Standard 27: Financial Reporting of Interests in Joint Ventures

Standard 27: Financial Reporting of Interests in Joint Ventures · Complied AI

(d)

the sharing by the venturers of the output, income, expenses or results of the joint venture.

8. The contractual arrangement establishes joint control over the joint venture. Such an

arrangement ensures that no single venturer is in a position to unilaterally control the activity. The

arrangement identifies those decisions in areas essential to the goals of the joint venture which require the

consent of all the venturers and those decisions which may require the consent of a specified majority of the

venturers.

9. The contractual arrangement may identify one venturer as the operator or manager of

the joint venture. The operator does not control the joint venture but acts within the financial and operating

policies which have been agreed to by the venturers in accordance with the contractual arrangement and delegated

to the operator.

Jointly Controlled Operations

10. The operation of some joint ventures involves the use of the assets and other

resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a

financial structure that is separate from the venturers themselves. Each venturer uses its own fixed assets and

carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which

represent its own obligations. The joint venture's activities may be carried out by the venturer's employees

alongside the venturer's similar activities. The joint venture agreement usually provides means by which the

revenue from the jointly controlled operations and any expenses incurred in common are shared among the

venturers.

11. An example of a jointly controlled operation is when two or more venturers combine

their operations, resources and expertise in order to manufacture, market and distribute, jointly, a particular

product, such as an aircraft. Different parts of the manufacturing process are carried out by each of the

venturers. Each venturer bears its own costs and takes a share of the revenue from the sale of the aircraft,

such share being determined in accordance with the contractual arrangement.

12. In respect of its interests in jointly controlled operations, a

venturer should recognise in its separate financial statements and consequently in its consolidated financial

statements:

(b)

the expenses that it incurs and its share of the income that it earns from the joint

venture.

13. Because the assets, liabilities, income and expenses are already recognised in the separate financial statements

of the venturer, and consequently in its consolidated financial statements, no adjustments or other

consolidation procedures are required in respect of these items when the venturer presents consolidated

financial statements.

14. Separate accounting records may not be required for the joint venture itself and

financial statements may not be prepared for the joint venture. However, the venturers may prepare accounts for

internal management reporting purposes so that they may assess the performance of the joint venture.

Jointly Controlled Assets

15. Some joint ventures involve the joint control, and often the joint ownership, by

the venturers of one or more assets contributed to, or acquired for the purpose of, the joint venture and

dedicated to the purposes of the joint venture. The assets are used to obtain economic benefits for the

venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the

expenses incurred.

16. These joint ventures do not involve the establishment of a corporation,

partnership or other entity, or a financial structure that is separate from the venturers themselves. Each

venturer has control over its share of future economic benefits through its share in the jointly controlled

asset.

17. An example of a jointly controlled asset is an oil pipeline jointly controlled and

operated by a number of oil production companies. Each venturer uses the pipeline to transport its own product

in return for which it bears an agreed proportion of the expenses of operating the pipeline. Another example of

a jointly controlled asset is when two enterprises jointly control a property, each taking a share of the rents

received and bearing a share of the expenses.

18. In respect of its interest in jointly controlled assets, a venturer

should recognise, in its separate financial statements, and consequently in its consolidated financial

statements:

(e)

any expenses which it has incurred in respect of its interest in the joint venture, for example, those

related to financing the venturer's interest in the assets and selling its share of the output.

Because the assets, liabilities, income and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements , no adjustments or other

consolidation procedures are required in respect of these items when the venturer presents consolidated

financial statements.

20. The treatment of jointly controlled assets reflects the substance and economic reality and, usually, the legal

form of the joint venture. Separate accounting records for the joint venture itself may be limited to those

expenses incurred in common by the venturers and ultimately borne by the venturers according to their agreed

shares. Financial statements may not be prepared for the joint venture, although the venturers may prepare

accounts for internal management reporting purposes so that they may assess the performance of the joint

venture.

Jointly Controlled Entities

21. A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or

other entity in which each venturer has an interest. The entity operates in the same way as other enterprises,

except that a contractual arrangement between the venturers establishes joint control over the economic activity

of the entity.

22. A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns

income. It may enter into contracts in its own name and raise finance for the purposes of the joint venture

activity. Each venturer is entitled to a share of the results of the jointly controlled entity, although some

jointly controlled entities also involve a sharing of the output of the joint venture.

23. An example of a jointly controlled entity is when two enterprises combine their activities in a particular line

of business by transferring the relevant assets and liabilities into a jointly controlled entity. Another

example is when an enterprise commences a business in a foreign country in conjunction with the government or

other agency in that country, by establishing a separate entity which is jointly controlled by the enterprise

and the government or agency.

