1. IAS 31 - Joint Ventures

2. Academic Resource Center Consolidations and joint ventures Page 2 Executive summary ► The accounting guidance for jointly controlled entities is generally similar under IFRS and US GAAP when the equity method of accounting is used. IFRS, however, provides a choice of the equity method of accounting or proportionate consolidation for jointly controlled operations. US GAAP only allows the proportionate consolidation when it is industry practice.

3. Academic Resource Center Consolidations and joint ventures Page 3 Progress on convergence ► ED 9, Joint Arrangements, in September 2007, which proposes to replace IAS 31 and eliminate the proportionate consolidation option for JVs due to be issued in the second quarter of 2010. ► IAS 11 has been issued effective January 1, 2013

4. Academic Resource Center Consolidations and joint ventures Page 4 Joint ventures The equity method of accounting for joint ventures is allowed. Similar IFRSUS GAAP

5. Academic Resource Center Consolidations and joint ventures Page 5 Joint ventures Categories of joint ventures IFRS ► Addresses the accounting for three categories of joint ventures: ► Jointly controlled operations. ► Jointly controlled assets. ► Jointly controlled entities. US GAAP ► Does not specifically address the accounting for jointly controlled operations or for jointly controlled assets.

6. Academic Resource Center Consolidations and joint ventures Page 6 Joint ventures Categories of joint ventures IFRS ► For jointly controlled operations and for jointly controlled assets, a separate legal entity is not generally established. These joint ventures are governed by a contractual agreement between the venture parties. ► An example of a jointly controlled operation would be when two companies agree to develop a new garbage disposal unit. One company is developing the motor and the other company is developing the rest of the unit. Each company would pay its own costs and they would share the revenue, based on a contractual agreement. ► An example of a jointly controlled asset would be a gas pipeline owned by several gas companies where each company pays its share of the costs to operate the pipeline. US GAAP ► Does not specifically address the accounting for jointly controlled operations or for jointly controlled assets.

7. Academic Resource Center Consolidations and joint ventures Page 7 Joint ventures Categories of joint ventures IFRS ► For a jointly controlled entity, a separate legal entity is generally established. ► An example of a jointly controlled entity would be when two companies set up a separate legal entity to manufacture fan blades. Each company would contribute assets to the joint venture. The jointly controlled entity would have its own accounting records. US GAAP ► Does not specifically address the accounting for jointly controlled operations or for jointly controlled assets.

8. Academic Resource Center Consolidations and joint ventures Page 8 Joint ventures Joint venture contribution IFRS ► The contribution of non-monetary assets is recognized at fair value, except when the significant risks and rewards of ownership have not been transferred to the joint venture, the gain or loss on the transaction cannot be reliably measured or the transition lacks commercial substance. Any gain on the contribution of separable non-monetary net assets may be limited to the amount realized, if the other joint venture partners do not contribute cash or cash equivalents. US GAAP ► A venturer generally records its contribution to a joint venture at cost. There are some exceptions to this general rule (such as when the other venturers contribute cash or commonly considered cash equivalents).

9. Academic Resource Center Consolidations and joint ventures Page 9 Joint ventures Method of accounting for jointly controlled entities IFRS ► Provides a choice between proportionate consolidation or equity method accounting for jointly controlled entities. ► Proportionate consolidation involves taking the percentage ownership of each line item in the financial statements and either including that amount in the appropriate line items of the entity’s financial statements or presenting these as separate line items in the financial statements (for example, “share of property, plant and equipment of joint venture”). US GAAP ► Generally requires using the equity method of accounting for jointly controlled entities. ► Proportionate consolidation is only allowed where it is industry practice (for example, in the extractive and construction industries). ► (Note: the IASB issued ED 9, Joint Ventures, in September 2007, which would eliminate proportionate consolidation of jointly controlled entities.)

10. Academic Resource Center Consolidations and joint ventures Page 10 Example 11 Three companies form a manufacturing joint venture. Company A owns 40%, Company B owns 30% and Company C owns 30% of the voting shares of the joint venture. Income and losses of the joint venture are shared equally. Any resolutions require approval of at least 60% of the shareholders. Each company can appoint one member to the board of directors. SPE example ► Discuss how the joint venture should be accounted for on each company’s books under both US GAAP and IFRS.

11. Academic Resource Center Consolidations and joint ventures Page 11 Example 11 solution: US GAAP: Under US GAAP, the equity method of accounting for the joint venture should be used by each company. IFRS: Under SIC 12, SPEs (entities created to accomplish a narrow and well-defined objective) are consolidated when the substance of the relationship indicates that an entity controls the SPE. No single company can control this joint venture. Under IFRS, either the equity method or proportionate consolidation should be used by each company to account for its interest in the joint venture. SPE example

12. Academic Resource Center Consolidations and joint ventures Page 12 Example 12 Company A and Company B form a joint venture. Company A contributes a subsidiary with separable net assets with a book value of $50.0 million (fair value of $60.0 million). Company B contributes a subsidiary with separable net assets with a book value of $70.0 million (fair value of $90.0 million). Company A will own 40% of the joint venture and Company B will own 60% of the joint venture. Joint venture example ► How should this transaction be accounted for by Company A under US GAAP and IFRS? Show all required journal entries.

13. Academic Resource Center Consolidations and joint ventures Page 13 Example 12 solution: US GAAP: Under US GAAP, no gain would be recorded and the investment in the joint venture would be recorded at the cost of the assets given up. Investment in joint venture $50,000,000 Net assets of subsidiary $50,000,000 Joint venture example

14. Academic Resource Center Consolidations and joint ventures Page 14 Example 12 solution (continued): IFRS: Under IFRS, the contribution of non-monetary assets is recognized at fair value. However, the gain recognized by Company A is limited to the realized gain. Company A now owns 40% of the joint venture with a fair value of $150.0 million ($60.0 million plus $90.0 million), worth $60 million. From this amount, you must eliminate that portion of the gain on Company A’s subsidiary which has not been realized (40% of difference between fair value of $60.0 million less cost of $50.0 million, which equals $4.0 million). Investment in joint venture $56,000,000 Net assets of subsidiary $50,000,000 Gain on disposal 6,000,000 Joint venture example