FUTURUM - Joint venture under ias 31

Joint Venture under IAS 31
Sukarnen
DILARANG MENG-COPY, MENYALIN, ATAU MENDISTRIBUSIKAN SEBAGIAN ATAU
SELURUH TULISAN INI TANPA PERSETUJUAN TERTULIS DARI PENULIS
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General Definition:
“Economic arrangements between two or more parties where strategic financial
and operating decision are made unanimously by the entities which share
control”
According to IAS 31:
“A joint venture is a contractual arrangement whereby two or more parties
undertake and economic activity that is subject to joint control”
Examples
• Shared Distribution Network;
• Consortium to jointly produce output (products or services);
• Property development and management;
• Property investment;
• Research and Development activities (i.e. Pharmaceuticals companies);
• Shared use of asset;
Joint Venture - Definition

Joint Venture – the Examples
Joint Ventures Requirements
Joint Control
Agreed Unanimously
Contractual
Arrangement
• Strategic Financial Decision
• Strategic Operating Decision
JOINT
VENTURE

Joint Venture – Joint Control
Definition
“..is a contractually agreed sharing of control over an economic activity
and exists only when the strategic financial and operating decisions
relating to the activity require the unanimous consent of all the parties
sharing control”
Venturers have joint control for their own mutual benefits;
Play an active role in joint venture’s strategic financial, investment
and operating decision;
No party can unilaterally control the joint venture;
The existence of veto decisions.

Example:
Does the joint control exist if all parties hold the equal share ownership
in a company?
A Corp B Corp C Corp D Corp
X Corp25%
25% 25%
25%
Decisions in entity X Corp need to be approved by a 75% vote of
venturers  in other terms require “consent” of a majority of the
owners
• Therefore, entity A Corp cannot account X Corp as a jointly
controlled entity as entity J is not jointly controlled
• For the entity X Corp, to be a jointly controlled entity, requires
unanimous agreement between venturers
• Majority Control is totally different from Joint Control

Examples of Strategic Decisions which need unanimous consent:
Issuing Shares;
Capital Expenditure;
Significant Asset Disposals;
Approving a business plan;
Changing the strategic direction of the business
Change in products;
Change in markets;
Change in operating activities;
Remuneration policy;
Major Financing;
Distribution and investment;
Nomination policy in determining the BoD or BoC

Unanimous consent is required depends on the nature of the
decision: differentiate between strategic and daily operating decision
(day to day decision).
All of these issues require unanimous consent because all of the
issues above can be categorized as strategic operating, investment and
financing decision;
For the lesser extent of issues (daily management and activities), there
is no need for unanimous consent  impractical in running a
business;
Joint venture agreement must include:
Types of strategic investment, operating and financial decisions
that require unanimous agreement between venturers;
Arbitration procedure in case the unanimous agreement between
venturers is not achieved;

Nature of Decisions
Strategic
Decisions
Day to Day
Decisions
Operating Investment Financing
Unanimous agreement
Y N
J.V. Agreement
Arbitration Procedures+
1)
2)
Impractical
Joint control in strategic decision  Veto rights for each venturers;
Veto rights distinguish the venturer with a minority shareholder;
Voting rights need to be considered to determine the joint control
existence;

Voting rights - Joint Control Exists (Example)
 Articles of Association of Entity C state that its operation should be conducted in
accordance with an annual business plan approved unanimously
 Chairman of the boards rotates between company A and B;
 Articles also set out the types of strategic decision which need unanimous consent of
all directors;
 Highly unlikely that directors from the same venturer will vote in different way;
There is no joint venture agreement, but based on the Articles of
Association the joint control does exist.
Company A
50%
Company B
Entity C
50%
A B
BoD

Voting Rights - Joint Control Does Not Exist (Example)
Company A
• If option is exercised <50%
• If option is not exercised =
50%
Company B
Entity C
A B
BoD
 Everything in the Articles are the same with the previous example, except that the
Company B has an option to buy some portion of Company A shares in entity C.
 This option can be exercised any time by the Company B in the event that A or B does
not agree on a strategic decision proposed by other venturer.
 Option price is set not so high so the possibility of exercise is remote
Joint control does not exist as B has an option to buy A’s share in C and
thus will cancel the joint control existence. If the option is exercised by
B, then B will have majority control over C and A will become the
minority shareholders in C
• If option is exercised > 50%
• If option is not exercised =
50%

Joint control does not mean that every venturer has the same financial
interest in the venture.
Each venturer MAY have different interests in the net assets, profit
and loss from a joint venture, but still be equal in terms of
exercising a joint control.
Example: A, B and C have a different portion 25:40:35 or 20:35:45,
but in order to meet a joint venture definition, there should be a
joint control including the veto right for each venturer.
For a special case, there might be an extreme split of interests.
For example A and B interests in a project is 7.5 : 92.5, but it could
be understood why a majority shareholders would accept to have a
joint control with the minority shareholders. For example: the
majority shareholders is the foreign company while the minority
shareholders is a local government or a party with significant
governmental influence.

Other factors in arrangement that should be carefully examined:
One party might manage the venture under the management
agreement while other parties have right of veto on some key
decisions  check whether the veto will be applicable;
Minority shareholders with the exercisable (convertible)
potential voting rights.
If there is a potential for minority shareholders to control the
entity, then the joint control would not exist;
In some situation, an investor may be a party to a joint venture,
but not be the one of the venturers sharing the joint control;
Entities take an ownership interest in shared assets, where the
group of users is too wide for practicing joint control;
Some investor only focus retain influence and access to
information.

Investor in joint venture does not share a joint control (Example)
A Corp
B Corp
C Corp
X
Entity
60%
30%
10%
B
O
D
Operational decisions requirement 51% majority;
BUT, the strategic financing and operating decision require entity A and B to
unanimously agree based on the contractual arrangement;
Contractual arrangement restrict majority shareholders power in respect of
strategic matters
In this case, company A and B has joint control while C has not. C would equity
account entity D in accordance with IAS 28, or if this not the case, as investment
according to IAS 39.

Joint control may not exist if;
In joint ventures operates under restrictions and impair the
venturers ability to implement essential decision, including the
transfer of funds
Several circumstances should be considered regarding the
exercisable of joint control:
The entity going into administration;
Government restrictions on the transfer of currency out of
country;
Significant international sanctions which may prohibit the
transfer of funds out of the conflicted country.
Types of condition above, restricts the venturers joint control over the
joint venture.

Joint Venture – Contractual Arrangement
The importance of joint control in the contractual agreement
Distinguish Joint Venture with investment in associates
Contractual Arrangement can be found in:
Form of contracts;
Minutes of discussion between venturers;
Articles of Association or by laws of the entity subject to the joint
control
In theory, a formal agreement is not strictly necessary;
In practice a fair degree of formality or legal agreement among
venturers is needed.
Example: A requirement of Joint Venture is sufficiently made
without the need of Joint Venture Agreement:
“A and B form a joint venture. In the articles of association of
entity, it is said that only entities A and B together can determine
the strategic and operating of J’s activity.”
Even though there is no separate joint venture agreement, entity J
meets the definition of a Joint Venture.

Issues in the Contractual Arrangement
The activity, duration and reporting obligation of the entity and
venturer;
Motives behind the establishment of Joint Venture and life of joint
venture
Governing Body of A Joint Venture;
Appointment of Directors and the Voting Rights of Venturers;
Set out strategic decisions with unanimous consent
Voting requirements for operational decisions
The capital contributions required from the venturers;
Sharing of output, income, expense or results of joint venture
between venturers;
Delegation of the entity’s day to day management;
Joint venture’s financial and operating policies.
Other Important Issues:
Transfer of Interests to new venturers;
Termination of ventures;
Arbitration procedures.

