Interests in Joint Ventures: IAS 31 Wiecek and Young IFRS Primer Chapter 33.

Interests in Joint Ventures: IAS 31

Wiecek and Young

IFRS PrimerChapter 33

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Consolidated and SeparateFinancial Statements

Related standards IAS 31 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

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Related Standards

APB 18 The Equity Method of Accounting for Investments in Common Stock

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Related Standards

SIC 13 Jointly Controlled Entities—

Non-monetary Contributions by Venturers IAS 27 Consolidated and Separate Financial

Statements IAS 28 Investments in Associates

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IAS 31 – Overview

Objective and scope Joint ventures Jointly controlled operations and jointly

controlled assets Jointly controlled entities Disclosure

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IAS 31 – Objective and Scope Joint venture - a contractual arrangement where two or more parties

share in an economic activity over which they have joint control

Joint control - regardless of actual ownership rights, the strategic financial and operating decisions, by contract, require unanimous consent of the venturers

– control in this IFRS has the same meaning as in other related IFRSs

Venturer - an entity that has joint control over a joint venture

Investor in a joint venture - a party to the venture without joint control

Exceptions to IAS 31– venturers’ interests in jointly controlled entities held by venture capital

organizations or mutual funds, unit trusts, and similar organizations that are accounted for at FVTPL

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IAS 31 – Joint Ventures

Variety of forms - jointly controlled operations, assets, or entities

Joint control by at least two parties must be contractually established– may be set out in the articles of incorporation or bylaws of the joint

venture – less formally through documentation of meetings between the venturers

Contractual agreement:– usually in writing– sets out the governance structure of the joint venture– the capital to be supplied by each venturer– how the output, income, and expenses will be shared– the purpose and duration of the venture

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IAS 31 – Jointly Controlled Operations and Jointly Controlled Assets

Jointly Controlled Operations– no separate entity established to conduct joint activities– a venturer enters into an agreement with one or more venturers to produce, market,

and distribute a specific product– each venturer provides its specific operating expertise– used to take advantage of the resources and abilities of the individual venturers

each may agree to use their own assets, incur their own expenses and liabilities, and finance their own requirements

Joint venture agreement – sets out how revenue from the sale of the product worked on together is shared – how shareable costs are to be allocated to venturers

Recognized in the venturer’s financial statements(a) the assets that it controls and the liabilities it incurs

(b) the expenses incurred and share of income earned from sale of goods or services by joint venture

The venturer prepares no investment-related adjustments

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IAS 31 – Jointly Controlled Operations and Jointly Controlled Assets Jointly Controlled Assets

– each party to agreement takes a share of the output from the asset and pays an agreed share of costs incurred to operate it

– each venturer has control over its share of future economic benefits through its share of the asset

– no legal or other entity is formed separately from the venturers themselves

Accounting for this form of joint venture is consistent with its economic substance and usually the legal form of the joint venture

Recognized in the venturer’s financial statements

(a) its share of specific jointly controlled assets and of liabilities incurred jointly with other venturers

(b) liabilities incurred on its own

(c) income from the sale or use of its share of the output of the venture along with its share of expenses incurred by the venture

(d) expenses it has incurred relative to its interest in the venture

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IAS 31 – Jointly Controlled Entities

Jointly controlled entities– may be a corporation, a partnership, or other form of organization– separate entity controls assets of the joint venture, incurs

liabilities and expenses, and earns income– each venturer usually has an ownership interest in the venture

and is entitled to a share of its profits or output– when organized, the individual venturers contribute cash or other

assets in return for an ownership interest contributions are recognized by each venturer as an investment

in the joint venture

Jointly controlled entity records receipt of assets contributed to it and prepares and presents financial statements on the results of its operations and financial position

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IAS 31 – Jointly Controlled Entities

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IAS 31 – Jointly Controlled EntitiesVenturer’s accounting Choice of 2 methods to account for its investment

– proportionate consolidation (the preferred approach)– equity method

Entities that meet one of the following three conditions are excluded from applying one of the two methods:

1. Interest in the jointly controlled entity is classified as “held for sale” under IFRS 5

2. Venturer meets exception in IAS 27.10 that qualifies parent with an interest in a jointly controlled entity not to present consolidated financial statements

3. All of the following apply:(a) venturer is a wholly owned subsidiary or partially owned subsidiary

whose other owners have been informed and do not object to the venturer not applying the proportionate consolidation or equity method

(b) venturer does not have publicly traded debt or equity instruments(c) the venturer’s ultimate or intermediate parent produces consolidated

financial statements for public use that comply with IFRSs

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IAS 31 – Jointly Controlled Entities

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IAS 31 – Jointly Controlled EntitiesProportionate Consolidation inter-entity transactions, balances, unrealized profits, and losses are

eliminated in proportion to the venturer’s interest preferred method because it reflects the “substance and economic

reality of a venturer’s interest in a jointly controlled entity . . . and control over the venturer’s share of the future economic benefits”

netting of assets and liabilities or income and expenses is not permitted unless legal right of offset exists and asset and liability are expected to be realized and settled, respectively

choice of reporting formats – Option 1: venturer’s share of each line item on venture’s financial

statements is added to venturer’s line item on its financial statements– Option 2: venturer’s share of each major classification of assets,

liabilities, income, and expenses is identified as a separate line item within the same classification on venturer’s financial statements

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IAS 31 – Jointly Controlled Entities

