Section 11 – Investments in Joint Ventures

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Section 11 – Investments in Joint Ventures

Summary

This section defines jointly controlled operations and jointly controlled assets. It also sets out how such ventures should be accounted for on the balance sheet. Joint ventures which are jointly controlled entities do not come within the scope of this Section 11 instead these are dealt with in Section 7 and Section 9 of FRS 105.

A joint venture is a contractual arrangement whereby two or more parties undertake an

economic activity that is subject to joint control. From the point of view of FRS 105, Section 11, joint ventures can take the form of jointly controlled operations or jointly controlled assets.

What is new when compared to FRSSE/old GAAP and FRS 102?

FRS 105 has identified three forms of joint venture, namely jointly controlled operations, jointly controlled assets and jointly controlled entities. These three forms are the same as what is included in FRS 102 therefore there are no differences from this respect.

However under FRS 9 of old GAAP/FRSSE, there were only two forms, namely; a joint arrangement and a joint arrangement that is not an entity (structures with the form but not the substance of a joint venture). Therefore, on adoption companies will need to re-assess the contractual arrangements to assess what form of joint venture they fall into under Section 11.

Jointly controlled operations are effectively operations where equipment etc. is shared but ownership does not pass and it is not shared. It is in fact not a legal entity.

Jointly controlled assets are effectively operations where venturers contribute equally towards the cost of one or more assets and they are owned jointly.

Jointly controlled entities are joint ventures that involve the establishment of a corporation, partnership or other entity in which the venture has an interest and there is a contractual arrangement between the venturers establishing joint control over the economic activity.

Jointly controlled operations and jointly controlled assets (Section 11 of FRS 105) = joint arrangements that is not an entity (FRS 9). The accounting for these are the same.

What is different?

The accounting for jointly controlled operations and jointly controlled assets is the same as required by previous GAAP’s. The differences from the perspective of jointly controlled entities has been discussed in Section 7 and 9 of this guide (e.g. FRS 105 does not permit consolidated financial statements to be prepared and requires investments in jointly controlled entities to be carried at cost less impairment only).

Other standards affecting Section 11 where differences arise:

Section 24 – Income tax – Deferred tax not required to be recognised under FRS 105 on any timing differences on jointly controlled assets or operations.

What are the key points?

A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. From the point of view of FRS 105, Section 11, joint ventures can take the form of jointly controlled operations or jointly controlled assets.
A jointly controlled operation accounts for its own share of the assets, liabilities, income, expenses and cash flows in the entity financial statements;
With regard to a jointly controlled asset, in the entity financial statements, it accounts for its own share of the assets and any liabilities that it has incurred;
A jointly controlled entity is recognised at cost less impairment as detailed in Section 9 of FRS 105.

What do accountants need to do?

Be aware of the differences between Section 11 and old GAAP/FRSSE/FRS 102 so that transition adjustments can be determined.

Review their client portfolio to identify clients who are affected by this section and advise those clients on the type of joint venture previous and how this joint venture will come under when they move to FRS 105 and the implications of this if any (applicable to FRSSE/ old GAAP only).

Advise clients of the fact that where the client wants to prepare consolidated financial statements so as to incorporate the results of a jointly controlled entity that consolidated financial statements will not be permitted to be prepared under FRS 105.

What do companies need to do?

Assess whether this standard is applicable to the entity. If applicable, be aware of the differences between Section 11 and old GAAP/FRSSE/FRS 102.

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