If there is a clear definition of joint control in the entity, so does the
definition and qualified as a joint venture, regardless how the parties
describe the arrangement.
A Corp
X Corp
100%
• A in financial distress
• X needs financing immediately
• What Should A Do?
Approaches Entity B:
• Entity B motives
• B Invest  20% of equity
• A & B sign contract:
• Each appoints 2 board members;
• Strategic Decisions Approved by
representatives board member
Joint Control via a Contract
A Corp
X Corp
80%
• The existence of the contract set out how
control over X is shared between
shareholders  Joint Control  X is JV
• Majority can’t unilaterally control over X Corp
B Corp
20%
B Corp

Contractual Arrangement may appoint one of venturers to run day-
to-day operations;
Operator does not control the joint venture, but acts within the
strategic financial, investment and operating decisions set out in
the arrangement
Venturers need to make sure that the policies which are already
set in the arrangement will be followed by the Operator;
However, if the venturer managing the day-to-day operation has the
power to govern the venturer’s financial, investment and operating
policies, and then it control the joint venture and the JV itself is its
subsidiary, then what is thought as a JV, actually not a joint venture.

Joint Ventures in The World and Indonesia
Why Joint Ventures? – Joint Venture in the World
Combining different skills;
USX (large integrated steel producer)–Nucor (Leading minimill steel
producer)
USX Corp
Nucor Corp
• Starting point: USX develop theory for a new
process of making steel from iron carbide,
eliminating blast furnaces and supporting coke
batteries. The new process is expected to reduce
costs as much as 25%
• Need to find a counterparty with small mill
capacity to run this new theory
• Entered an agreement to study the feasibility of the
process
• Nucor will possess a considerable experience
and expertise in constructing the types of plants
that would be required for such process

Enable a firm to achieve market penetration into new areas
overtime;
For example: Geis and Geis (2001) mentioned that Microsoft had
been engaged with several joint ventures activity with different
purposes, starting from developing a new product, expand into
new geographic areas and participate in new-technology driven
activity (to pretend its “leader” status in the technology industry).
Example: Microsoft and DreamWorks SKG in the establishment of
DreamWorks Interactive.
Market
Product
Existing Market New Market
Market Penetration Market DevelopmentExisting Product
New Product
Diversification (Horizontal,
Vertical, Concentric,
Conglomerate)
Product Development
Based on the examples above, small firms have something unique to
be offered to the industry leaders

Enable a firm to achieve market penetration into new areas
overtime;
For example: Geis and Geis (2001) mentioned that Microsoft had
been engaged with several joint ventures activity with different
purposes, starting from developing a new product, expand into
new geographic areas and participate in new-technology driven
activity (to pretend its “leader” status in the technology industry).
Example: Microsoft and DreamWorks SKG in the establishment of
DreamWorks Interactive.

Combining different skills, market and expertise: Indonesia Case
No
1
2
3
4
5 F&B
AXA and Bank Mandiri plan to establish a joint
venture for general insurance
KS and Posco in Indonesia; form a joint venture for
build and operate steel plant in Cilegon worth for
US$6 billion in order to produce 4-meter steel plates
Garuda Indonesia and Lufthansa (commercial
information system joint venture) in 2004
Elnusa and CGGVeritas; joint venture will provide 2D
and 3D marine seismic surveys and data acquisition
services for oil and gas clients operating locally in
Indonesia and region. (source: www.cggveritas.com)
Heinz and ABC created Heinz ABC Indonesia
Financial Sector
Steel Producer
Airlines
Oil and Gas
DescriptionIndustry

Strategic Planning
Joint ventures are used in combination with internal development, mergers,
minority investments in order to implement corporate long-term strategy
for the value-enhancement growth.
For example: Expansion to new market (increase market share in domestic
and abroad) and low-cost strategy (in example: joint venture between KS
and Posco).
 Knowledge Acquisition/Transfer of Knowledge , Know - How
The complexity of knowledge to be transferred is a key factor in
determining the contractual relatioship between the venturers for example
between USX Corp and Nucor Corp;
Usually involved a complicated set of technological and organizational
circumstances;
Challenges: Successful adaptations to changing internal and environmental
events in achieving the efficiency in the process of transferring knowledge.
Need “operational context”.
Motives for Joint Venture and Joint Arrangement

Risk Reduction
Reduction in financial risk:
Smaller Investments (lower R&D costs)
Reduction in operational risk:
Reduce cost raised by accidents in airlines industry;
Claims from customers if the products defects;
Costs in machinery overhaul;
Distribution channel.
Other risks;
Labor strikes;
Changes in industry regulation
Tax Aspects
For example a patent or licensable technology contributed by a venturer
for a joint venture will bring a lower tax consequences compares to a
royalty earned through a licensing agreement (in example: One Partner
contributes the technology and another contributes a depreciable facilities).
 International Aspects
Reduce risk of expanding into a foreign environment;
Favorable tax treatment and/or political incentives.
Motives for Joint Venture and Joint Arrangement

Flexibility in joint ventures;
Limited life span;
Scope of business;
Therefore, limiting both your commitment and business
exposure.
Opportunity to gain from new capacity and new expertise;
Gain new knowledge and new technology;
 Access more resources in terms of raw material and labor;
 Sharing risks with venture partners;
 Joint venture offers a company a creative way to exit from a non-core
business and separation from the parent business easily, in terms of
divestitures and business consolidation.
Advantages of Joint Venture

Challenges in building a joint venture agreement;
The objectives of joint venture can not be clearly stated by each
individual;
There might be imbalances in the level of expertise, investment and
asset brought into a joint venture by each venture partner;
Can be resulted in poor integration and integration;
May not possess full support from partners at the early stages;
Unprofessional JV Partners may hurt company reputations.
Difficult to change the contractual agreement between venturers
since the necessity for unanimously consent.
Disadvantages of Joint Venture

Joint Venture Forms-Jointly Controlled Operations
Definition (according to IAS 31 para. 13):
“Each venturer uses its own property, plant and equipment and carries its own
inventories. It also incurs its own expenses and liabilities and raises its own
finance, which represents its own obligations.”
How the Jointly Controlled Operation Works?
Each venturers control its own resources;
Carried out by the venturer’s employees alongside with the venturer’s
similar activities.
Revenue and expenses in common incurred from the sale of joint
product are shared among the venturers.
Sharing mechanism is stated in the contractual agreement.
Combine resources, operations and expertise in order to manufacture,
market and distribute jointly a particular product.

Joint Venture Forms-Jointly Controlled Operation
Example: High Speed Train
Two entities agree to develop and manufacture a high-speed train where, for
example, the engine may be developed by one venturer and the carriages
by another. Each venturer would pay the costs and take a share of the
revenue from the sale of the trains according to the agreement. Here each
venturer will show in its financial statements the assets that it controls,
the liabilities that it incurs, together with the expenses that it incurs and
its share of the income from the sale of goods or services.
Because the joint venturer is simply recording its own assets and liabilities
and expenses that have been incurred and its share of the joint venture
Income, there are no adjustments or other consolidation procedures used
in respect of these items

Joint Venture Forms-Jointly Controlled Assets
“The assets are used to obtain the 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.”
How the Jointly Controlled Assets Works?
Joint ownership of assets that is not a separate entity;
Separation between the shared costs and revenues from the use of joint
controlled assets and those that each venturer born for its owned-
production.

Joint Venture Forms-Jointly Controlled Assets
Example: Oil Industry
A number of oil companies jointly own a pipeline. The pipeline will be used to
transport the oil, and each venturer agrees tobear part of the expenses of
operating the pipeline. The financial statements of each venturer will show its
share of the joint assets, any liabilities it has incurred directly, and its share
of any joint liabilities together with any income from the sale or usage of its
share of the output of the joint venture. Additionally any share of the
expenses incurred by the joint venturer or expenses incurred directly will be
shown in the financial statements

Joint Venture Forms-Jointly Controlled Entities
“…a joint venture that involves the establishment of a corporation, partnership
or other entity in which each venturer has an interest. The entity operates in the
same way with other entities, except that a contractual arrangement between the
venturers establishes joint control over the economic activity of the entity”
How the Jointly Controlled Entities Works?
Entity  Distinct Existence (Organization or Institution) example
Corporation, Partnership, Trust, Governmental Agency, etc;
Involve transfer of assets and liabilities
Combining all of assets and liabilities for a particular business line
Separate legal entity  activities are run by jointly controlled entity
and not by the venturers: Have its own contracts and raise financing.
Some jointly controlled entities involve the sharing of output
(products or services) produced by jointly controlled entity.
The existence of the joint controlled entity will extend a venturer’s
existing underlying operations and differentiate the joint controlled
entity and the joint controlled assets and operations.

Joint Venture Forms-Jointly Controlled Entity
Example: Newmont Nusa Tenggara in Indonesia

Other Joint Arrangements
Collaborative Arrangements
Strategic Alliances
Build – Operate - Transfer

Accounting for Jointly Controlled Operation
ACCOUNTING
for
JOINTLY
CONTROLLED
OPERATION
Treats as the independent operations
accounts independently on its own assets,
liabilities and expenses
booked in the venturer’s own financial
statements
account for the share of the income
Not a separate legal entity
• no intra-group balance
The Accounting for Jointly Controlled Operation is like an Accounting
for Branch

in its separate and consolidated financial statements a venturer
should recognize:
The assets that it controls
The liabilities that it incurs
The expenses that it incurs
Its share of the income that it earns from the joint venture

Example:
Entity A Entity B
builds the products identifies the opportunity for market
provides the day-to-day management
makes 10% margin on the products sold
contributed 10,000 contributed 40,000
Joint Operation
During the first year of JO's operation:
Entity A incurred costs for inventory and work-in-progress 70,000
Portion sold to Joint Operation 50,000
Margin 10% 5,000
Selling price to Joint Operation 55,000
Joint Operation
Sales of the products 40,000
Cost of sale (30,000)
Margin 10,000

Example:
Entity A Joint Operation 55% JO Adjustments Entity Adjusted
C'000 C'000 C'000 C'000 C'000
Balance Sheet
Contribution 10.00 0.00 0.00 (10.00) (c ) 0.00
Inventory and work in progress
Cost 70.00 55.00 30.25 (30.25) (a) 70.00
Transfer to cost of sales (50.00) (30.00) (16.50) 27.50 (b) (39.00)
30.00 25.00 13.75 (12.75) 31.00
Cash/loan (25.00) 35.00 19.25 0.00 (5.75)
5.00 60.00 33.00 (12.75) 25.25
Liability to entity A and entity B 0.00 50.00 27.50 (10.00) ( c) 17.50
Retained earnings 5.00 10.00 5.50 (2.75) 7.75
5.00 60.00 33.00 (12.75) 25.25
Income Statement
Sales 55.00 40.00 22.00 (30.25) (a ) 46.75
Cost of sales (50.00) (30.00) (16.50) 27.50 (b) (39.00)
Net profit 5.00 10.00 5.50 (2.75) 7.75
(a)
(b)
(c ) There is a disparaty in the amount of capital contributed by both of the parties to the joint
operation. Entity A has contributed 20% of monetary capital compared to the 80% contributed by
entity B. As this is a 55/45 joint venture, it is likely that entity A, which is entitled to 55% of the
45% of entity A's sales have in effect been made to entity B and these can continue to be recognized
by entity A. But 30,250 (55% x 55,000) of entity A's sales need to be eliminated and replaced by its
share of the sales made by the joint operation (22,000)
Similarly, 45% of entity A's cost of sales relates to sales made in effect to entity B, the other 55%
(that is, 27,500 being 55% of 50,000) relate to the goods sold to the joint operation at a profit
margin of 10% and these need to be eliminated. The balance of inventory of 31,000 is made of up
entity A's inventory and work in progress of 20,000 is made up of entity A's inventory and work in
progress of 20,000 together with the share outstanding in the joint operation of 13,750 (55% x
25,000), less the profit element included in this inventory of 2,750, which has been eliminated.

Accounting for Jointly Controlled Assets
ACCOUNTING
for
JOINTLY
CONTROLLED
ASSETS
Share in jointly controlled assets is
classified as assets rather than investment
Any liabilities that it has incurred jointly
with other venturers
Recognizes any shared incomes and
Expenses raised from the joint venture
Any expenses incurred by the venturer
solely in relation to its interests in JV

in its separate and consolidated financial statements a venturer
should recognize:
its share of the assets
any liabilities that it has incurred
its share of any liabilities incurred jointly with the other venturers in
relation to the joint venture, any income it receives from the joint venture
its share of any expenses incurred by the joint venture
any expenses that it has incurred in respect of its interest in the joint
venture

Example:
Entity A Entity B Entity C
45% 40% 15%
Jointly Controlled Asset -
offshore loading platform
The platform cost to construct (to be shared as per % ownership) 10,000,000
Construction was completed on 31 Dec. 20X0.
The platform operating costs per year 500,000
Total barrels of oil loaded each year from independent oil fields
of entities A, B and C 100,000
In the year to 31 Dec. 20X1
Entity A sold 40,000 barrels of oils costing each 250
Cost of inventory per barrel 200
Margin 50
Entity A, B and C are oil companies that together own and operate an offshore loading
platform.The platform is close to producing fields that they own and operate independently
from each other.Entity A, B and C agreed to share services and costs of operating the offshore
loading platform. Decisions regarding the platform require the unanimous agreement of the
Local regislation requires the dismantlement of the platform at the end of its 10-year useful,
economic life, resulting in a decommissioning liability of 800,000.

Accounting for Jointly Controlled Entity
ACCOUNTING
for
JOINTLY
CONTROLLED
ENTITY
Proportionate Consolidation
The equity method
Held for sale
Accounting Option:
Exception For:
Non-current asset held-for-sale
And discontinued operations
OR:
at the lower of its carrying amount,
and fair value less costs to sell

Held for sale
• restate the previous year’s comparatives and account
• from the date the jointly controlled entity was classified as held for sale
A held-for-sale can be no longer classified as held-for-sale, IF:
• any required adjustment to the carrying amount of a non-current asset
• in the period in which the criteria for being held-for-sale are no longer
met

Example:
Does the joint control exist if all parties hold the equal share ownership
in a company?

The Choice of Accounting Method
IAS 31 advocates proportionate consolidation over the equity
method because:
Portrays the venturer’s share of the joint venture activities;
Provides a broader and more comprehensive representation of the extent
of venturer’s operations and assets and liabilities;
Distinction to be made between entities that are jointly controlled and
those over which the investor has significant influence;
Caution - Applying a consistent accounting policy
An investor should be consistent in applying one policy for all jointly controlled
entities. It is not appropriate to use proportionate consolidation for certain types
of jointly controlled entities and equity account others.