24. Many jointly controlled entities are similar to those joint ventures referred to as jointly controlled operations

or jointly controlled assets. For example, the venturers may transfer a jointly controlled asset, such as an oil

pipeline, into a jointly controlled entity. Similarly, the venturers may contribute, into a jointly controlled

entity, assets which will be operated jointly. Some jointly controlled operations also involve the establishment

of a jointly controlled entity to deal with particular aspects of the activity, for example, the design,

marketing, distribution or after-sales service of the product.

25. A jointly controlled entity maintains its own accounting records and prepares and presents financial statements

in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled

entity.

Separate Financial Statements of a Venturer

26. In a venturer's separate financial statements, interest in a jointly

controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13, Accounting for

Investments .

27. Each venturer usually contributes cash or other resources to the jointly

controlled entity. These contributions are included in the accounting records of the venturer and are

recognised in its separate financial statements as an investment in the jointly controlled

entity.

Consolidated Financial Statements of a Venturer

28. In its consolidated financial statements, a venturer should report

its interest in a jointly controlled entity using proportionate

consolidation except:

(b)

an interest in a jointly controlled entity which operates under severe long-term

restrictions that significantly impair its ability to transfer funds to the venturer.

Interest in such a jointly controlled entity should be accounted for as an investment in accordance

with Accounting Standard (AS) 13, Accounting

for Investments .

Explanation

Explanation:

The period of time, which is considered as near future for the purposes of this Standard primarily

depends on the facts and circumstances of each case. However, ordinarily, the meaning of the words ‘near future’

is considered as not more than twelve months from acquisition of relevant investments unless a longer period can

be justified on the basis of facts and circumstances of the case. The intention with regard to disposal of the

relevant investment is considered at the time of acquisition of the investment. Accordingly, if the relevant

investment is acquired without an intention to its subsequent disposal in near future, and subsequently, it is

decided to dispose off the investment, such an investment is not excluded from application of the proportionate

consolidation method, until the investment is actually disposed off. Conversely, if the relevant investment is

acquired with an intention to its subsequent disposal in near future, however, due to some valid reasons, it

could not be disposed off within that period, the same will continue to be excluded from application of the

proportionate consolidation method, provided there is no change in the intention.

29. When reporting an interest in a jointly controlled entity in consolidated financial statements, it is

essential that a venturer reflects the substance and economic reality of the arrangement, rather than the joint

venture's particular structure or form. In a jointly controlled entity, a venturer has control over its share of

future economic benefits through its share of the assets and liabilities of the venture. This substance and

economic reality is reflected in the consolidated financial statements of the venturer when the venturer reports

its interests in the assets, liabilities, income and expenses of the jointly controlled entity by using

proportionate consolidation.

30. The application of proportionate consolidation means that the consolidated balance sheet of the venturer includes

its share of the assets that it controls jointly and its share of the liabilities for which it is jointly

responsible. The consolidated statement of profit and loss of the venturer includes its share of the income and

expenses of the jointly controlled entity. Many of the procedures appropriate for the application of

proportionate consolidation are similar to the procedures for the consolidation of investments in subsidiaries,

which are set out in Accounting Standard (AS)

21, Consolidated Financial Statements .

31. For the purpose of applying proportionate consolidation, the venturer uses the consolidated financial statements

of the jointly controlled entity.

32. Under proportionate consolidation, the venturer includes separate line items for its share of the assets,

liabilities, income and expenses of the jointly controlled entity in its consolidated financial statements. For

example, it shows its share of the inventory of the jointly controlled entity separately as part of the

inventory of the consolidated group; it shows its share of the fixed assets of the jointly controlled entity

separately as part of the same items of the consolidated group.

Explanation

Explanation:

While applying proportionate consolidation method, the venturer’s share in the post-acquisition reserves of the

jointly controlled entity is shown separately under the relevant reserves in the consolidated financial

statements.

33. The financial statements of the jointly controlled entity used in applying proportionate consolidation

are usually drawn up to the same date as the financial statements of the venturer. When the reporting dates are

different, the jointly controlled entity often prepares, for applying proportionate consolidation, statements as

at the same date as that of the venturer. When it is impracticable to do this, financial statements drawn up to

different reporting dates may be used provided the difference in reporting dates is not more than six months. In

such a case, adjustments are made for the effects of significant transactions or other events that occur between

the date of financial statements of the jointly controlled entity and the date of the venturer's financial

statements. The consistency principle requires that the length of the reporting periods, and any difference in

the reporting dates, are consistent from period to period.

34. The venturer usually prepares consolidated financial statements using uniform accounting policies for the like

transactions and events in similar circumstances. In case a jointly controlled entity uses accounting policies

other than those adopted for the consolidated financial statements for like transactions and events in similar

circumstances, appropriate adjustments are made to the financial statements of the jointly controlled entity

when they are used by the venturer in applying proportionate consolidation. If it is not practicable to do so,

that fact is disclosed together with the proportions of the items in the consolidated financial statements to

which the different accounting policies have been applied.

