Your document headline

Chapter 22
INTERESTS IN JOINT VENTURES (IAS 31)
SCOPE
The Standard applies to accounting for interests in joint ventures and the financial reporting of assets, liabilities, income, and expenses of the joint ventures in the
accounts of the venturers.
It does not apply to investments in jointly controlled entities held by venture capital organizations, mutual funds, unit trusts, and other similar entities or items that are
accounted for at fair value through profit and loss or classified as held-for-trading under IFRS 9 and IAS 39.
A venturer does not have to apply proportionate consolidation or the equity method in these circumstances:
1. Where the interest is classified as held for sale under IFRS 5.
2. Where a parent is exempt from preparing consolidated financial statements by IAS 27. In the separate financial statements prepared by the parent, the
investment in the jointly controlled entity may be accounted for by the cost method or under IFRS 9 and IAS 39.
3. If all four of the following apply:
a. The venturer is a wholly owned subsidiary or a partially owned subsidiary by another entity and its owners have been informed and do not object to
the venturer not applying proportionate consolidation or the equity method.
b. The venturer’s debt or equity capital is not traded on a public market.
c. The venturer has not filed nor is filing its financial statements with a security commission for the purpose of issuing any class of financial instrument.
d. The ultimate or intermediate parent produces consolidated financial statements in accordance with International Financial Reporting Standards
(IFRS).
(in accordance with IAS 31)
DEFINITIONS OF KEY TERMS
Joint venture. A contractual agreement between two or more parties that undertake an economic activity that is subject to joint control.
Joint control. The contractually agreed sharing of control over economic activity that exists when the strategic decisions relating to the activity require
unanimous consent of the parties involved.
Control. The power to govern the financial and operating policies so as to obtain benefits.
Venturer. A party to a joint venture who has joint control over that joint venture.
Investor in a joint venture. A party to a joint venture who does not have joint control over that venture.
There are three different forms of joint venture set out in the IAS.
1. Jointly controlled operations
2. Jointly controlled assets
3. Jointly controlled entities
DIFFERENT FORMS OF JOINT VENTURE
In all of these cases, there must be a contractual arrangement that establishes joint control.
The contractual arrangement is important; if there is no contractual arrangement to establish the joint control, the investments are not deemed to be joint ventures
under IAS 31.
Contractual arrangements can be created in different ways. They can be by contract or via discussions (minuted) among the venturers, or they may be set out in the
articles of the entity.
The contractual arrangement usually should be in writing and deal with the nature of the activities, the appointment of the board of directors, the capital
contributions by the venturers, and the sharing of profits and losses of the joint ventures. The key thing is that no single venturer should be in a position to control the
activities.
JOINTLY CONTROLLED OPERATIONS
In jointly controlled operations, a separate entity is not established. Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own
financing. The agreement between the venturers normally would set out the details of how the revenue and expenses were going to be shared.
An example of this type of agreement may be where 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