Definition
“A method of accounting whereby a venturer’s share of each of the assets,
liabilities, income and expenses of a jointly controlled entity is combined line
by line with similar items in the venturer’s financial statements”
Similar to the preparation of consolidated financial statements;
B/S of the venturer includes its share of the assets and liabilities of the
jointly controlled entity;
The income statement includes its share of incomes and expenses of the
jointly controlled entity.
Difference from full consolidation:
Under full consolidation, the subsidiary’s assets, liabilities, revenues and
expenses are included in full
Other investors’ interests are reflected as a single figure in the balance
sheet and income statement as a non-controlling interest.
Reporting
Option
combine its proportionate interest in the individual line
items with those of itself
The venturer may present its proportionate interests
separately

Proportionate Consolidation in 50:50 joint venture (Example)
Where the jointly controlled entity has subsidiaries with a non-controlling
interest, the venturer’s share of the non-controlling interest would either be
included within the group non-controlling interest or disclosed as a separate line
item, depending on which of the two formats for proportionate consolidation is
adopted
A Corp B Corp
X Corp
50%50%
Asset Liabilities
1) Total Assets of A 1) Total Liabilities of A
2) 50% Total Assets of X 2) 50% Total Liabilities of X
Equity
1) Total Equity of A
2) 50% Total Equity of X
Proportionate Consolidation in A's Balance Sheet
Revenues:
Revenues from A operation
50% of revenues from X operation
Expenses:
Expenses from A operation
50% of expenses from X operation
Proportionate Consolidation in A's Income Statement
Whichever format is used to give 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 realization of the asset or the settlement
of the liability.” [IAS 31 para 35]

Proportionate Consolidation in 50:50 joint venture (Example-Continue)
The summarised balance sheets of A Limited and B Limited on 31 December 20X2

Assume A purchased its 25 per cent holding in B Limited some years ago when the retained
profits of B were £28 000, then the summarized of B Balance Sheet is as below:
The book values of the assets and liabilities of B at the date of acquisition should be
replaced by their fair values, or more precisely their value to the business, at that date.
However, for ease of exposition, we shall assume that the book values at the date of
acquisition were equal to their fair values.
• Goodwill exist: £10,000

Using proportional consolidation we would produce the following balance sheet, grouping
like items for the investing company and associate together on a line-by-line basis.

The Equity Method
Definition
“…. a method of accounting whereby the investment is initially recorded at
cost and adjusted thereafter for the post-acquisition change in the investor’s
share of net assets of the investee. The profit or loss of the investor includes
the investor’s share of the profit or loss of the investee.” [IAS 28 para 2]
The investment is stated as one line item, initially recognized at cost;
The carrying amount of the investment is increased or decreased:
to recognize the investor’s share of the profit or loss of the associate after the date of
acquisition
The investor’s share of the profit or loss of the associate is adjusted for the effect of
any fair value adjustment recognized upon initial recognition, and is recognized in the
investor’s income statement.
Any distributions received from the associate reduce the investment’s carrying
amount
Adjustments to the associate’s carrying amount may also be necessary for
changes in the investor’s proportionate interest in the associate that arises from
changes in the associate’s other comprehensive income, that have not been
recognized in the associate’s profit or loss.

The Equity Method
IAS 31 does not detail how the results of jointly controlled entities should be dealt
with in the cash flow statement
Guidance is found in IAS 7, “Cash Flow Statements”:
“An Entity which reports its interest in a jointly controlled entity using proportionate
consolidation, includes in its consolidated cash flow statement its proportionate
share of the jointly controlled entity’s cash flows. An entity which reports such an
interest using the equity method includes in its cash flow statement, the cash flows
in respect of its investments in the jointly controlled entity, and distributions and
other payments or receipts between it and the jointly controlled entity.” [IAS 7 para
38]”

The Equity Method
Example – Equity Method Accounting
Entity A acquired a 30% interest in entity C and achieved significant influence
Amount
Cost of the investment 250,000
Carrying amount of net assets of the associate at the
date of acquisition
500,000
Fair value of net assets of the associate at the date of
acquisition
600,000
The difference between fair value and carrying
amount, as the fair value of property, plant and
equipment (having remaining useful life of 10 years)
higher than its book value
100,000
After acquisition:
Entity C booked profit after tax 100,000
Dividends paid out of current profits 9,000
Entity C recognized exchange losses shown in other
comprehensive income
20,000

The Equity Method
Entity A’s interest in entity C at the end of the year is calculated as follows:
Calculation Amount
Goodwill calculation:
Cost of investment 250,000
Share of fair value of entity’s C net assets 30% x 600,000 180,000
Goodwill at the acquisition date 70,000
Calculation Amount
Balance of acquisition under the equity
method (including goodwill of 70,000)
250,000
Movement during the year:
Entity A’s share of entity C’s after-tax
profit
30% x 100,000 30,000
Elimination of dividend received by
entity A from entity C
30% x 9,000 (2,700)
Entity A’s share of entity C’s exchange
differences
30% x 20,000 (6,000)
Entity A’s share of amortization of the fair
value uplift
30% x (100,000/10
years)
(3,000)
Entity A’s interest in entity C at the end of
the year under the equity method
(including goodwill)
268,300

The Equity Method
Net assets in Entity C at the end of the year:
Reconciliation :
Amount
Net assets at the start of the year 500,000
Profit during the year 100,000
Less : dividends (9,000)
Less : foreign exchange losses (20,000)
Net assets at the end of the year 571,000
Calculation Amount
Entity A’s share of entity C’s net assets 30% x 571,000 171,300
Goodwill 70,000
Entity A’s share of entity C’s fair value
adjustments
30% x (100,000
initial fair value
difference – 10,000
depreciation of the
year)
27,000
Entity A’s interest in entity C 268,300

The Equity Method
In order to summarize:

Proportionate Consolidation v.s Equity Method

Goodwill and Fair Values
Acquired jointly controlled entities are initially recorded at the fair value of
the consideration. In preparing its consolidated financial statements:
The venturer recognizes its share of the jointly controlled entity’s
identifiable assets, liabilities and contingent liabilities at their fair values;
The carrying amount of the venturer’s investment and the venturer’s
share of equity in the joint controlled entity are eliminated;
Any excess of the fair value of the consideration given to acquire the
stake in the venture over the jointly controlled entity’s identifiable assets,
liabilities and contingent liabilities is goodwill;
Goodwill =
The Aggregate of:
• fair value of consideration transferred
• amount of any non-controlling interest
recognized;
• In a business combination achieved in
stages, the acquisition date fair value of the
acquirer’s previously held equity interest in
the acquiree
-
The assets and liabilities
recognized in accordance
with IFRS 3 “Business
Combinations”

Any goodwill in the jointly controlled entity’s own books is not an identifiable
asset and is ignored.
A venturer only recognizes separately an intangible asset if it meets the
definition of an intangible asset in IAS 38, “Intangible Assets” as below:
“an identifiable non-monetary asset without physical substance”
KEY CHARACTERISTICS OF INTANGIBLE ASSETS
resources controlled and expects
to derive future economic
benefits
Lack physical substance identifiable to be distinguished
from goodwill
Separable
From contractual or
other legal rights

RECOGNIZED AN ITEM AS INTANGIBLE ASSET IN
A FINANCIAL STATEMENT
Meets the definition of an
intangible asset
Meets the recognition crtiteria
probable that future economic
benefits will flow to the entity
cost of the asset can be
reliably measured
THE COST SHOULD BE
EXPENSED
If does not meet the
recognition criteria

Goodwill arising on the acquisition of a jointly controlled entity that is
proportionately consolidated is included with the group’s other goodwill on
the acquisition of subsidiaries. It is tested annually for impairment as
required by IAS 36 and the disclosure requirements of IFRS 3 are applied.
The treatment of goodwill under proportionate consolidation is different to
that under equity accounting;
In equity accounting, it is not treated as a separate asset, but instead
included within the equity accounted amount;
For equity accounted investments, the approach to impairment
testing is considered in paragraph 31 to 34 of IAS 28, “Investments in
Associates”

Share
A venturer has control over its share of future economic benefits
through its share of the assets and liabilities of the jointly controlled
entity;
The profit sharing arrangements between the venturers is the key;
Normal situations, the share is derived from the percentage holding in
shares to determine the profit sharing arrangements and dividends;
In other situations, the economic interest and other distributions may
differ from the shareholding;
When a joint venture is not directly owned by the investor but held
through a subsidiary, it is not appropriate to use the net method;
The investor proportionately consolidates its interest in JV using the full
percentage interest the subsidiary has in JV and then accounts for the
non-controlling interest in that interest in the joint venture  reflects the
fact that the investor has full control over the subsidiary
Example: a parent owns 80% of a subsidiary and that subsidiary owns
50% of a joint venture, the parent should proportionately consolidate 50%
of the joint venture and show a non-controlling interest of 10% (50% x
20%)