35. While giving effect to proportionate consolidation, it is inappropriate to offset any assets or liabilities by

the deduction of other liabilities or assets or any income or expenses by the deduction of other expenses or

income, unless a legal right of set-off exists and the offsetting represents the expectation as to the

realisation of the asset or the settlement of the liability.

36. Any excess of the cost to the venturer of its interest in a jointly controlled

entity over its share of net assets of the jointly controlled entity, at the date on which interest in the

jointly controlled entity is acquired, is recognised as goodwill, and separately disclosed in the consolidated

financial statements. When the cost to the venturer of its interest in a jointly controlled entity is less than

its share of the net assets of the jointly controlled entity, at the date on which interest in the jointly

controlled entity is acquired, the difference is treated as a capital reserve in the consolidated financial

statements. Where the carrying amount of the venturer's interest in a jointly controlled entity is different

from its cost, the carrying amount is considered for the purpose of above computations.

37. The losses pertaining to one or more investors in a jointly controlled entity may exceed their interests in the

equity 3 of the jointly controlled entity. Such excess, and any further losses

applicable to such investors, are recognised by the venturers in the proportion of their shares in the venture,

except to the extent that the investors have a binding obligation to, and are able to, make good the losses. If

the jointly controlled entity subsequently reports profits, all such profits are allocated to venturers until

the investors' share of losses previously absorbed by the venturers has been recovered.

38. A venturer should discontinue the use of proportionate consolidation from the date that:

(b)

in all other cases, as an investment in accordance with Accounting Standard (AS) 13, Accounting for

Investments , or in accordance with Accounting Standard (AS) 23, Accounting for

Investments in Associates

in Consolidated Financial Statements , as appropriate. For this purpose, cost of the

investment should be determined as under:

(i)

the venturer's share in the net assets of the jointly controlled entity as

at the date of discontinuance of proportionate consolidation should be ascertained, and

(ii)

the amount of net assets so ascertained should be adjusted with the

carrying amount of the relevant goodwill/capital reserve (see paragraph 36 ) as at the date of discontinuance of

proportionate consolidation.

Transactions between a Venturer and Joint Venture

40. When a venturer contributes or sells assets to a joint venture, recognition of any portion of a

gain or loss from the transaction should 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 venturer should recognise only that portion of the gain or loss which is attributable to the interests of

the other venturers. The venturer should recognise the full amount of any loss when the contribution or sale

provides evidence of a reduction in the net realisable value of current assets or an impairment loss.

41. When a venturer purchases assets from a joint venture, the venturer should 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 should recognise its share of the losses resulting from these transactions in the same way as profits

except that losses should be recognised immediately when they represent a reduction in the net realisable value

of current assets or an impairment loss.

42. To assess whether a transaction between a venturer and a joint venture provides evidence of impairment of an

asset, the venturer determines the recoverable amount of the asset as per Accounting Standard (AS) 28, Impairment of Assets .

In determining value in use, future cash flows from the asset are estimated based on continuing use of the asset

and its ultimate disposal by the joint venture.

43. In case of transactions between a venturer and a joint venture in the form of a jointly

controlled entity, the requirements of paragraphs 40 and 41 should be applied only in the preparation

and presentation of consolidated financial statements and not in the preparation and presentation of

separate financial statements of the venturer.

44. In the separate financial statements of the venturer, the full amount of gain or loss on the transactions taking

place between the venturer and the jointly controlled entity is recognised. However, while preparing the

consolidated financial statements, the venturer's share of the unrealised gain or loss is eliminated. Unrealised

losses are not eliminated, if and to the extent they represent a reduction in the net realisable value of

current assets or an impairment loss. The venturer, in effect, recognises, in consolidated financial statements,

only that portion of gain or loss which is attributable to the interests of other venturers.

Reporting Interests in Joint Ventures in the Financial Statements of an Investor

45. An investor in a joint venture, which does not have joint control, should report its interest in a

joint venture in its consolidated financial statements in accordance with Accounting Standard (AS) 13, Accounting for

Investments , Accounting Standard

(AS)

21, Consolidated Financial Statements or Accounting Standard (AS) 23, Accounting for

Investments in Associates in Consolidated Financial Statements , as appropriate.

46. In the separate financial statements of an investor, the interests in joint ventures should be

accounted for in accordance with Accounting

Standard (AS) 13, Accounting for Investments .

Operators of Joint Ventures

47. Operators or managers of a joint venture should account for any fees in accordance with Accounting Standard (AS) 9, Revenue

Recognition .

48. One or more venturers may act as the operator or manager of a joint venture. Operators are usually paid a

management fee for such duties. The fees are accounted for by the joint venture as an expense.

Disclosure

49. A venturer should disclose the information required by paragraphs 50, 51, and 52 in its separate

financial statements as well as in consolidated financial statements.

50. A venturer should disclose the aggregate amount of the following contingent liabilities, unless the

probability of loss is remote, separately from the amount of other contingent liabilities: