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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.
Example 2: Loans to jointly controlled operation
Company X and Y entered into a jointly controlled operation where the contractual agreement makes it clear that it is owned 50/50 by each party. However in order to get the operation started, Company X had to provide a loan of CU100,000 and Company Y a loan of CU200,000 to the joint operation.
Therefore the total borrowings in the joint operation are CU300,000 and under the agreement costs and revenues are shared 50/50 which includes the liabilities of the joint operation. Therefore Company Y has to recognise an asset for the amount receivable from Company X and Company X has to recognise its liability.
The way in which the amount payable to Company Y in Company X’s financial statements should be accounted for is as follows:
|
|
CU |
CU |
|
Dr Amounts due from Joint Venture |
50,000 |
|
|
Cr Amounts due to Company Y |
|
50,000* |
*(CU300,000*50%) = CU150,000. Therefore, amount to be shown as a receivable is the amount of the loan given of CU200,000 less CU150,000 being the element that Company Y legally had to make (CU50,000).
Example 3: Accounting for a jointly controlled operation
Company A manufacturers a product. It has entered into an agreement with a packaging and marketing Company, Company B to create a jointly controlled operation. A contractual agreement makes it clear that all decisions require unanimous consent. As per the agreement the profits and liabilities are shared 50/50. As part of the agreement Company A will charge the operation on a cost plus 20% basis. Both parties are required to contribute CU20,000 each.
During the year Company A sold CU100,000 of goods to the joint operation which cost Company A CU83,333.
The joint operation made sales of CU70,000 and it cost the joint operation CU60,000. To account for these joint operation sales in Company A’s financial statements, the below is required:
Example 4: Jointly controlled assets
Company A, B & C entered into a joint venture whereby they decided to purchase a specially designed warehouse for holding frozen food. As part of the joint venture agreement, all parties had equal say in the operation of the facility and therefore meet the definition of a joint venture. Company A, B & C contributed CU10,000, CU40,000 and CU50,000 respectively which is reflective of the ownership in the asset. The cost of the asset was CU100,000.
The costs are shared in proportion to the ownership. During year 1 the joint venture incurred CU10,000 in costs to maintain the facility excluding depreciation. The property is being depreciated over 5 years. Company A made sales from this unit of CU100,000. This would be accounted in the books of Company A as follows:
|
|
CU |
CU |
|
Dr PPE |
10,000 |
|
|
Cr Cash |
|
10,000 |
Being journal to recognise the portion of the asset on Company A’s balance sheet
|
|
CU |
CU |
|
Dr Property Expenses |
1,000 |
|
|
Cr Bank (CU10,000*10%) |
|
1,000 |
Being journal to reflect Company A’s portion of expenses
|
|
CU |
CU |
|
Dr Depreciation |
2,000 |
|
|
Cr Accumulated Depreciation on PPE (CU100,000/5yrs*10%) |
|
2,000 |
Being journal to reflect depreciation charge on Company A’s portion of the assets
|
|
CU |
CU |
|
Dr Debtors |
100,000 |
|
|
Cr Sales |
|
100,000 |
Being journal to reflect sales by Company A.
Example 5: Cost model
Company A acquired 50% of an interest in Company B for CU100,000 plus stamp duty of CU1,000 plus professional fees of CU1,000. The other 50% of Company B is owned by a third party. The total cost of the investment to be shown on the balance sheet is CU102,000. This is kept at this cost over its life unless an impairment is identified.
Dividends received are recognised in the profit and loss account when received. It is irrelevant whether this is paid from pre or post acquisition reserves. However if it was paid from pre-acquisition reserves, then the entity should assess if this is an indication of impairment of the investment. If so an impairment review needs to be performed.
Example 5A: Dividend paid out of pre-acquisition reserves.
Company A acquired an 50% interest in a joint venture for CU10,000 when the profit and loss reserves of the associate were CU5,000. During the year the company received a dividend of CU10,000 from the associate. This CU10,000 is recognised in the financial statements as income (i.e. credit profit and loss and debit bank). It is irrelevant that some of it was paid out of pre-acquisition reserves.
If we assume the fair value of the investment after the dividend is only CU7,000. An impairment of CU3,000 would need to be recognised depending on the circumstance.
Example 6: Equity method accounting
Company A acquired a 35% interest in Company B at the start of the financial year of CU50,000. This was deemed to be a joint venture as all parties had equal say where unanimous consent is required. The net assets of Company B at that time were CU50,000 but the fair value of the net assets was CU70,000, the additional uplift being on the property in the company. The property has a remaining life of 10 years. Goodwill is assumed to have life of 20 years.
The profit after tax of Company B for the year was CU50,000 and a dividend of CU10,000 was declared. Company B posted CU5,000 to other comprehensive income.
Prior to year end Company B sold goods worth CU1,000 to Company A and a profit of CU500 was made by company B on this sale. These goods are still in stock in Company A at the year end.