Preference Share
IAS 31 refers to IAS 27 for the procedures appropriate for the
application of the equity method;
IAS 27 (revised) requires that:
“If a subsidiary has outstanding cumulative preference shares that are
classified as equity and are held by non-controlling interests, the parent
computes its share of profits or losses after adjusting for the dividends on
such shares, whether or not dividends have been declared.” [IAS 27 para
36; IAS 27(revised) para 29];
The standard requires this because if the venturer is not the holder
of the preference shares, the venturer is not entitled to a share of the
profits or losses that are used to pay the preference dividend
Example:

Options, Convertible Shares (Debt)
When the venturer holds share warrants, options, and convertibles in its
jointly controlled entity, these should not be taken into account in
determining the venturer’s share to proportionally consolidate.
Although the standard itself is silent on this point, the standard does refer
to IAS 27, “Consolidated and Separate Financial Statements”, for the
procedures appropriate for the application of the equity method and this
conclusion can be reached from para 19 of IAS 27, which says:
“When potential voting rights exist, the proportions of profit or loss and
changes in equity allocated to the parent and non-controlling interests are
determined based on present ownership interests and do not reflect the
possible exercise or conversion of potential voting rights”. [IAS 27 para
19]”
In addition, the implementation guidance on potential voting rights notes
that it accompanies not only IAS 27 and IAS 28 but also IAS 31
The implications of potential voting rights are considered further in
Course Series “Mergers & Acquisitions : Financial Reporting (IFRS 3)
and Taxation” October 19-20, 2011, and “Consolidation Reporting (IAS
27)” November 9, 2011.

Intra-group Balances
The application of proportionate consolidation means that the venturer’s
consolidated balance sheet includes its share of the assets and liabilities,
which it jointly controls.
IAS 27 requires intra-group balances to be eliminated in full [IAS 27 para
20]. In proportionate consolidation, intra-group balances should be
eliminated to the extent of the venturer’s interest in the jointly controlled
entity;
The remaining intra-group balance that has not been eliminated should be
presented separately.
Reason: The venture is being accounted for by proportionate not full
consolidation
Example – Elimination of intra-group liability on proportionate
consolidation.

Normal Trading Transactions
A venturer may sell assets to a joint venture or may acquire assets from a
joint venture in the course of the venturer’s normal operations
The recognition of any gain or loss from this transaction should reflect its
substance [IAS 31 para 48]
any gain arising on the transaction is recognized only to the extent of
the equity interest of other venturers and investors.
IAS 27 requires that in full consolidation, intra-group transactions be
eliminated completely, but This is not the case for proportionate
consolidation
IAS 31 requires that when a venturer sells an asset to a jointly controlled
entity and has transferred the asset’s risks and rewards of ownership,
while the assets sold are retained by the jointly controlled entity, any gain
arising on the transaction is recognized only to the extent of the equity
interest of other venturers and investors.
The accounting for assets sold at a loss is similar

Normal Trading Transactions
In assessing whether the transaction provides evidence of impairment, the
venturer determines the asset’s recoverable amount under IAS 36,
“Impairment of Assets
In determining value in use, future cash flows from the assets are
estimated based on the asset’s continuing use and its ultimate disposal by
the jointly controlled entity
The share of the profit is deducted from the carrying value of the asset in
the venturer’s financial statements until the venturer realizes the gain by
selling the asset
When a venturer purchases an asset from a jointly controlled entity and
the transaction gives rise to a loss in the jointly controlled entity, IAS 31
requires the venturer to not recognize its share of the loss on the
transaction unless the transaction is evidence that the asset should have
impaired or written down to net realizable value in the jointly controlled
entity

Transfer of Assets to Jointly Controlled Entity
Same with the recognition criteria when a venturer purchases (sells)
assets from (to) jointly controlled entity
However, there are exceptions to the general rules in IAS 31, which
are addressed in SIC 13, “Jointly Controlled Entities – non-monetary
contributions by venturers”. If any of the exceptions apply, the gains
or losses are considered unrealized
SIC 13 identifies three instances when it may not be appropriate for a
venturer to recognize a gain or loss on a non-monetary contribution,
because the gain or loss is not realized
The significant risks and rewards of ownership of the contributed non-
monetary assets have not been transferred to the jointly controlled
entity
The gain or loss arising can not be measured reliably
The contribution transaction lacks commercial substance
If the future cash flows are expected to change significantly as a result of
the transaction
Compares the expected future cash flows from its interest in the jointly
controlled entity to those that it would have received from the asset
transferred

However, if a venturer received monetary or non-monetary assets as well
an equity interest in the jointly controlled entity, an appropriate portion of
gain or loss resulting from this transaction should be recognized by the
venturer in profit or loss
In principle, when a venturer transfers assets to the joint venture in
exchange for an equity interest in the joint venture, the accounting is the
same as that for transactions in the normal course of operations between
a venturer and a jointly controlled entity. Gains or losses are recognized in
income by the venturer to the extent of the equity interest of other
venturers and investors at the time of the contribution
The consideration received for the assets contributed is the value of
the equity interest received in the jointly controlled entity. This is
compared to the book value of the assets contributed. Any resultant
gain or loss is recognized only to the extent of the other venturer’s
interest (this is the portion that is considered to be realized)

The contributions by the venturers for an equity in the jointly controlled
entity may take various forms i.e. cash or other assets
Under SIC 13, when a joint venture is formed, the entity must record the
assets contributed at fair value, however, where a business is contributed,
the joint venture has a choice of accounting policy and may either:
Record the business contributed at fair value, including goodwill, or,
At the previous carrying amounts in the financial statements of the
venturers

Assets or Business Contributions on JV Formation
How a joint venture should account for assets contributed to it by the
venture partners upon formation? Should assets be recorded at fair value,
or on a predecessor basis in the separate financial statement of the joint
venture?
According to IFRS 2 and 3:
record the business contributed at fair value, including goodwill, or
At the previous carrying amount in the financial statement of the
venturer
The IFRS 2 scope exemption relates only to the formation of a joint
venture, therefore, subsequent contributions of assets or businesses to a
joint venture may be within IFRS 2’s scope
IFRS 2 requires that the goods acquired by issuing equity
instruments should be recognized at fair value

Acquisitions and Disposals of JV
Acquisition Rule
Jointly controlled entity is established as joint venture by the venturers–
initially recorded at the cost of the amount invested on establishment
The venturer acquires a stake in the business and joint control
simultaneously – are recorded at the cost to acquire the relevant stake
If one investor already holds a fifty per cent stake, another investor might
acquire an additional investment in the entity to bring its voting rights to
50%, and they form a contractual agreement, thus enabling it to have
joint control
The percentage interest remains the same, but the arrangements change
from significant influence to joint control
Accounting treatment where an investment in a jointly controlled entity is
acquired in stages
In some cases, a venturer may obtain joint control of an investee through
the exercise of a forward contract, or call option over the investee’s
shares

Disposal Rule
a venturer discontinues the use of the proportionate consolidation
method or equity accounting from the date on which it ceases to have
joint control over a jointly controlled entity
Loss of joint control may happen
when the venturer disposes of its interest or
when restrictions are placed on the jointly controlled entity such that
the venturer no longer has joint control
When joint control ceases, the interest becomes:
A subsidiary – the investor would account for its interest in
accordance with IAS 27
An associate – IAS 28
An investment – IAS 39

Disposal Rule
When an investor loses joint control of an investee, the investor
measures any retained investment at fair value. The investor has to
recognize in profit or loss, any difference between:
The fair value of any retained investment and any proceeds from
disposing of the part interest in the jointly controlled entity; and
The carrying amount of the investment at the date when joint control
is lost
The fair value of the investment at the date when it ceases to be a jointly
controlled entity will be its fair value on initial recognition as a financial
asset in accordance with IAS 39
The effect of this is that the gain or loss recognized in the income
statement on the disposal will be the same as if all of the investment
had been sold. A similar re-measurement would be undertaken
where an investment ceases to be a jointly controlled entity and is
accounted for as an associate under IAS 28

