ACCT 6010 Advanced Financial Reporting
Accounting for joint arrangements
The University of 1
Learning objectives
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Learning objectives:
After completing this topic students should be able to
1. Demonstrate understanding of the definitions of joint arrange- ments, joint venturer, party to joint arrangement & joint control
8.1, 8.2 & 8.3
2. Identify the differences between a joint venture and joint operation
8.3.6 & 8.3.7
3. Prepare accounting entries to adopt the line by line method
4. Evaluate the financial reporting effects of the line by line method
8.5; Graham, King & Morrill
5. Identify the AASB 12 disclosure requirements for joint arrangements
8.9 & AASB 12
6. Critically evaluate the accounting requirements for joint arrangements
So et al & “In the headlines”
The University of 2
LS CLASS 12 1
– Arthur et al. 8th , Chapter 8 – 2019 Accounting Handbook
– AASB 11 Joint Arrangements (July 2015)
– AASB 128 Investments in Associates and Joint Ventures
– AASB 124 Related Party Disclosures paras 9(b), 18 & 19
– AASB 12 Disclosure of Interests in Other Entities paras 20-23, B12 & B16
– Course pack Topic 10 materials
– “In the headlines” KPMG May 2011, Issue 2011/15
– Graham, King and Morrill (2003)
– So, Wong, Zhang and Zhang (2018)
The University of 3
1. Overview of equity accounting – Types of investment
Fair Value through OCI
The University of
significant influence
Joint Venture
Joint Operation
joint control
Subsidiary
Fair Value AASB 9 (ACCT6001)
Equity accounting AASB 128 (week 11&12)
Line-by-line method (week 12)
Consolidation AASB 10 (week 1-10)
LS CLASS 12 2
BlueScope Steel: Investment in joint ventures
The University of 6
1. Definitions
Joint arrangements
– “a joint arrangement is an arrangement of which two or more parties have joint control” [AASB 11.4 and AASB 128.3]
– Used for large projects in mining, property development & construction industries as projects require varying degrees of management, resources & finance
Joint venturer
– “is a party to a joint venture and has joint control over that joint venture” [AASB 11 Appendix A; AASB 128.3]
The University of 7
LS CLASS 12 3
1. Definitions (cont.)
Party to a joint arrangement
“An entity that participates in a joint arrangement regardless of whether that entity has joint control of the arrangement”
[AASB 11 Appendix A]
Joint control
“is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control”
[AASB 11.7 & AASB 128.3]
The University of 8
1. Definitions (cont.) – Joint Control
Assessing joint control
– Professional judgment & an understanding of the substance of the arrangement is required [AASB 11.8-12 & B5-B8]
– The following situations are excluded when a party:
– is able to control the arrangement – subject to AASB 10
– only has protective rights and does not make decisions about
relevant activities of the arrangement
– When the arrangement is not a joint arrangement for an entity
their investment is subject to the AASB 10, AASB 128 or AASB 9
[AASB 11.23, AASB 11.25 & B11]
vRefer to Application Examples directly under AASB 11.B8
The University of 9
LS CLASS 12 4
2. Joint arrangement – Contractual arrangement
Joint arrangement agreement
Must have:
1. Contractual agreement between the parties that establishes a joint arrangement; and
2. Clauses in the agreement that allows 2 or more of the parties to the joint arrangement joint control of the arrangement [AASB 11.5]
The University of 10
2. Joint arrangements – Contractual arrangement (cont.)
Refer to joint arrangement agreements to identify :
– What the joint arrangement will do & for how long
– Responsibility for management
– Contribution of funds
– Joint control details including appointment, decision making process and voting rights of joint venturers
– How the assets, liabilities, revenues, expenses or profit of the joint arrangement will be shared
[AASB 11.B4]
The University of Sydney
Ø Complete Arthur et al. Q8.6
LS CLASS 12 5
2. Joint arrangements – Types
– Joint arrangements are classified as either a “joint venture” or a “joint operation” depending upon the rights and obligations of the parties to the joint arrangement [AASB 11.14]
– Financial statement preparers need to consider structure, legal form of each structure, terms of contractual agreement and other relevant facts & circumstances [AASB 11.B15]
– Joint operation: Joint operators have joint control, rights to the assets and obligations for the liabilities of the joint arrangement [AASB 11.15]
– Joint venture: Joint venturers have joint control and rights to the net assets of the joint arrangement [AASB 11.16]
The University of 12
2. Joint arrangements – Types (cont.)
Joint venture
– If assets and liabilities of a joint arrangement are held in a separate vehicle the arrangement can be either a joint operation or a joint venture [AASB 11.B19]
– Separate vehicle can be a company, partnership or trust
– Corporate form is often used when limited liability is an issue as a
entity can enter into contracts in its own name & borrow funds
– Usually share profits but venturers’ can share in output
– Joint ventures maintain accounting records to prepare its own
financial statements
– Contributions are recognised by joint venturers as “Investment in
Joint Ventures” [AASB 11.24]
vRefer to AASB 11 Illustrative Examples 2, 4 & 6
The University of 13
LS CLASS 12 6
2. Joint arrangements – Types (cont.)
Joint operation
– Ifassetsandliabilitiesofajointarrangementarenotheldinaseparate vehicle it is a “joint operation” [AASB 11.B16]
– Ifassetsandliabilitiesofajointarrangementareheldinaseparate vehicle we need to assess the terms and conditions to determine the rights, obligations & classification of joint operation [AASB 11.B21]
– Usesjointoperators’assets&resources
– Eachjointoperatorundertakestheirownborrowings
– Maintainsaccountingrecordstopreparefinancialstatementsforinternal
management purposes only
– Jointoperatorrecognisesassetsitjointlycontrols,expenses&liabilitiesit
incurs & share of sales revenue or joint operation output [AASB 11.20] v Refer to AASB 11 Illustrative Examples 1, 3 & 5
The University of 14
2. Joint arrangements – Types (cont.)
Structure of joint arrangement
Not structured through a Separate vehicle
Structured through a separate vehicle
1. Does legal form give parties rights to assets & obligations for arrangement’s liabilities?;
2. Do the arrangements give parties rights to assets & obligations for its liabilities?;
3. other facts & circumstances economic benefits or debts
The University of 15
Joint operation
Joint venture
LS CLASS 12 7
3. Accounting for joint arrangement interests
Joint operation arrangements: Line by line method
– proportional consolidation [AASB 11.20]
– Adjustmentsrecognisedinjointoperatorfinancialstatementswhich
will flow through to consolidated accounts [AASB 11.20] Joint venture arrangements: equity accounting method
– In accordance with the requirements of AASB 128 & AASB 11.24
US GAAP / IFRS point of difference: While US GAAP only addresses the accounting for joint ventures, IFRS addresses two types of joint arrangements: (1) joint operations and (2) joint ventures.
The University of 16
4. Line by line method
Step 1: Initial recognition
– Record contributions to joint operation as “Investment in joint operation – at cost”
– If the joint operator has contributed a non-cash asset, consider if risks of ownership have been transferred
– If so, the joint operator recognises a gain, being the difference between the agreed value & the carrying amount of the asset prior to sale, times the % of asset sold to other venturers (remaining % ownership of asset would still be held by joint operator) [AASB 11.B34]
– Full amount of loss on the contributed asset is recognised if it represents impairment loss [AASB 11.B35]
The University of 17
LS CLASS 12 8
4. Line by line method (cont.)
Step 2: Disaggregation
– Disaggregate 1 line “Investment in joint operation – at cost” account at the end of each reporting period by including % of revenue, expenses, assets & liabilities of the joint operation in the joint operator’s financial statements [AASB 11.20]
– If joint operator is non contributor of an asset recognised by the joint operation at fair value, joint operator’s interest in the asset is based on its fair value.
– If the joint operator is the contributor of the asset, its interest will be effected by its accounting policy for that class of asset [AASB 11.21]
The University of 18
4. Line by line method (cont.)
Step 3: Depreciation and amortisation
– Record depreciation and amortisation for the % of joint operation assets recognised by joint operation in the joint operators’ books.
– Depreciation /amortisation rates and methods determined by each joint operator’s accounting policies
– Depending upon whether a joint operator’s interest in a joint operation asset is based on its fair value or original cost and depreciation method, depreciation could be different for each joint operator
[AASB 11.21]
The University of 19
LS CLASS 12 9
4. Line by line method (cont.)
Step 4: Management fee
– If a joint operator is the manager, adjust management fees received by the joint operator so it only reflects the interests of the other joint operators.
[AASB 11.21]
The University of 20
4. Line by line method (cont.)
Step 5: For production joint operation
– Adjust material costs for inventory still on hand at reporting date as joint operator recognises all inventory costs as cost of production
– Need to consider:
– Production costs from Step 2
– Depreciation from Step 3
– Management fee adjustment from Step 4
and split the total cost of production between cost of goods sold
(JO output sold) and inventory (JO output still on hand ) ØComplete Arthur et al. E8.7
The University of 21
LS CLASS 12 10
4. Line by line method
Evaluation
– A joint operator’s interest in an asset does not meet the definition of asset due to control issues.
– Only has control over an interest in an asset
– Can distort the joint operator’s financial statements as controlled
assets are combined with joint operations assets & effects ratios
– Imposes “financial performance” of joint operation into the joint operator’s financial statements.
– For example total cost of production for a process
– Reflects the substance & economic reality of a joint operator’s
interest in a joint operation.
– For example recognises total value of assets employed in a
specific operation within the extended group
The University of 22
4. Line by line method (cont.)
Evaluation (cont.)
vResearch evidence:
vRefer Graham, King and Morrill (2003) – critique that the line-by-line method provides users with greater decision utility (return predictability) than the equity method
vHowever the line-by-line method appears to be less value relevant than the equity method (So et. al, 2018)
The University of 23
LS CLASS 12 11
5. Related Party Transactions
An entity is related to a reporting entity if any of the following
conditions applies:
– One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).
– Both entities are joint ventures of the same third party.
– One entity is a joint venture of a third entity and the other entity
is an associate of the third entity.
[AASB 124.9(b)]
Further refer to AASB 124.18-19 for disclosure requirements
The University of 24
6. Disclosure requirements – AASB 12
– Information so users can determine financial effects of interests in and risks of joint arrangements [AASB 12.20]
– Name, activities and place of business [AASB 12.21]
– Whether fair value or equity method adopted If equity method adopted fair value of investment if quoted
[AASB 12.21]
– Details of any restrictions or different balance dates [AASB 12.22]
– Unrecognised losses [AASB 12.22]
– Commitments [AASB 12.23]
– Contingent liabilities [AASB 12.23]
The University of 25
LS CLASS 12 12
6. Disclosure requirements – AASB 12 (cont.)
For each material joint venture disclose:
– Dividends,summarisedfinancialinformationincludingcurrentassets,non- current assets, current liabilities, non current liabilities, revenue, profit & loss from continuing operations, other comprehensive income and total comprehensive income. [AASB 12.B12]
– Cashandcashequivalents,currentfinancialliabilities,noncurrent financial liabilities, depreciation and amortisation, interest income, interest expense & income tax expense [AASB 12.B13]
For immaterial joint venture disclose the aggregate amounts of:
– profit&lossfromcontinuingoperations,othercomprehensiveincomeand total comprehensive income. [AASB 12.B16]
The University of 26
Next Week: Foreign Currency Transactions
The University of 28
LS CLASS 12 13
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