Company A prepares consolidated financial statements. Assume there is no deferred tax on any unremitted dividends.
The carrying value of the investment in Company A’s consolidated financial statements is as follows:
*note it would also be acceptable if this was set against inventory in the consolidated financial statements
The journal required to be posted to account for the movement is:
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
10,100 |
|
|
Dr Share of Associates Loss in OCI Cr Share of Joint Venture Profit for year in P&L |
11,850
|
1,750 |
Impairments
The investment is reviewed for impairment indicators annually and once one is identified an impairment review should be performed in line with Section 27-Impairment of Assets. Possible indicators of impairment would include:
- Losses incurred by the joint venture;
- Liquidity issues affecting the payment of dividends; and
- Payment of a large dividend shortly after set up.
In assessing the recoverable amount, it should be based on the higher of the present value of the dividends that the investor expects to receive in the future and the proceeds from the ultimate sale.
Even where the joint venture has booked an impairment on its assets, this is not enough for the investor (the investor will take its proportion of the loss as part of its share of the loss after tax for the year). The investor has to review the carrying amount of the investment for impairment itself.
This will include reviewing:
- Any additional impairment required to be booked on any fair value uplifts recognised on acquisition. In the example above the fair value of the fixed assets were CU20,000 above the net book amounts in the associate. So if we assume the joint venture booked an impairment in its financial statements on the carrying amount of the fixed assets this will mean that the investor would have to recognise an impairment on the CU20,000 uplift as this would not be included in the associates impairment review; and
- Reviewing the carrying amount of the investment. The goodwill included in the carrying amount at that time is not tested separately for impairment but is tested as part of the overall investment.
If there are any loans owed by the associate these would also be required to be accounted for under Section 11 – Basic Financial Instruments.
Transactions between a venturer and a joint venture
Extracts from FRS102 section 15.16 – 15.17
15.16 When a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venture shall recognise only that portion of the gain or loss that is attributable to the interests of the other ventures’. The venturer shall recognise the full amount of any loss when the contribution or sale provides evidence of an impairment loss.
15.17 When a venturer purchases assets from a joint venture, the venturer shall not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. A venturer shall recognise its share of the losses resulting from these transactions in the same way as profits except that losses shall be recognised immediately when they represent an impairment loss.
If investor does not have joint control
Extract from FRS102 section 15.18
15.18 An investor in a joint venture that does not have joint control shall account for that investment in accordance with Section 11 Basic Financial Instruments or Section 12 Other Financial Instruments Issues or, if it has significant influence in the joint venture, in accordance with Section 14 Investments in Associates.
OmniPro comment
It is very common for the investors to transact with the joint venture. Typical transactions include the following:
- Contribution of cash to the joint venture by the venturers in proportion to the agreed relative shares;
- Contribute other assets to the joint venture which is treated as akin to cash contributed on set up; and
- Make sales to or purchases from the joint venture.
Sales and purchases of goods to and from the joint venture
In the example above in relation to the carrying value of investment in a joint venture in the consolidated financial statements. It can be seen how sales between the group and the joint venture should be accounted for i.e. the profit element relating to the investors share should be deferred until the following year.
In the example above, the joint venture sold goods to the investor, in that instance the profit was deferred and the journal posted to debit share of profit of joint venture and credit the investment in the joint venture. This is known as upward selling. In the following year the journal would be reversed to profit and loss reserves as the profit would have already been included in the joint venture financial statements in the prior year.
Where downward selling occurs i.e. where members of the group or the investor sell to the joint venture company. In this case the journals required are to:
|
Dr Investment in Joint Venture |
|
Dr Revenue |
|
Cr Cost of Sales |
Obviously if a loss was incurred then the journals would reverse.
Example 7: Elimination of profit where investor sells goods to joint venture
Company A the investor sells goods to its 35% associate Company B for CU100,000. This is considered to be a joint venture. The cost of this sale is CU40,000. At the year end the associate company still has these items in stock. Therefore a journal is required to eliminate 35% of the profit on this transaction as follows:
|
|
CU |
CU |
|
Dr Revenue (CU100,000*35%) |
35,000 |
|
|
Cr Cost of Sales (CU40,000*35%) |
|
14,000 |
|
Cr Investment in Joint Venture (CU60,000*35%) |
|
21,000 |
Example 8: Sale of asset from venturer to joint venture at profit
Company A and Company B create a joint venture company both of which own 50% of that joint venture. Both contribute CU100,000 each. The joint venture then purchases an asset from Company A for CU160,000. The assets NBV was CU140,000 in Company A’s books. At the time of sale, the remaining life of the asset was 10 years. The journal to be posted in Company A’s books are:
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
100,000 |
|
|
Cr Bank |
|
100,000 |
Being journal to reflect investment in joint venture.
|
|
CU |
CU |
|
Dr Bank |
160,000 |
|
|
Cr Investment in Joint Venture |
|
10,000* |
|
Cr PPE |
|
140,000 |
|
Cr Gain on Disposal |
|
10,000 |
*although a profit of CU20,000 (i.e. CU160,000-CU140,000) was made on disposal, 50% (being Company A’s interest in the joint venture) of the profit is deferred as it has not been sold outside the group. This profit will be released to the profit and loss account within the share of the joint ventures’ profits over the remaining life of the asset (i.e. CU10,000/10 yrs= CU1,000 per annum) as this will be depreciated in the books of the joint venture during that period.