Equity Method

IASB Exposure Draft ED 9 Joint Arrangements issued in 2007 – if the proposals are retained in the final standard, equity method will be

the only method permitted– many believe that having joint control is more similar to having

significant influence than having control this supports the use of the equity method

Survey of companies reporting in accordance with IFRSs in 2005– 144 companies reporting investments in jointly controlled entities were

equally split in use of proportionate consolidation and equity method– significant country-specific differences in the use of each method

strongly influenced by the methods required by national reporting standards prior to adoption of IFRS

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IAS 31 – Jointly Controlled EntitiesJoint Control Is Lost

When venturer no longer has joint control and the investment has not become a subsidiary or associate

– account for remaining investment under IAS 39 from date joint control was lost If the investment becomes a subsidiary

– investor accounts for this as a business combination under IFRS 3 and prepares consolidated financial statements according to IAS 27

If investment becomes an investment in an associate– the investor applies IAS 28

When joint control is lost, any remaining investment is measured at its fair value and a gain or loss on disposal is recorded

The gain or loss is the difference between – carrying amount of investment when joint control is lost – total of the fair value of retained investment and proceeds of disposal on the

portion disposed of

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IAS 31 – Jointly Controlled EntitiesSeparate Financial Statements are those where subsidiaries and investments in associates and

jointly controlled entities are accounted for on the basis of the direct equity interest - not on a basis related to investor’s interest in investee’s net assets and reported results

– IAS 27 helps determine the accounting for an interest in a jointly controlled entity for separate financial statements

In effect, the investment is accounted for at cost or in accordance with IAS 39

Investments without Joint Control If an investor has an equity interest in a joint venture but is not a venturer

– investor applies IAS 28 if significant influence in the joint venture– otherwise, it applies IAS 39

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IAS 31 – Jointly Controlled EntitiesTransactions between a Venturer and a Joint Venture

Accounted for as if venturer conducts transactions in part with the other non-related venturers and in part internally

Transaction is assumed to take place with other venturers at arm’s-length– the venturer recognizes that portion of the transaction and any associated gain or

loss To extent the venturer is dealing with its own ownership interest

– that portion of the transaction and gain or loss is eliminated Requirements

– when a venturer contributes or sells assets to a joint venture, the venturer recognizes only the portion of any gain or loss that is associated with the other venturers’ interests

- as the joint venture realizes the gain in its dealings with outside parties, the venturer then recognizes its portion of any gain or loss as realized

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IAS 31 – Jointly Controlled EntitiesTransactions between a Venturer and a Joint Venture

Requirements (continued)– If a loss is evidence of a decline in the asset’s net realizable value

or an impairment, then full loss is recognized immediately

– When joint venture sells assets to a venturer and reports a gain on the sale, the venturer does not recognize its share of the gain until it has sold the asset in turn to a third party

- the venturer recognizes its share of any gain as it is realized

Operators of Joint Ventures When a venturer acts as an operator or manager of a joint venture, it

is usually paid a fee for these services– the joint venture recognizes the fee paid as an expense and the venturer

refers to IAS 18 to determine how to account for the fee received

IAS 31 – Disclosure

Disclosures for Consolidated Financial Statements

Explanations of why an entity is a subsidiary when investor does not own more than half the voting power

Information about date of a subsidiary’s financial statements if different from the date of parent company’s statements

Information about any significant restrictions on ability of subsidiary to pay cash dividends and to transfer funds to parent to repay loans/advances

Effects of changes in parent’s ownership interest in a subsidiary that do not result in a loss of control

Gain or loss recognized on the loss of control of a subsidiary

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IAS 31 – Disclosure A venturer reports information about its joint ventures description of the interest proportion of ownership interest held method it uses to recognize this interest

Totals reported by venturer that relate to its joint venture interests if line-by-line proportionate consolidation or the equity method is used

– amount of current assets– long-term assets– current liabilities– long-term liabilities– income– expenses

Other venturer disclosures– potential obligations associated with contingent liabilities – commitments of joint ventures separately from those of venturer itself

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Current GAAP Comparisons

Page 64 of 164 ofhttp://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement DisclosuresBP plchttp://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/ara_2007_annual_report_and_accounts.pdf

Group Income Statement page 98 of 212

Interests in joint ventures note page 102 of 212

Investments in jointly controlled

entities note page 136 of 212

Subsidiaries, jointly controlled entities

and associates note page 170 of 212

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Looking Ahead Accounting for investments in joint ventures

– originally a part of the IASB’s short-term convergence project with FASB– IASB now conducts the joint ventures project alone

Objective of the joint ventures project – to eliminate the choice now allowed in IAS 31 – to clarify the definitions of joint assets and joint operations

IASB– reviewing the responses to its 2007 Exposure Draft, ED 9 Joint Arrangements– expects to issue a final IFRS entitled Joint Arrangements in late 2009

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Looking AheadTentative decisions exposed in ED 9, Joint Arrangements

• Types of interests parties could have in a joint arrangement o direct interests (interests in joint operations or joint assets)o indirect interests (interest in a joint venture)

• A party to a joint arrangement should recognize its contractual rights and

obligations according to applicable IFRSs

• A party should recognize its interest in a joint venture using the equity methodo proportionate consolidation not allowed

• Disclosures aligned with those required for investments in associates

Except for the elimination of the use of proportionate consolidation, these changes are not expected to result in significant differences in the profit or loss and financial position of parties to these joint arrangements

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End-of-Chapter Practice

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End-of-Chapter Practice

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End-of-Chapter Practice

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