Disposal Rule
The re-measurement is triggered by the loss of joint control as opposed
to a change in stake. Therefore, re-measurement will occur whether the
loss of joint control occurs as a result of events, transactions or other
changes in circumstance
The investor accounts for all amounts recognized previously in other
comprehensive income in relation to that entity in the same way as if the
jointly controlled entity had disposed of the related assets or liabilities
The standard gives an example, where a jointly controlled entity has
available-for-sale financial assets and the investor loses joint control of
the entity. The investor reclassifies to profit or loss the gain or loss
previously recognized in other comprehensive income in relation to those
assets
If an investor’s ownership interest in a jointly controlled entity is reduced,
but the investment continues to be a jointly controlled entity, the investor
reclassifies to profit or loss a proportionate amount of the gain or loss
previously recognized in other comprehensive income

Disposal Rule
Where a jointly control entity has been equity accounted and it becomes
an associate, the equity method remains appropriate
Only if the investor ceased to have significant influence would the
accounting change
The standard states:
“A venturer shall discontinue the use of the equity method from the
date on which it ceases to have joint control over, or have significant
influence in, a jointly controlled entity.[IAS 31 para 41]”

Financial Analysis and Interpretation
Entities can form joint ventures in which none of the entities own
more than 50 percent of the voting rights in the joint venture
This enables every member of the venturing group to use the equity
method of accounting for unconsolidated affiliates to report their share of
the activities of the joint ventures. They can also use proportionate
consolidation—and each one need not use the same method
use th e equity method, joint ventures enable firms to report lower debt-
to-equity ratios and higher interest coverage ratios, although this does
not affect the return on equity
Forming joint ventures also affects the cash flow reported by the
sponsoring group of firms. When the equity method of accounting for
jointly controlled entities is used, monies exchanged between a parent
and the jointly controlled entities are reported as income or expenses,
whereas in consolidation accounting any cash flows that are internal to
members of the consolidated group are not reported separately

Example:
Electro Inc
Techno Inc
30%
40%
30%
Mechan Inc Civil Inc

Mechan Inc. sold inventories with an invoice value of $600,000 to Techno
Inc. during the year.Included in Techno Inc.’s inventories June 30, 20X1, is
an amount of $240,000, which is inventory purchased from Mechan Inc. at
a profit markup of 20 percent. The income tax rate is 30 percent.
Techno Inc. paid an administration fee of $120,000 to Mechan Inc. during
the year. This amount is included under “Other operating income.”
In order to combine the results of Techno Inc. with those of Mechan Inc.
the following issues would need to be resolved:
Is Techno Inc. an associate or joint venture for financial reporting
purposes?
Which is the appropriate method for reporting the results of Techno in
the financial statements of Mechan?
How are the above transactions between the entities to be recorded
and presented for financial reporting purposes in the consolidated
income statement?

First issue
The existence of a contractual agreement, whereby the parties involved
undertake an economic activity subject to joint control, distinguishes a joint
venture from an associate. No one of the ventures should be able to
exercise unilateral control
However, in the event that no contractual agreement exists, the
investment would be regarded as being an associate because the
investor holds more than 20 percent of the voting power and is
therefore presumed to have significant influence over the investee
Second Issue
• If Techno Inc. is regarded as a joint venture, the proportionate
consolidation method or the equity method must be used. However, if
Techno Inc. is regarded as an associate, the equity method would be used

Third issue
The proportionate consolidation method is applied by adding 40 percent of
the income statement items of Techno Inc. to those of Mechan Inc
The recording of consolidation is as below:

Third issue
The administration fee is eliminated by reducing other operating income
with Mechan Inc.’s portion of the total fee, namely $48,000, and
reducing operating expenses accordingly. The net effect on the
consolidated profit is nil

Third issue

Accounting for Jointly Controlled Entities as
Passive Investments
Although the expectation is that investments in jointly controlled entities
will be accounted for by the proportionate consolidation or equity method
(the benchmark and allowed alternative treatments, respectively), in
certain circumstances the venturer should account for its interest following
the guidelines of IAS 39, that is, as a passive investment.
The prescription when the investment has been acquired and is being
held with a view toward disposition within twelve months of the
acquisition, or
Value of venturers is derived from the change in fair value and
not from the operating results
The investee is operating under severe long-term restrictions that
severely impair its ability to transfer funds to its venturer owners,
inability to transfer funds would mean that the venture partners
would be unable to obtain any benefit, in the short run at least,
from their investment in the jointly controlled entity
As amended by IAS 39, IAS 31 provides that in the separate financial
statements of an investor that issues consolidated financial statements as
well, the cost method may alternatively be employed to present the
investment in the joint venture

Change from Joint Control to Full Control Status
If one of the venturers’ interest in the jointly controlled entity is increased:
whether by an acquisition of some or all of another of the
venturers’ interest , or
by action of a contractual provision of the venture agreement
(resulting from a failure to perform by another venturer
Therefore, with state of conditions above, proportionate consolidation
method of accounting ceases to be appropriate and full consolidation will
become necessary

Accounting for Transaction between Venture
Partner and Jointly Controlled Entities
Transfer at a Gain to the Transferor
At general, underlying principle of financial reporting is that earnings
are to be realized only by engaging in transactions with outside
parties. Thus, gains cannot be recognized by transferring assets (be
they productive assets or goods held for sale in the normal course of
the business) to a subsidiary, affiliate, or joint venture, to the extent
this really would represent a transaction by an entity with itself
Were this not the rule, entities would establish a range of related
entities to sell goods to, thereby permitting the reporting of
profits well before any sale to real, unrelated customers ever
took place. The potential for abuse of the financial reporting
process in such a scenario is too obvious to need elaboration
IAS 31 stipulates that when a venturer sells or transfers assets to a
jointly controlled entity, it may recognize profit only to the extent that
the venture is owned by the other venture partners, and then only to
the extent that the risks and rewards of ownership have indeed been
transferred to the jointly controlled entity
The logic is that a portion of the profit has in fact been realized,
to the extent that the purchase was agreed on by unrelated
parties that jointly control the entity making the acquisition

Example 1: Trading transactions between a venturer and its jointly
controlled entity

controlled entity
Entity B's books:
Calculation Amount
Gain on disposal of warehouse 70,000 x 45%= 31,500
Warehouse - proportionately consolidated 150,000 x 55%= 82,500
Less : unrealized portion of the gain on disposal (38,500)
Net 44,000
consisting of:
Original book value of the warehouse 80,000
Entity B's share (55%) of original book value of the warehouse 44,000
When the warehouse is sold by entity A or as it is depreciated, the eliminated
profit of 38,500 above can be recognized.
Note : this treatment is the same whether the asset sold is inventory or
property, plant and equipment. The only difference is that inventory is likely
to be sold sooner and so the eliminated gain is likely to be recognized sooner.

controlled entity
For example, the warehouse is depreciated over 10 years of remaining useful life.
Carrying amount of the warehouse 150,000
Depreciation per year 10 years (15,000)
At the end of 20X2,
the carrying amount of the warehouse will be 135,000
Entity B's interest of the warehouse 55% x 135,000= 74,250
The unrealized gain of 38,500 is amortized in proportion to
the depreciation charged by entity A 3,850
Remaining unrealized gain on disposal 38,500 - 3,850= 34,650
Warehouse - net carrying amount:
the carrying amount of the warehouse 135,000
Entity A's interest in the carrying amount
of the warehouse 55% x 135,000= 74,250
less the unrealized gain on disposal (34,650)
39,600

controlled entity
This is equal to:
The original net carrying amount of the warehouse 44,000
Less : depreciation in year 1 (4,400)
Net 39,600
If the warehouse were sold to entity A for 10,000:
Selling price 10,000
Book value of the warehouse 80,000
Loss on disposal (70,000)
The loss may provide evidence that the warehouse was impaired prior to the sale.
If the is the case, the loss of 70,000 would be recognized as an impairment in
entity A's books prior to the asset disposal.