In the following year if we assume a profit after tax of CU10,000, then the journal to be posted in the consolidated financial statements is:
|
|
CU |
CU |
|
Dr Investment in Joint Venture (being CU10,000 profit for the year plus the release of CU1,000 of the gain previously deferred as it is now realised as it has been charged as depreciation in the joint venture results) |
11,000 |
|
|
Cr share of joint venture profit |
|
11,000 |
Being journal to reflect share of joint venture profit in the year
Example 9: Sale of asset from venturer to joint venture at loss
If we take example 8 and assume the fixed asset was sold for CU130,000 i.e. a loss was incurred. In this case the full loss should be recognised in Company A’s books. The journals required in the consolidated financial statements are:
|
|
CU |
CU |
|
Dr Loss on Disposal |
10,000 |
|
|
Dr Bank |
130,000 |
|
|
Cr PPE |
|
140,000 |
Being journal to recognise full loss on disposal
Example 10: Sale of asset from joint venture to venturer at loss (Section 15.17)
Company A and Company B create a joint venture company both of which own 50% of that joint venture. Both contribute CU100,000 each. The joint venture then purchases an asset from a third party for CU160,000. The following year the joint venture company sold the property to Company A for CU150,000. The assets NBV was CU140,000 in the joint ventures books. At the time of sale, the remaining life of the asset was 10 years. The journal to be posted in Company A’s books are:
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
5,000 |
|
|
Dr PPE |
145,000* |
|
|
Cr Bank |
|
150,000 |
*This is the price paid of CU150,000 less the profit made by the joint venture attributable to Company A of CU5,000 (CU10,000*50% ownership) which is released over the life of the asset.
The joint venture company would recognise the sale in the normal way.
Example 11: loss in excess of investment
Company A has a 35% joint venture. The cost was CU100,000. At the end of year 1 the joint venture made a loss of CU150,000. In this instance the CU100,000 would be credited against the investment but the CU50,000 would not be recognised as there is no obligation on Company A with regard to these losses.
If in year 2 a profit of CU40,000 was recognised by the joint venture, this CU40,000 would not be recognised as a loss of CU50,000 has went unrecognised previously. Only when another CU10,000 is profit are made can the entity recognise the profit in the parent company consolidated accounts.
If there was a loan which met the definition of a long term investment then CU50,000 of the loss above would be taken off that loan.
Example 12: Full derecognition of joint venture due to sale
If we take example 6 above and assume at the start of year 2, Company A sold its 35% interest in the joint venture to a third party for CU70,000. The journals to post in the consolidated accounts are:
|
|
CU |
CU |
|
Dr Bank |
70,000 |
|
|
Cr Investment in Joint Venture |
|
60,100 |
|
Cr Profit on Disposal of Associate |
|
9,900 |
Example 13: Partial derecognition of a joint venture due to sale but joint control still retained
If we take example 2 above and assume at the start of year 2, Company A reduced in holding in the joint venture from a 35% to a 25% interest but still the parties agreed that there was joint control. On sale the company received CU20,000 on sale. The journals to post in the consolidated accounts are:
|
|
CU |
CU |
|
Dr Bank |
20,000 |
|
|
Cr Investment in Associate (CU60,100*(10/35)) |
|
17,171 |
|
Cr Profit on Disposal of Joint Venture |
|
2,829 |
From that date on the remaining carrying amount of CU42,929 (CU60,100-CU17,171) is treated as the investment cost.
Example 14: Transfer of joint venture as a result of loss of joint control due to sale
If we take example 6 above and assume at the start of year 2, Company A reduced its holding in the joint venture from a 35% to a 15% interest such that there was no longer joint control. On sale the company received CU30,000. The journals to post in the consolidated accounts are:
|
|
CU |
CU |
|
Dr Profit on Disposal of Joint Venture |
4,343 |
|
|
Dr Bank |
30,000 |
|
|
Cr Investment in Joint Venture (CU60,100*(20/35)) |
|
34,343 |
From the date of sale, the remaining 15% with a carrying amount of CU25,757 (CU60,100-CU34,343) is reclassed as a financial asset and accounted for in accordance with Section 11-Basic Financial Instruments or where significant influence is still maintained accounted for as an associate. Where fair value can be determined it will be fair valued at the end of each reporting date with movements posted in the profit and loss.
