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

2. Consolidated and Separate Financial Statements
Related standards
IAS 31
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

3. Related Standards
APB 18 The Equity Method of Accounting for Investments in Common Stock

4. Related Standards Non-monetary Contributions by Venturers
SIC 13 Jointly Controlled Entities—
Non-monetary Contributions by Venturers
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates

5. IAS 31 – Overview Objective and scope Joint ventures
Jointly controlled operations and jointly controlled assets
Jointly controlled entities
Disclosure

6. IAS 31 – Objective and Scope
Joint venture - a contractual arrangement where two or more parties share in an economic activity over which they have joint control
Joint control - regardless of actual ownership rights, the strategic financial and operating decisions, by contract, require unanimous consent of the venturers
control in this IFRS has the same meaning as in other related IFRSs
Venturer - an entity that has joint control over a joint venture
Investor in a joint venture - a party to the venture without joint control
Exceptions to IAS 31
venturers’ interests in jointly controlled entities held by venture capital organizations or mutual funds, unit trusts, and similar organizations that are accounted for at FVTPL

7. IAS 31 – Joint Ventures
Variety of forms - jointly controlled operations, assets, or entities
Joint control by at least two parties must be contractually established
may be set out in the articles of incorporation or bylaws of the joint venture
less formally through documentation of meetings between the venturers
Contractual agreement:
usually in writing
sets out the governance structure of the joint venture
the capital to be supplied by each venturer
how the output, income, and expenses will be shared
the purpose and duration of the venture

8. IAS 31 – Jointly Controlled Operations and Jointly Controlled Assets
no separate entity established to conduct joint activities
a venturer enters into an agreement with one or more venturers to produce, market, and distribute a specific product
each venturer provides its specific operating expertise
used to take advantage of the resources and abilities of the individual venturers
each may agree to use their own assets, incur their own expenses and liabilities, and finance their own requirements
Joint venture agreement
sets out how revenue from the sale of the product worked on together is shared
how shareable costs are to be allocated to venturers
Recognized in the venturer’s financial statements
(a) the assets that it controls and the liabilities it incurs
(b) the expenses incurred and share of income earned from sale of goods or services by joint venture
The venturer prepares no investment-related adjustments

9. IAS 31 – Jointly Controlled Operations and Jointly Controlled Assets
each party to agreement takes a share of the output from the asset and pays an agreed share of costs incurred to operate it
each venturer has control over its share of future economic benefits through its share of the asset
no legal or other entity is formed separately from the venturers themselves
Accounting for this form of joint venture is consistent with its economic substance and usually the legal form of the joint venture
Recognized in the venturer’s financial statements
(a) its share of specific jointly controlled assets and of liabilities incurred jointly with other venturers
(b) liabilities incurred on its own
(c) income from the sale or use of its share of the output of the venture along with its share of expenses incurred by the venture
(d) expenses it has incurred relative to its interest in the venture

10. IAS 31 – Jointly Controlled Entities
may be a corporation, a partnership, or other form of organization
separate entity controls assets of the joint venture, incurs liabilities and expenses, and earns income
each venturer usually has an ownership interest in the venture and is entitled to a share of its profits or output
when organized, the individual venturers contribute cash or other assets in return for an ownership interest
contributions are recognized by each venturer as an investment in the joint venture
Jointly controlled entity records receipt of assets contributed to it and prepares and presents financial statements on the results of its operations and financial position

11. IAS 31 – Jointly Controlled Entities

12. IAS 31 – Jointly Controlled Entities
Venturer’s accounting
Choice of 2 methods to account for its investment
proportionate consolidation (the preferred approach)
equity method
Entities that meet one of the following three conditions are excluded from applying one of the two methods:
Interest in the jointly controlled entity is classified as “held for sale” under IFRS 5
Venturer meets exception in IAS that qualifies parent with an interest in a jointly controlled entity not to present consolidated financial statements
All of the following apply:
(a) venturer is a wholly owned subsidiary or partially owned subsidiary whose other owners have been informed and do not object to the venturer not applying the proportionate consolidation or equity method
(b) venturer does not have publicly traded debt or equity instruments
(c) the venturer’s ultimate or intermediate parent produces consolidated financial statements for public use that comply with IFRSs

13. IAS 31 – Jointly Controlled Entities

14. IAS 31 – Jointly Controlled Entities
Proportionate Consolidation
inter-entity transactions, balances, unrealized profits, and losses are eliminated in proportion to the venturer’s interest
preferred method because it reflects the “substance and economic reality of a venturer’s interest in a jointly controlled entity and control over the venturer’s share of the future economic benefits”
netting of assets and liabilities or income and expenses is not permitted unless legal right of offset exists and asset and liability are expected to be realized and settled, respectively
choice of reporting formats
Option 1: venturer’s share of each line item on venture’s financial statements is added to venturer’s line item on its financial statements
Option 2: venturer’s share of each major classification of assets, liabilities, income, and expenses is identified as a separate line item within the same classification on venturer’s financial statements