Example 2: Venturers A, B, and C jointly control venture D (each
having a 1/3 interest), Venturer A sells equipment to the venture
Venturer A
Calculation Amount
Book value 40,000
Gain 60,000
Gain recognized in the profit and loss statement 2/3 x 60,000 40,000
Unrealized gain 1/3 x 60,000 20,000
Venturer A’s statement of financial position
Calculation Amount
Equipment 100,000
Share of the equipment 1/3 x 100,000 33,333
Minus : unrealized gain (20,000)
Net 13,333
This is the same with:
Book value (pre-transaction) 40,000
Share of the equipment 1/3 x 40,000 13,333

If the asset is subject to depreciation, the deferred gain on the
transfer (1/3 * 60,000 = 20,000) would be amortized in proportion to
the depreciation reflected by the venture, such that the depreciated
balance of the asset reported by A is the same as would have been
reported had the transfer not taken place;
Example: assume that the asset has a useful economic life of five
years after the date of transfer to D
Calculation Amount
Deferred gain 20,000
Useful economic life of the equipment 5 years
Depreciation per year 20,000/5 4,000
At end of the first post-transfer year:
Net carrying value 100,000 – 20,000 80,000
Entity A’s proportionate interest 1/3 x 80,000 26,667
The unamortized balance of the deferred
gain
20,000 - 4,000 16,000
The net reported amount of A’s share of the
jointly controlled entity’s asset
10,667
Entity A reporting the remaining share of its
asset
1/3 x (40,000 –
8,000)
10,667

Transfer of Asset at a Loss
When a transfer is at an amount below the transferor’s carrying value
is not analogous; rather, such a transfer is deemed to be
confirmation of a permanent decline in value, which must be
recognized by the transferor immediately rather than being deferred
the conservative bias in accounting: Unrealized losses are often
recognized, while unrealized gains are deferred
Example: Assume that venturer C (a 1/3 owner of D) transfers an
asset
Venturer C
Calculation Amount
Book value 150,000
Loss 30,000
Venturer C must recognize the full 30,000 at the
time of the transfer
Venturer C will recognize 1/3 interest in the asset
held by entity D
1/3 x 120,000 40,000

Accounting for Assets Puchased from a Jointly
Controlled Entities
A similar situation arises when a venture partner acquires an asset
from a jointly controlled entity: The venturer cannot reflect the gain
recognized by the joint venture, to the extent that this represents its
share in the results of the venture’s operations
Example: Assuming that A, B, and C jointly own D. Entity D sells an
equipment to venturer B
Calculation Amount
Book value of asset 200,000
Gain on sale 75,000
B’s portion of the gain (this violates the
realization concept under GAAP)
1/3 x 75,000 25,000
Venturer B
Purchase cost 275,000
Less : Deferred gain (25,000)
Net carrying value 250,000
Original book value of the equipment 200,000
The increase in value realized by venturer A and
C
2/3 x 75,000 50,000
Total 250,000

Controlled Entities
Calculation Amount
As the asset is depreciated, the deferred gain
will be amortized as well
Purchase cost in venturer B 275,000
Deferred gain (25,000)
Net carrying amount 250,000
Useful life of the asset in venturer B 10 years
Annual depreciation of the asset 275,000/10 years 27,500
Annual amortization of the deferred gain 25,000/10 years 2,500
At the end of the first year:
The carrying value of the asset 275,000 – 27,500 247,500
The unamortized balance of the deferred gain 25,000 – 2,500 (22,500)
The net carrying value, after offsetting the
remaining deferred gain
225,000
This corresponds to: 9/10 x 250,000 225,000
The amortization of the deferred gain should be credited to
depreciation expense to offset the depreciation charged on the nominal
acquisition price and thereby to reduce it to a cost basis as required by
GAAP

Transfer at a Loss to the Transferor
If the asset was acquired by B at a loss to D, on the other hand, and
the decline was deemed to be indicative of an other-than-temporary
diminution in value, B should recognize its share of this decline;
Example: Entity D sells an asset to venturer B
Controlled Entities
Calculation Amount
Book value of asset 50,000
Loss on sale 6,000
Venturer B will recognize a share of the loss 1/3 x 6,000 2,000
Note : this loss will not be deferred and will not
be added to the carrying value of the asset in
venturer B’s books.
Venturer B will report the asset at its acquisition
cost
44,000

Entity A enters into a joint venture with entity B. Their relative
interests in the jointly controlled entity are to be 60% and 40%,
respectively
The two venturers agree to contribute businesses as follows
Venture Transfers a Business to A Joint Venture in
Exchange for Equity Interest
Entity A Entity B Total
Book value of net identifiable assets (including
goodwill)
100 100 200
Fair value of net identifiable asset 200 150 350
Fair value of associated goodwill 100 50 150
Total fair value 300 200 500
Entity A uses equity accounting for jointly controlled entity
Entity B proportionately consolidates jointly controlled entity

Entity A: Equity Method
Entity A goodwill calculation
Calculation Amount
Fair value of A’s business sold to the other
venturer B and contributed to joint venture
300 x 40% 120
Fair value of net identifiable assets acquired from
the other venturer B
150 x 60% 90
Entity A goodwill 30
Entity A gain in consolidated financial
statements
Calculation Amount
Fair value of business acquired from joint venture 200 x 60% 120
Book value of business contributed to joint
venture
100 x 40% 40
Entity A gain on disposal 80

Entity A gain in separate financial statements
Calculation Amount
Fair value of equity interest 500 x 60% 300
Book value of business disposed of (contributed
to joint venture)
100
Entity A gain on disposal in separate financial
statements
200
Reconciliation with Entity A gain on disposal
shown in the consolidated financial statements
200 x 40% 80
The unrealized gain eliminated against the
200 - 80 120

Amount of Equity Interest in Consolidated
Financial Statements
Calculation Amount
Carrying amount of investment 200 + 100 300
Unrealized gain eliminated 120
Net 180
Or
60% of the old business retained, which had a
book value of 100
100 * 60% 60
60% of FV of business contributed by entity B to
joint venture of 200
200 x 60% 120
Total 180
Note : the balance will be shown as an investment
in joint venture on the balance sheet and includes
the 30 of goodwill.

Entity B: Proportionate Consolidation
Entity B goodwill calculation
Calculation Amount
Fair value of B’s business sold to the other
venturer A and contributed to joint venture
200 x 60% 120
Fair value of net identifiable assets acquired from
the other venturer A
200 x 40% 80
Entity B goodwill 40
Entity B gain in consolidated financial
statements
Calculation Amount
Fair value of business acquired from joint venture 300 x 40% 120
Book value of business contributed to joint
venture
100 x 60% 60
Entity B gain on disposal 60

Entity B gain in separate financial statements
Calculation Amount
Fair value of equity interest 500 x 40% 200
Book value of business disposed of (contributed
to joint venture)
100
Entity B gain on disposal in separate financial
statements
100
Reconciliation with Entity B gain on disposal
shown in the consolidated financial statements
100 x 60% 60
The unrealized gain eliminated against the
100 - 60 40

Amount of Equity Interest in Consolidated
Financial Statements
Calculation Amount
Carrying amount of investment 150 + 50 200
Unrealized gain eliminated 40
Net 160
Or
40% of the old business retained, which had a
book value of 100
100 * 40% 40
40% of FV of business contributed by entity A to
joint venture of 300
300 x 40% 120
Total 160
Note : the balance will be shown as an investment
in joint venture on the balance sheet and includes
the 40 of goodwill.
Consisting of:
Goodwill 40
Book value of the original assets 100
Assets acquired 80
Less : assets disposed of (60) 160
Or
Fair value of the equity interest received 500 x 40% 200
Less : the unrealized gain (40)
Net 160