Example 15: Loss of joint control not due to sale
If we take example 6 and assume joint control was lost due to additional shares being issued due to certain preference shares converting for example. In this instance no profit or loss is recognised on disposal instead the carrying amount of CU60,100 becomes the investment cost and is accounted for in accordance with Section 11 or Section 14 of FRS 102.
Example 16: Initial carrying amount of a joint venture following loss of control of an entity
In Year 1 Company A purchased a 100% interest in Company B for CU100,000. At the beginning of year 2, Company A disposes of 50% of its interest for CU65,000 resulting in the creation of a joint venture. Therefore at that point the remaining 50% interest is treated as an investment in a joint venture assuming there is joint control. At the date of disposal the carrying amount of the net assets in Company A’s consolidated financial statements was CU70,000 and goodwill was CU10,000. The fair value of Company B’s net assets is CU90,000.
On the sale Company A deconsolidates Company B and accounts for the joint ventures share of the net assets under the equity method. The amount to be recognised as an investment in the joint venture is based on the carrying amount of the net assets and goodwill that has been retained i.e. 50%:CU40,000 ((CU70,000+CU10,000)*50%).
Example 17: Step increase in an existing joint venture
Section 15 does not specifically deal with such circumstances. However, it would be appropriate for the additional interest to be added to the existing carrying amount of the joint venture and the existing interest in the joint venture is not re-measured.
Company A obtained a 20% interest in Company B for CU50,000 and had joint control at that time. At the date of acquisition, the net assets of Company B was CU50,000 but the fair value of the net assets was CU70,000, the additional uplift being on the property in the company. The property has a remaining life of 10 years. Goodwill is assumed to have life of 20 years.
At the start of year 2 Company A acquires a further 10% of Company B for CU10,000. The fair value of the net assets at that time were CU75,000
After the second acquisition Company B is still a joint venture as Company A only owns 45% of the Company and there is still joint control. For reference see below the goodwill calculated on initial recognition
Goodwill recognised at start of year 1
|
|
CU |
|
Total price paid for 35% share |
50,000 |
|
Less fair value of net assets received (CU70,000*35%) |
(24,500) |
|
Goodwill on acquisition |
25,500 |
Goodwill recognised on subsequent acquisition
|
|
CU |
|
Total price paid for 10% share |
10,000 |
|
Less fair value of net assets received (CU75,000*10%) |
(7,500) |
|
Goodwill on acquisition |
3,500 |
Therefore the price paid of CU10,000 is made up of CU3,500 goodwill for the additional 10% acquired. This goodwill will be written off over the useful life.
As can be seen above the previous acquisition is not re-measured. It stays the same.
Example 18: Derecognition of joint ventures losses
Parent A prepares consolidated financial statements. At the date of transition, it had a 50% investment in a joint venture company. The joint venture company had net liabilities of CU100,000 on its balance sheet at the date of transition. A provision of CU25,000 was included in the consolidated financial statements of old GAAP at the date of transition to reflect the 25% ownership of these losses. A loss of CU5,000 was recognised in the 2014 accounts.
Assume the date of transition is 1 January 2014 and no deferred tax was recognised as it was not tax deductible. The journals required on transition are:
On 1 January 2014
|
|
CU |
CU |
|
Dr Provision for Losses of Associate |
50,000 |
|
|
Cr Profit and Loss Reserves |
|
50,000 |
Being journal to derecognise provision for associates share of net liabilities
Journals to be posted at 31 December 2014 assuming the above journals were posted to reserves
|
|
CU |
CU |
|
Dr Provision for Losses of Associate |
5,000 |
|
|
Cr Profit and Loss Reserves |
|
5,000 |
Being journal to derecognise provision for joint venture’s share of net liabilities for the 2014 year
Example 19: JANE reclassified as a jointly controlled entity
Company A has an interest in a joint venture which was previously accounted for as a JANE under old GAAP. However as this is a legal entity, it now has to be accounted for as a jointly controlled entity and therefore the equity method of accounting should be used. For simplicity assume there was no goodwill on initial acquisition and there were no unrealised profits to be deferred on the date of transition. Assume the carrying amount in old GAAP consolidated books at 1 January 2014 is the net assets of CU100,000. The net asset at 1 January 2014 is split – debtors-CU50,000, creditors-CU20,000 and fixed assets CU70,000. The profit shown in the consolidated profit and loss for the year ended 31 December 2014 was CU4,000 (with the turnover recognised for the joint venture of CU30,000, administration expenses of CU5,000, cost of sales of CU20,000 and a tax cost of CU1,000). The net asset of the joint venture at 31 December 2014 as shown in the consolidated financial statements under old GAAP is split – debtors-CU54,000, creditors-CU20,000 and fixed assets CU70,000. Company A owns 50% of the share capital. On transition the following adjustment will be required in the consolidated financial statements:
On 1 January 2014
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
100,000 |
|
|
Dr Creditors |
20,000 |
|
|
Cr Debtors |
|
50,000 |
|
Cr PPE |
|
70,000 |
Being journal to reflect Company A’s allocation of the joint ventures net assets at 31/12/14 to an investment in a joint venture. Note the above journals do not have to be brought forward.
