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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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15.12 Fair value model for a jointly controlled entity
15.12.1 Extracts from FRS102-Section 15.14-15.15A
15.14 When an investment in a jointly controlled entity is recognised initially, a venturer that is not a parent, that chooses to adopt the accounting policy set out in paragraph 15.9(c), shall measure it at the transaction price.
15.15 At each reporting date, investments in jointly controlled entities shall be measured at fair value using the fair value guidance in the Appendix to Section 2. Changes in fair value shall be recognised in other comprehensive income (or profit or loss) in accordance with paragraphs 17.15E and 17.15F.
15.15A The venturer shall recognise dividends and other distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition.
15.12.2 OmniPro comment
15.12.2.0 Overview
Section 15.15 of FRS 102 gives an entity a choice to where the option to fair value the investment is chosen. The choice is to carry these at fair value through profit and loss or through OCI.
15.12.2.1 Fair value through other comprehensive income (OCI)
15.12.2.1.1 Measurement and recognition
Where the fair value model through other comprehensive income is chosen, the following rules apply as stated in Section 15.15 of FRS 102:
- On initial recognition the investment is measured at the transaction price (i.e. cost plus directly attributable acquisition fees)
- Fair value movements are recognised in other comprehensive income/revaluation reserve where the movement is positive unless previous devaluations have been recognised in the profit and loss in which case they are recognised in the profit and loss up to the amount previously recognised in the profit and loss and after that to other comprehensive income; and
- Fair value movements which are negative are first set against the revaluation reserve and where this is reduced to nil, they are then posted to the profit and loss.
15.12.2.1.2 Treatment of transaction costs
All transaction costs are expensed as incurred.
15.12.2.1.3 Frequency of valuations
The revaluations should be performed on a regular basis so that the carrying amount is not materially different from its fair value.
15.12.2.1.4 What happens when fair value cannot be measured reliably
Where fair value can no longer be measured it is then stated at the carrying value at that time which is deemed to be its original cost as per the rules in Section 15.15 of FRS 102.
15.12.2.1.5 Deferred tax
As there will be fair value adjustments, there will be a deferred tax impact for the differences between the tax base and the carrying amount. The deferred tax adjustment should follow the initial adjustment to reflect the new carrying amount i.e. on initial recognition the deferred tax impact will be posted to other comprehensive income. The deferred tax rate to be used will be the rate that it is expected that the investment will be settled for. Where the investment is to be held for dividend purposes then the trading tax rate should be used (assuming the dividend will be taxable), however where it is expected the investment will be sold it should be measured at the capital gains tax/sales tax rate (assuming the gain will be taxable as certain relief may exempt tax on the disposal). The application of deferred tax is detailed in Section 29 of FRS 102.
15.12.2.1.6 Example of application of Fair Value through Other Comprehensive Income model
Example 20: Adoption of fair value through other comprehensive income
Company A in its individual financial statements has adopted a policy of fair valuing investments in joint ventures through other comprehensive income. The joint venture was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 and 31 December 2017 was CU120,000 and CU95,000 and CU125,000 respectively. Assume a deferred tax sales rate of 20%. Assume that the investment is held for future disposal as opposed to dividends – on this basis the sales tax rate should be used (if the investment was held for future dividends then the dividend tax rate should be used to measure deferred tax). Note if there was a tax exemption then no deferred tax would be required however we have assumed that there is not for the purposes of this calculation. The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
| CU | CU | |
|
Dr Investments in Joint Venture (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 2016 year
| CU | CU | |
| Dr Fair Value Movement in Profit and Loss | 5,000 | |
| Dr Fair Value Movement in Joint Venture in OCI/Revaluation reserve | 20,000 | |
| Cr Investments in Joint Venture (CU120,000-CU95,000) | 25,000 |
Being journal to reflect fall in value at 31 December 2016. 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 in line with Section 17 of FRS 102.
| 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 2016 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 CU500 would be recognised ((CU100,000-CU95,000)*20%)
Journals required in the 31 December 2017
| CU | CU | |
|
Dr Investments in Joint Venture (CU125,000-CU95,000) |
30,000 | |
| Cr Profit and Loss Fair Value Movement | 5,000 | |
| Cr Fair Value Movement in Joint Venture in P&L | 25,000 |
Being journal to reflect uplift in value on from 2016 to 2017. 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 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 was not recognised in 2016 as per narrative above as the asset was not deemed recoverable.
15.12.2.1.7 Recognition of income
Dividends received are recognised in the profit and loss account when receivable. It is irrelevant whether this is paid from pre or post acquisition reserves as per Section 15.15A of FRS 102. However, if it was paid from pre-acquisition reserves, then the entity should assess if there is an indication of impairment of the investment.
15.12.2.2 Fair value through the profit and loss
15.12.2.2.1 Measurement and recognition
Section 11 provides the accounting treatment where fair value through the profit and loss is chosen.
All movements in the fair value of the investment is recognised in the profit and loss account.
15.12.2.2.1.1 Fair value
The fair value is determined in line with Section 11 i.e. first where available, the value from a quoted market, if this is not available then based on an identical transaction which was entered into within the recent past and if this is not available a valuation technique which uses the most of the external data and very little of entity data. See further details at 11.7.2.1.2
15.12.2.2.2 Frequency of valuations
The revaluations should be performed on a regular basis so that the carrying amount is not materially different from its fair value.
15.12.2.2.3 What happens when fair value cannot be measured reliably?
Where the valuation cannot be measured reliably then the investment must be carried at cost less impairment. Where fair value is used deferred tax must be considered.
15.12.2.2.4 Example of application of Fair Value through profit and loss model
Example 21: Adoption of fair value through profit and loss
Company A in its individual financial statements has adopted a policy of fair valuing investments in joint venture through the profit and loss. The joint venture was acquired at the start of year 1 and original cost was CU100,000. The fair value of the investment at 31 December 2015 and 31 December 2016 was CU95,000 and CU125,000 respectively. Assume a deferred tax sales rate of 20%. Assume that the investment is held for future disposal as opposed to dividends – on this basis the sales tax rate should be used (if the investment was held for future dividends then the dividend tax rate should be used to measure deferred tax). Note if there was a tax exemption then no deferred tax would be required however we have assumed that there is not for the purposes of this calculation. The adjustments required to reflect the fair value policy and the related deferred tax are:
Journals required in the 31 December 2015 year
| CU | CU | |
| Dr Fair Value on Movement in Joint Venture in P&L | 5,000 | |
|
Cr Investments in Joint Venture (CU100,000-CU95,000) |
5,000 |
Being journal to reflect fall in value at 31 December 2015
| CU | CU | |
| Dr Deferred Tax Liability | 1,000 | |
|
Cr Deferred Tax in P&L ((CU5,000)*20%) |
1,000 |
Being journal to reflect deferred tax on the downward valuation. The movement of CU95,000 to CU100,000 is recognised on the basis that the entity believes there will be taxable profits to utilise this in the future.
Journals required in the 31 December 2016 year
| CU | CU | |
|
Dr Investments in Joint Venture (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 2015 to 2016
| CU | CU | |
|
Dr Deferred Tax in P&L ((CU125,000-CU95,000)*20%) |
6,000 | |
| Cr Deferred Tax Liability | 6,000 |
Being journal to reflect deferred tax on the uplift.
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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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