Journal entry shown in entity B’s consolidated financial statements
Dr/(Cr) Account Amount Description
Dr Net Assets 80 Acquisition of 40% of entity
A’s assets contributed to the
joint venture at fair value
Dr Goodwill 40 See above calculation
Cr Gain on disposal 60 See above calculation
Cr Net assets 60 Disposal of 60% of entity B’s
assets contributed to the joint
venture at book value

In Exchange for an Interest in a Joint Venture
Transactions through which companies form joint ventures and
where each party has contributed businesses have become
increasingly common
Under SIC 13, when a joint venture is formed :
the jointly controlled entity must record the assets contributed
at fair value
where a business is contributed to the jointly controlled entity,
the jointly controlled entity has a choice of accounting policy:
may either record the business contributed at fair value,
including goodwill, OR
record the business contributed at the previous carrying
amounts in the financial statements of the venturers

Disposal of a subsidiary for an interest in a
joint venture
Example: Entity A owns 100% of entity B. Entity C owns 100% of
entity D
Entity B Entity D
Book value of entity’s net assets 400,000 300,000
Fair value of entity’s net assets 600,000 400,000
Goodwill on the acquisition of entity 150,000 0
Book value of impaired goodwill 100,000 0
Fair value of entity’s business 800,000 800,000
A new joint venture entity, Newco, is formed into which entities A and C
contribute the businesses of entities B and D, respectively, and each of
entity A and entity C receives shares in Newco giving each a 50% share

joint venture
Example: Entity A owns 100% of entity B. Entity C owns 100% of
entity D
One of the Options: Fair Value Balance Sheet
Calculation Amount
Net assets (at fair value) 600,000 + 400,000 1,000,000
Goodwill 600,000
Total 1,600,000
Equity 1,600,000
Equity represents
Fair value of the entity B’s business 800,000
Fair value of the entity D’s business 800,000

joint venture
SIC 13 principles – Entity A may apply this model as a policy option
only if the resulting entity is a jointly-controlled entity as defined in
IAS 31
Entity A
Calculation of gain/(loss) on disposal of 50% of
entity B
Calculation Amount
Share of net assets disposed of at book value 50% x 400,000 200,000
Share of goodwill disposed of 50% x 100,000 50,000
Total 250,000
Share of value of entity D received as
consideration (fair value of consideration being
half of fair value of entity D’s business)
400,000
Gain on disposal 150,000

joint venture
Calculation of goodwill on acquisition of 50%
of entity D
Calculation Amount
Value of half of business of entity B given up 400,000
Fair value of net assets acquired 50% x 400,000 200,000
Goodwill arising 200,000
IAS 27 – Entity A may apply this model or the SIC 13 principles model
above as a policy option if the resulting interest is a jointly-controlled
entity as defined in IAS 31
SIC 13 principles – Entity A may apply this model as a policy option
only if the resulting entity is a jointly-controlled entity as defined in
IAS 31
Entity A

joint venture
Under the principles set out in IAS 27, entity A will also recognize a
gain on the re-measurement of the retained interest in entity B to its
fair value given it has lost control of entity B
entity B
Calculation Amount
Gain on disposal See above 150,000
Calculation of gain/(loss) on re-measurement of
retained earnings in entity B
Share of net assets retained at book value 50% x 400,000 200,000
Share of goodwill retained 50% x 100,000 50,000
Book value of retained interest in entity B 250,000
Fair value of retained interest in entity B
(assuming proportional to the fair value)
50% x 800,000 400,000
Gain on re-measurement of retained interest in
entity B
150,000
Total gain recognized by entity A 300,000
SIC 13 principles – Entity C may apply this model as a policy option only if
the resulting interest is a jointly-controlled entity as defined in IAS 31

joint venture
SIC 13 principles – Entity C may apply this model as a policy option
only if the resulting interest is a jointly-controlled entity as defined in
IAS 31
entity D
Calculation Amount
Share of net assets disposed of at book value –
assuming no goodwill in books of entity C
50% x 300,000 150,000
Share of value of entity B received as
consideration (fair value of consideration being
half of fair value of entity B’s business)
400,000
of entity B
Calculation Amount
Value of half of business of entity D given up 400,000
Goodwill arising 100,000

joint venture
IAS 27 – Entity C may apply this model or the SIC 13 principles model above
as a policy option if the resulting interest is a jointly-controlled entity as
defined is IAS 31
Under the principles of IAS 27, entity C also recognizes a gain on the re-
measurement of the retained interest in entity D to its fair value given it has
lost control of entity D
The gain or loss arising on acquisition of its
50% share in Newco
Calculation Amount
Gain on disposal of 50% of entity D – calculation
is the same as above
250,000
Calculation of gain/(loss) on re-measurement of
retained interest in entity D:
Share of net assets retained at book value –
assuming no goodwill for entity C
50% x 300,000 150,000
Fair value of retained interest in entity D
50% x 800,000 400,000
entity D
250,000
Total gain recognized by entity C 500,000

Disposal of a subsidiary in exchange for an
interest in a JV, others contribute cash
Fair value balance sheet
Entity B Entity D
Book value of entity’s net assets 400,000 300,000
Fair value of entity’s net assets 600,000 400,000
Goodwill on the acquisition of entity 150,000 0
Book value of impaired goodwill 100,000 0
Fair value of entity’s business 800,000 500,000
Entity pays in cash into the joint venture 300,000
Calculation Amount
Net assets at fair value (excluding cash) 600,000 + 400,000 1,000,000
Cash 300,000
Goodwill 300,000
Total 1,600,000
Equity 1,600,000
Equity represents
Fair value of the entity B’s business 800,000
Fair value of the entity D’s business 800,000

SIC 13 principles – Entity A may apply this model as a policy option only if
IAS 27 – Entity A may apply this model or the SIC 13 principles model above
as a policy option only if the resulting interest is a jointly-controlled entity as
defined in IAS 31
If IAS 27 is followed, the retained interest in entity B would also be re-
measured to fair value resulting in a gain on re-measurement of 150,000,
calculated consistently with the above
• Total gain recognized on the transaction by entity A would be 300,000
entity B
Calculation Amount
Share of value of entity D received 50% x 800,000 400,000
Share of net assets and goodwill disposed of (at
book value)
50% x 500,000 250,000

of entity D
Calculation Amount
Value of half of business of entity B given up 50% x 800,000 400,000
Share of cash 150,000
350,000
Goodwill 50,000
SIC 13 principles – Entity C may apply this model as a policy option only if
entity D
Calculation Amount
Share of value of entity D received 50% x 300,000 150,000
Cash 50% x 300,000 150,000
300,000
Share of value of entity B received as
consideration
400,000

IAS 27 – Entity C may apply this model as a policy option only if the
resulting interest is a jointly-controlled entity as defined in IAS 31
If the IAS 27 model is followed, the retained interest in
Calculation Amount
Calculation of gain/(loss) on re-measurement
of retained interest in entity D:
Book value of the interest retained 50% x 300,000 150,000
Fair value of retained interest in entity D
50% x 500,000 250,000
entity D
100,000
Total gain recognized by entity C 200,000
of entity B
Calculation Amount
Value of half of businesses and cash contributed 50% x (500,000
+300,000)
400,000
Goodwill 100,000

Proof:
Calculation Amount
Entity A starts with :
Net assets in entity B 400,000
Goodwill in entity B 100,000
500,000
Entity A finishes with:
A share of assets of Newco of half of the book
value of assets contributed by entity A
50% x 400,000 200,000
Half of the fair value of the assets contributed by
entity C
50% x 400,000 200,000
Half of the cash contributed by entity C 50% x 300,000 150,000
Total 550,000
Net gain 50,000
Plus : goodwill that entity A retains relating to
entity B
50,000
Total gain 100,000
Goodwill (50,000)
Net 100,000

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