Journals required for the year ended 31 December 2014
|
|
CU |
CU |
|
Dr Investment in Joint Venture |
104,000 |
|
|
Dr Creditors |
20,000 |
|
|
Cr Debtors |
|
54,000 |
|
Cr PPE |
|
70,000 |
Being journal to reflect Company A’s allocation of the joint ventures net assets at transition to an investment in a joint venture. Note the above journals do not have to be brought forward.
|
|
CU |
CU |
|
Dr Turnover |
30,000 |
|
|
Cr Cost of sales |
|
20,000 |
|
Cr Administration expenses |
|
5,000 |
|
Cr Tax |
|
1,000 |
|
Cr Share of profit in joint venture |
|
4,000 |
Being journal to reflect the reclassification of results for the joint venture from each of the line items in the P&L to one line item as required by the equity method of accounting.
A similar journal will be required for the 31 December 2015 year end.
Example 20: Updated carrying amounts as a result of joint venture transition to FRS 102
Company A has a 30% interest in Company B which cost CU10,000. Company A prepares consolidated financial statements. At 1 January 2014 the net asset of Company B was CU120,000 and the carrying amount of the investment in the consolidated financial statements under old GAAP was CU39,000 ignoring any goodwill amortisation. Assume the date of transition is 1 January 2014 and no deferred tax is recognised on the uplift as the investment will be settled through dividends which will not be subject to tax on receipt of dividends from the joint venture. The joint ventures balance sheet has been restated to FRS 102 compliance figures and the new net asset figure is CU100,000.
The adjustments required on transition are:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves |
1,000 |
|
|
Cr Investment in joint ventures ((CU100,000*the percentage ownership of 30%=CU30,000) plus the initial cost of CU10,000 less carrying amount under old GAAP of CU39,000= CU1,000) |
|
1,000 |
Being journal to reflect the updated allocation of the joint ventures net assets based on FRS 102 numbers
For 31 December 2014 the below journals would need to be posted depending how the net assets of the joint venture has moved:
|
|
CU |
|
Dr/Cr Investment in Joint Venture |
XX |
|
Cr/Dr Share of Joint Venture Results |
XX |
Example 21: Adoption of fair value through profit and loss on transition
Company A in its individual financial statements has adopted a policy of fair valuing investments in joint ventures through the profit and loss. Assume 1 January is the date of transition. The carrying value under old GAAP was CU100,000 at 1 January 2014 and 31 December 2014 & 2015 which represented the original cost. The fair value of the investment at 1 January 2014, 31 December 2014 and 31 December 2015 was CU120,000, CU95,000 and CU125,000 respectively. Assume a deferred tax sales rate of 20% (assuming investment is held for future sale, if not, the dividend tax rate should be utilised). The adjustments required on transition to reflect the fair value policy and the related deferred tax are:
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Joint Venture (CU120,000-CU100,000) |
20,000 |
|
|
Cr Profit and Loss Reserves |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Profit and Loss Reserves (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value on movement in Joint Ventures in P&L |
25,000 |
|
|
Cr Investments in Joint Ventures (CU120,000-CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014
|
|
CU |
CU |
|
Dr Deferred Tax liability |
4,000 |
|
|
Cr Deferred Tax in P&L (CU20,000*10%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%)
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Joint Ventures (CU125,000-CU95,000) |
30,000 |
|
|
Cr Fair value on movement in joint venture in P&L |
|
30,000 |
Being journal to reflect uplift in value from 2014 to 2015
|
|
CU |
CU |
|
Dr Deferred tax in P&L ((CU125,000-CU100,000)*20%) |
5,000 |
|
|
Cr Deferred tax liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 is not recognised as the asset was not previously recognised.
Example 22: Adoption of fair value through other comprehensive income on transition
If we take example 21 above and assume Company A in its individual financial statements has adopted a policy of fair valuing investments in joint ventures through other comprehensive income this time. The journals required would be as follows.
1 January 2014
|
|
CU |
CU |
|
Dr Investments in Associates (CU120,000-CU100,000) |
20,000 |
|
|
Cr Revaluation Reserve |
|
20,000 |
Being journal to reflect uplift in value on transition to show fair value
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
4,000 |
|
|
Cr Deferred Tax Liability |
|
4,000 |
Being journal to reflect deferred tax on the uplift
Journals required in the 31 December 2014 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Fair Value Movement in Profit and Loss |
5,000 |
|
|
Dr Fair Value on Movement in Joint Ventures in OCI/Revaluation Reserve |
20,000 |
|
|
Cr Investments in Joint Ventures (CU120,000- CU95,000) |
|
25,000 |
Being journal to reflect fall in value at 31 December 2014. The CU5,000 is posted to the profit and loss as there is nothing left in the revaluation reserve after the CU20,000 has been debited.
|
|
CU |
CU |
|
Dr Deferred Tax Liability |
4,000 |
|
|
Cr Deferred Tax in Revaluation Reserve (CU20,000*20%) |
|
4,000 |
Being journal to reverse deferred tax recognised at 1 January 2014 as the investment is now stated below cost. No deferred tax asset recognised as assumed it is not probable there will be taxable profits to utilise the loss. If there was taxable profits then the deferred tax asset of CU1,000 would be recognised ((CU100,000-CU95,000)*20%).
