not a parent.
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15.2 Definition of joint ventures
15.2.1 Extract from FRS 102: Section 15.2 – 15.3
15.2 Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the ventures’).
15.3 A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets, or jointly controlled entities.
15.2.2 OmniPro comment
15.2.2.1 What forms of entities can be considered a joint venture
As per Section 15.2 and 15.3 of FRS 102 a joint venture exists where there is joint control and that joint control is:
- contractually agreed over an economic activity (see 15.2.2.6), and
- exists only when the strategic financial and operating decisions relating to the activity (See 15.2.2.5 for further details);
- require the unanimous consent of the parties sharing control See 15.2.2.3 for further details on strategic decisions that would require unanimous consent.
It is clear that a joint venture:
- does not have to be a company, it can be an unincorporated business.
- No one party can have control above the other and in order for one to exist
- there must be at least 2 parties.
- Unanimous consent is required in the arrangement. Unanimous consent means that any party to the arrangement can prevent any of the other parties, or group of other parties, from making decisions of a strategic, financial or operating nature without its consent. See 15.2.2.3 for further details on strategic decisions that would require unanimous consent.
- There no requirement for the same percentage holding to be held – if the above conditions apply then the percentage holdings is irrelevant (see 15.2.2.7)
15.2.2.2 What happens where one of the venturers manage the joint venture?
When the contractual arrangement identifies one venturer as the manager of the joint venture, it should be clear that the operator does not control the operation; it is merely running the business in line with the ventures’ wishes as a whole. It cannot take action without the approval of the other venturers on key strategic, financial or operating decisions. See 15.2.2.3 for examples of strategic, financial or operating decisions that would require unanimous consent.
15.2.2.3 Examples of strategic, financial or operating decisions that would require unanimous consent.
Examples of types of strategic decisions that would require unanimous consent are:
- Major financing;
- Approving a business plan;
- Approving a budget;
- Remuneration policy;
- Share issues; and
- Significant asset disposals and acquisitions.
Also see 15.2.2.4
15.2.2.4 What types of joint ventures are there?
As per Section 15.3 of FRS 102 there are three types of joint ventures namely;
- Jointly controlled operations (See 15.3.2);
- Jointly controlled assets (See 15.3.3); and
- Jointly controlled entities (See 15.3.4).
Each of these are explained further below.
15.2.2.5 What is defined as the strategic, financial and operating decisions?
Although FRS 102 does not define what the strategic, financial and operating decisions would cover, these are generally understood to include areas such as budgeting, capital expenditure, treasury management, dividend policy, production, marketing, sales and human resources.
15.2.2.5.1 What is defined a control for the purpose of joint control?
Appendix I in FRS 102 defines control as the ‘power to govern the financial and operating policies of an entity so as to obtain benefits from its activities’.
15.2.2.6 What is meant by a contractual arrangement?
Section 15 does not define what is meant by a contractual arrangement. However, in order for it to be contractual in nature, it must be in writing and agreed by all parties. The rules may be incorporated in the articles of association or by way of a shareholder’s agreement. IAS 31 of IFRS states that this contract arrangement should set out the following:
- The activity, duration and reporting obligations of the joint venture;
- The rules for appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers;
- The capital contributions to be made by the venturers; and
- Rules with regard to the sharing by the venturers of the output, income, expenses, or results of the joint venture.
15.2.2.7 Is there a requirement for the same percentage holding to be held?
In order to be a joint venture there is no requirement that the shareholders own the same percentage shares/rights in the entity. If the contractual agreement (see 15.2.2.6) makes it clear the unanimous agreement is required this is the key determination.
15.2.2.7.1 Determining if joint control exists
Example 1: Determining if joint control exists
X, Y and Z enter into an agreement to start a joint entity. Entity A, X, Y and Z own 30%, 50% and 20% respectively. All parties enter into a contractual agreement whereby it is agreed that a unanimous decision is required from X and Y on all major strategic financial and operating decisions.
In this instance X and Y are joint venturers and will account for this as a joint venture however Z should account for this as an associate assuming it has significant influence if not it should be accounted for under Section 11.
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Example
Example 1: Determining if joint control exists.
Example 2: Loans to jointly controlled operation.
Example 3: Accounting for a jointly controlled operation.
Example 4: Jointly controlled assets.
Example 5A: Dividend paid out of pre-acquisition reserves.
Example 6: Equity method accounting.
Example 7: Elimination of profit where investor sells goods to joint venture.
Example 8: Sale of asset from venturer to joint venture at profit.
Example 9: Sale of asset from venturer to joint venture at loss.
Example 10: Sale of asset from joint venture to venturer at loss (Section 15.17 of FRS 102).
Example 11: loss in excess of investment.
Example 12: Deferred tax on unremitted earnings.
Example 13: Full derecognition of joint venture due to sale.
Example 14: Partial derecognition of a joint venture due to sale but joint control still retained.
Example 15: Transfer of joint venture as a result of loss of joint control due to sale.
Example 16: Loss of joint control not due to sale.
Example 18: Step increase in an existing joint venture.
Example 19: Step increase from investment /financial asset to associate.
Example 20: Adoption of fair value through other comprehensive income.
Example 21: Adoption of fair value through profit and loss.
Example 22: Extract from the accounting policy notes to the consolidated financial statements.
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