15. IAS 31 – Jointly Controlled Entities
Equity Method
IASB Exposure Draft ED 9 Joint Arrangements issued in 2007
if the proposals are retained in the final standard, equity method will be the only method permitted
many believe that having joint control is more similar to having significant influence than having control
this supports the use of the equity method
Survey of companies reporting in accordance with IFRSs in 2005
144 companies reporting investments in jointly controlled entities were equally split in use of proportionate consolidation and equity method
significant country-specific differences in the use of each method
strongly influenced by the methods required by national reporting standards prior to adoption of IFRS

16. IAS 31 – Jointly Controlled Entities
Joint Control Is Lost
When venturer no longer has joint control and the investment has not become a subsidiary or associate
account for remaining investment under IAS 39 from date joint control was lost
If the investment becomes a subsidiary
investor accounts for this as a business combination under IFRS 3 and prepares consolidated financial statements according to IAS 27
If investment becomes an investment in an associate
the investor applies IAS 28
When joint control is lost, any remaining investment is measured at its fair value and a gain or loss on disposal is recorded
The gain or loss is the difference between
carrying amount of investment when joint control is lost
total of the fair value of retained investment and proceeds of disposal on the portion disposed of

17. IAS 31 – Jointly Controlled Entities
Separate Financial Statements
are those where subsidiaries and investments in associates and jointly controlled entities are accounted for on the basis of the direct equity interest - not on a basis related to investor’s interest in investee’s net assets and reported results
IAS 27 helps determine the accounting for an interest in a jointly controlled entity for separate financial statements
In effect, the investment is accounted for at cost or in accordance with IAS 39
Investments without Joint Control
If an investor has an equity interest in a joint venture but is not a venturer
investor applies IAS 28 if significant influence in the joint venture
otherwise, it applies IAS 39

18. IAS 31 – Jointly Controlled Entities
Transactions between a Venturer and a Joint Venture
Accounted for as if venturer conducts transactions in part with the other non-related venturers and in part internally
Transaction is assumed to take place with other venturers at arm’s-length
the venturer recognizes that portion of the transaction and any associated gain or loss
To extent the venturer is dealing with its own ownership interest
that portion of the transaction and gain or loss is eliminated
Requirements
when a venturer contributes or sells assets to a joint venture, the venturer recognizes only the portion of any gain or loss that is associated with the other venturers’ interests
- as the joint venture realizes the gain in its dealings with outside parties, the venturer then recognizes its portion of any gain or loss as realized

19. IAS 31 – Jointly Controlled Entities
Transactions between a Venturer and a Joint Venture
Requirements (continued)
If a loss is evidence of a decline in the asset’s net realizable value or an impairment, then full loss is recognized immediately
When joint venture sells assets to a venturer and reports a gain on the sale, the venturer does not recognize its share of the gain until it has sold the asset in turn to a third party
- the venturer recognizes its share of any gain as it is realized
Operators of Joint Ventures
When a venturer acts as an operator or manager of a joint venture, it is usually paid a fee for these services
the joint venture recognizes the fee paid as an expense and the venturer refers to IAS 18 to determine how to account for the fee received

20. IAS 31 – Disclosure Disclosures for Consolidated Financial Statements
Explanations of why an entity is a subsidiary when investor does not own more than half the voting power
Information about date of a subsidiary’s financial statements if different from the date of parent company’s statements
Information about any significant restrictions on ability of subsidiary to pay cash dividends and to transfer funds to parent to repay loans/advances
Effects of changes in parent’s ownership interest in a subsidiary that do not result in a loss of control
Gain or loss recognized on the loss of control of a subsidiary

21. IAS 31 – Disclosure
A venturer reports information about its joint ventures
description of the interest
proportion of ownership interest held
method it uses to recognize this interest
Totals reported by venturer that relate to its joint venture interests if line-by-line proportionate consolidation or the equity method is used
amount of current assets
long-term assets
current liabilities
long-term liabilities
income
expenses
Other venturer disclosures
potential obligations associated with contingent liabilities
commitments of joint ventures separately from those of venturer itself

22. Current GAAP Comparisons
Page 64 of 164 of

23. IFRS Financial Statement Disclosures
BP plc
Group Income Statement page 98 of 212
Interests in joint ventures note page 102 of 212
Investments in jointly controlled
entities note page 136 of 212
Subsidiaries, jointly controlled entities
and associates note page 170 of 212

24. Looking Ahead Accounting for investments in joint ventures
originally a part of the IASB’s short-term convergence project with FASB
IASB now conducts the joint ventures project alone
Objective of the joint ventures project
to eliminate the choice now allowed in IAS 31
to clarify the definitions of joint assets and joint operations
IASB
reviewing the responses to its 2007 Exposure Draft, ED 9 Joint Arrangements
expects to issue a final IFRS entitled Joint Arrangements in late 2009

25. Looking Ahead Tentative decisions exposed in ED 9, Joint Arrangements
• Types of interests parties could have in a joint arrangement
direct interests (interests in joint operations or joint assets)
indirect interests (interest in a joint venture)
• A party to a joint arrangement should recognize its contractual rights and
obligations according to applicable IFRSs
• A party should recognize its interest in a joint venture using the equity method
proportionate consolidation not allowed
• Disclosures aligned with those required for investments in associates
Except for the elimination of the use of proportionate consolidation, these changes are not expected to result in significant differences in the profit or loss and financial position of parties to these joint arrangements

26. End-of-Chapter Practice

27. End-of-Chapter Practice

28. End-of-Chapter Practice

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