Journals required in the 31 December 2015 year assuming the above journals are posted to reserves
|
|
CU |
CU |
|
Dr Investments in Joint Ventures (CU125,000-CU95,000) |
30,000 |
|
|
Cr Profit and Loss Fair Value Movement |
|
5,000 |
|
Cr revaluation reserve/OCI |
|
25,000 |
Being journal to reflect uplift in value on from 2014 to 2015. CU5,000 credit to profit and loss as CU5,000 had previously been debited to the profit and loss for the downward valuation
|
|
CU |
CU |
|
Dr Deferred Tax in Revaluation Reserve/OCI |
5,000 |
|
|
((CU125,000-CU100,000)*20%) |
|
|
|
Cr Deferred Tax Liability |
|
5,000 |
Being journal to reflect deferred tax on the uplift. The movement of CU95,000 to CU100,000 is not recognised as the asset was not previously recorded.
Example 23: Deferred tax on unremitted earnings
Company A invested CU10,000 to acquire 50% of Company B. The carrying amount at 1 Janaury 2014 in old GAAP books was CU15,000. The date of transition is 1 January 2014. The movement was due to income recognised since acquisition for the entity’s share of the profits year on year. Assume that the dividend when made to Company A by Company B are taxable in the hands of Company A at a rate of 10%. Under old GAAP deferred tax was not recognised as Company B was not legally obliged to pay a dividend. Assume the venturer does not have control over when it will be distributed. The transition adjustments required on transition are as follows:
1 January 2014
|
|
CU |
CU |
|
Dr Profit and Loss Reserves ((CU15,000-CU10,000)*10%) |
1,500 |
|
|
Cr Deferred Tax Liability |
|
1,500 |
Being journal to reflect deferred tax on unremitted earnings.
An adjustment may also be required in 31 December 2014 and 2015 year end where the parent company’s consolidated profit included its share of income/losses of the joint venture.
Example 23: Extract from the accounting policy notes to the consolidated financial statements
Basis of consolidation
The Group financial statements reflect the consolidation of the results, assets and liabilities of the parent undertaking, the Company and all of its subsidiaries, together with the Group’s share of profits/losses of associates and joint ventures. Where a subsidiary, associate or joint venture is acquired or disposed of during the financial year, the Group financial statements include the attributable results from, or to, the effective date when control passes, or, in the case of associates, when significant influence is lost.
Subsidiary undertakings
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are capitalised with the cost of the investment. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the group’s share of identifiable net assets acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised as negative goodwill on the balance sheet and amortised through the profit and loss account in the period in which the non-monetary assets are recovered.
Associates and joint ventures
Associates are those entities in which the Group has significant influence over, but not control of, the financial and operating policies. Joint ventures are those entities over which the Group has joint control, established by contractual agreement and requiring unanimous consent for strategic, financial and operating decisions. Investments in associates and joint ventures are accounted for using the equity method of accounting.
Under the equity method of accounting, the Group’s share of the post-acquisition profits or losses of its associates and joint ventures is recognised in the income statement. The income statement reflects, in profit before tax, the Group’s share of profit after tax of its associates and joint ventures in accordance with Section 14 of FRS102, ‘Investments in Associates’ and Section 15 of FRS 102, ‘Interests in Joint Ventures’. The Group’s interest in their net assets is included as investments in associates and joint ventures in the Group Statement of Financial Position at an amount representing the Group’s share of the fair value of the identifiable net assets at acquisition plus the Group’s share of post acquisition retained income and expenses. The Group’s investment in associates and joint ventures includes goodwill on acquisition. The amounts included in the financial statements in respect of the post acquisition income and expenses of associates and joint ventures are taken from their latest financial statements prepared up to their respective year ends together with management accounts for the intervening periods to the Group’s year end. The fair value of any investment retained in a former subsidiary is regarded as a cost on initial recognition of an investment in an associate or joint venture. Where necessary, the accounting policies of associates and joint ventures have been changed to ensure consistency with the policies adopted by the Group.
Transactions eliminated on consolidation
Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the Group financial statements. Unrealised gains and income and expenses arising from transactions with associates and joint ventures are eliminated to the extent of the Group’s interest in the entity. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that they do not provide evidence of impairment.
Example 24: Extract from notes to the financial statements – Joint Venture undertakings note in the consolidated financial statements and example of consolidated profit and loss account
|
Financial assets Investments in joint venture |
2015 CU |
2014 CU |
|
|
|
|
|
At 1 January |
XXXX |
XXXX |
|
Share of profits after tax |
XXX |
XXX |
|
Dividends received |
(XXX) |
(XXX) |
|
Loss on dilution of investment |
(XX) |
(XX) |
|
Arising on acquisition |
XX |
XX |
|
Share of other comprehensive (expense)/income |
(XXX) |
(XXX) |
|
|
|
|
|
At 31 December |
XXXX
|
XXXX
|
a) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
|
|
|
|
|
|
Subsidiary undertakings |
|
|
|
|
(i) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
100%
|
|
This investment has been fully provided against. |
|
||
|
(ii) XXXX Limited Address 1, Address 2 |
Patent holding company |
Ordinary share capital |
100% |
|
Associate |
|
|
|
|
(iii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25%
|
|
Joint Venture |
|
|
|
|
(iv) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50%
|
Extract from the consolidated profit and loss account showing share of joint venture interest
|
|
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Turnover |
XXXXX |
XXXXX |
|
|
|
|
|
Cost of sales |
(XXXX)
|
(XXXX)
|
|
|
|
|
|
Gross profit |
XXXX |
XXXX |
|
|
|
|
|
Operating expenses |
(XXX) |
(XXX) |
|
|
|
|
|
Other operating income |
XXX
|
XXX
|
|
|
|
|
|
Group operating profit |
XXX |
XXX |
|
|
|
|
|
Share of profit in joint venture |
XXX |
XXX |
|
|
|
|
|
Profit on ordinary activities before interest and taxation |
XXXX |
XXXX |
|
|
|
|
|
Interest receivable |
XXX |
XXX |
|
|
|
|
|
Interest payable |
(XXX)
|
(XXX)
|
|
|
|
|
|
Profit on ordinary activities before taxation |
XXXX |
XXXX |
|
|
|
|
|
Tax on profit on ordinary activities |
(XXX)
|
(XXX)
|
|
|
|
|
|
Profit for the financial year |
XXX |
XXX |
Example 25: Extract from accounting policy notes to the financial statements for the parent entity financial statements and for an entity that holds a joint venture interest but is not required to prepare consolidated financial statements
THE BELOW IS TO BE INCLUDED WHERE THE PARENT COMPANY IS EXEMPT FROM CONSOLIDATION DUE TO ITS IMMEDIATE PARENT COMPANY (WHICH IS IN THE EEA) PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 299 of the Companies Act 2014 and its reference to the EU 7th Directive equivalence.
THE BELOW IS TO BE INCLUDED WHERE THE PARENT COMPANY IS EXEMPT FROM CONSOLIDATION DUE TO ITS ULTIMATE PARENT COMPANY (WHICH IS IN OR OUTSIDE THE EEA) PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Consolidated accounts
The company has not prepared consolidated accounts for the period as, being a wholly owned subsidiary of the ultimate parent company, XXXXXX Limited, it is exempted from doing so under Section 9 of FRS 102 which is accommodated under Section 300 of the Companies Act 2014 and its reference to the EU 7th Directive equivalence.
THE BELOW IS TO BE INCLUDED WHERE THE PARENT COMPANY IS EXEMPT FROM CONSOLIDATION DUE TO THE GROUP BEIING CONSIDERED A SMALL COMPANY UNDER COMPANY LAW
Consolidation
The company and its subsidiaries combined meet the size exemption criteria for a group and the company is therefore exempt from the requirement to prepare consolidated financial statements by virtue of Section 297 of the Companies Act 2014. Consequently, these financial statements deal with the results of the company as a single entity.
Financial assets
Financial assets are stated at cost less provision for any diminution in value.
Financial assets which can be reliably measured are measured at their fair value.
Dividends
Dividends from the company’s shares are recognised as income on receipt of the dividend.
Example 26:Extract from notes to the financial statements for the parent entity financial statements – Financial asset note
|
Financial assets |
|
Subsidiary Undertakings |
Joint Venture and associates |
Other investments |
Total |
|
|
|
CU |
CU |
CU |
CU |
|
Cost |
|
|
|
|
|
|
At 1 January 2015 & 1 January 2014 & 1 January 2013 |
|
XXX |
XXX |
XXX |
XXX |
|
Additions |
|
XXX |
XXX |
XXX |
XXX |
|
Fair value adjustments |
|
– |
XXX |
– |
XXX |
|
Disposals |
|
(XXX)
|
–
|
–
|
(XXX)
|
|
At 31 December 2015 |
|
XXX
|
XXX
|
XXX
|
XXX
|
|
|
|
|
|
|
|
|
Amounts provided: |
|
|
|
|
|
|
At 1 January 2015, 1 January 2014 & 1 January 2013 |
|
XXX |
XXX |
XXX |
XXX |
|
Additional provision |
|
XXX
|
–
|
–
|
XX
|
|
At 31 December 2015 |
|
XXX
|
XXX
|
XXX
|
XXX
|
|
|
|
|
|
|
|
|
Carrying amount |
|
|
|
|
|
|
At 31 December 2015 |
|
XXXX
|
XXXX
|
XXXX
|
XXXX
|
|
|
|
|
|
|
|
|
At 31 December 2014 |
|
XXXX |
XXXX |
XXXX |
XXXX |
(a) Investment in Subsidiary undertakings are stated at cost less impairment. Investments in associates are measured at fair value based on the quoted share prices. Other investments are held at cost less impairment. The fair value of the joint venture interest cannot be determined as there is no published price quotations.
(b) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
% of Share Class Held |
|
|
|
|
|
|
Subsidiary undertakings |
|
|
|
|
(v) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
100%
|
|
This investment has been fully provided against. |
|
||
|
(vi) XXXX Limited Address 1, Address 2 |
Patent holding company |
Ordinary share capital |
100% |
|
Associate |
|
|
|
|
(vii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25%
|
|
Joint Venture |
|
|
|
|
(viii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50% |
Example 27: Extract rom notes to the financial statements for the for an entity that holds an associate/subsidiary/joint venture interest but is not required to prepare consolidated financial statements – Financial asset note
|
9 Financial assets |
Subsidiary Undertakings |
Joint Venture and Associates |
Other investments |
Total |
|
|
CU |
CU |
CU |
CU |
|
Cost |
|
|
|
|
|
At 1 January 2015, 1 January 2014 & 1 January 2013 |
XXX |
XXX |
XXX |
XXX |
|
Additions |
XXX |
XXX |
XXX |
XXX |
|
Fair value adjustments |
– |
XXX |
XXX |
|
|
Disposals |
(XXX)
|
–
|
–
|
(XXX)
|
|
At 31 December 2015 |
XXX
|
XXX
|
XXX
|
XXX
|
|
|
|
|
|
|
|
Amounts provided: |
|
|
|
|
|
At 1 January 2015, 1 January 2014 & 1 January 2013 |
XXX |
XXX |
XXX |
XXX |
|
Additional provision |
XXX
|
–
|
–
|
XX
|
|
At 31 December 2015 |
XXX
|
XXX
|
XXX
|
XXX
|
|
Carrying amount |
|
|
|
|
|
At 31 December 2015 |
XXXX
|
XXXX
|
XXXX
|
XXXX
|
|
|
|
|
|
|
|
At 31 December 2014 |
XXXX
|
XXXX
|
XXXX
|
XXXX
|
a) Investment in Subsidiary undertakings are stated at cost less impairment. Other investments are held at cost less impairment.
Investments in joint ventures are measured at fair value based on valuation models which make the most of external market data such that the fair value represents the estimated value that could be obtained in an arm’s length transaction under normal business conditions. The discounted cash flows use a discount rate of 10%. The valuation used a multiple of earnings which is consistent with industry norms
(b) Details of investments in which the parent Company holds 20% or more of the nominal value of any class of share capital are as follows:
|
Name and Registered Office |
Nature of Business |
Nature of Shares Held |
%of Share Class Held |
Net Assets/ Liabilities |
Results for year |
|
|
|
|
|
CU |
CU |
|
Subsidiary undertakings |
|
|
|
|
|
|
(ix) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
100%
|
XXXX |
XXXX |
|
This investment has been fully provided against. |
|
|
|
||
|
(x) XXXX Limited Address 1, Address 2 |
Patent holding company |
Ordinary share capital |
100% |
XXX |
XXXX |
|
Associate |
|
|
|
|
|
|
(xi) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
25%
|
XXXX |
XXXX |
|
Joint Venture |
|
|
|
|
|
|
(xii) XXXX Limited Address 1, Address 2 |
Machinery Manufacturing |
Ordinary share capital |
50%
|
XXXX |
XXXX |
Example 28: Extract from the profit and loss account for an entity which is not a parent that holds an investment in an associate/joint venture or an entity that is a parent but consolidated financial statements are not required to be prepared where income is received from an associate/joint venture/subsidiary
|
|
2015 |
2014 |
|
|
CU |
CU |
|
|
|
|
|
Turnover |
– |
– |
|
|
|
|
|
Cost of sales |
(XXX)
|
(XXX)
|
|
|
|
|
|
Gross profit |
– |
– |
|
|
|
|
|
Administrative expenses |
(XXX)
|
–
|
|
|
|
|
|
Operating loss |
(XXX) |
– |
|
|
|
|
|
Income from shares in joint venture |
XXXX |
– |
|
|
|
|
|
Income from other financial assets |
XXXX |
– |
|
|
|
|
|
Interest payable |
(XX)
|
(XXX)
|
|
|
|
|
|
Profit/(loss) on ordinary activities before taxation |
86,442 |
(22) |
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]