Joint Arrangement PDF

COLLEGE OF ACCOUNTANCY AND FINANCE Page 1 ACCO 30103 – Advanced Financial Accounting and Reporting JOINT ARRANGEMENT IFRS 11 Joint Arrang...

COLLEGE OF ACCOUNTANCY AND FINANCE Page 1 ACCO 30103 – Advanced Financial Accounting and Reporting JOINT ARRANGEMENT IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly). IFRS 11 was issued in May 2011 and applies to annual reporting periods beginning on or after 1 January 2013. DEFINITION OF TERMS 1. Joint arrangement - An arrangement of which two or more parties have joint control. 2. Joint control - 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. 3. Joint operation - A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. 4. Joint operator - A party to a joint operation that has joint control of that joint operation. 5. Joint venture - A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. 6. Joint venturer - A party to a joint venture that has joint control of that joint venture. 7. Party to a joint arrangement – An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement. 8. Separate vehicle – A separately identifiable financial structure, including separate legal entities or entities recognized by statute, regardless of whether those entities have a legal personality. JOINT ARRANGEMENTS A joint arrangement is an arrangement of which two or more parties have joint control. A joint arrangement has the following characteristics: the parties are bound by a contractual arrangement, and the contractual arrangement gives two or more of those parties joint control of the arrangement. The contractual arrangement sets out the terms upon which the parties participate in the activity that is the subject of the arrangement. The contractual arrangement generally deals with such matters as: the purpose, activity and duration of the joint arrangement. how the members of the board of directors, or equivalent governing body, of the joint arrangement, are appointed. the decision-making process: the matters requiring decisions from the parties, the voting rights of the parties and the required level of support for those matters. The decision- making process reflected in the contractual arrangement establishes joint control of the arrangement. the capital or other contributions required of the parties. how the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement.  COLLEGE OF ACCOUNTANCY AND FINANCE Page 2 ACCO 30103 – Advanced Financial Accounting and Reporting Does the contractual arrangement give all the parties, or a group of the parties, control of the arrangement collectively? No Yes Outside the scope of Do decisions about the relevant activities that significantly affect IFRS 11 the returns of the arrangement require the unanimous consent of all parties, or group of the parties, that collectively control the arrangement? No Yes The arrangement is jointly controlled therefore the arrangement is a joint arrangement. JOINT CONTROL 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. Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of control in IFRS 10 Consolidated Financial Statements). After concluding that all the parties, or a group of the parties, control the arrangement collectively, an entity shall assess whether it has joint control of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that collectively control the arrangement. The requirement for unanimous consent means that any party with joint control of the arrangement can prevent any of the other parties, or a group of the parties, from making unilateral decisions (about the relevant activities) without its consent. Examples – Joint Control 1. Three parties establish an arrangement with the following voting rights: A – 50%; B – 30%; and C – 20%. The contractual arrangement between A, B and C specifies that at least 75% the voting rights are required to make decisions about the relevant activities of the arrangement. Even though A can block any decision, it does not control the arrangement because it needs the agreement of B. The terms of their contractual arrangement requiring at least 75% of the voting rights to make decisions about the relevant activities imply that A and B have joint control of the arrangement because decisions about the relevant activities of the arrangement cannot be made without both A and B agreeing.  COLLEGE OF ACCOUNTANCY AND FINANCE Page 3 ACCO 30103 – Advanced Financial Accounting and Reporting 2. An arrangement has three parties: A – 50%, and B and C each have 25%. The contractual arrangement between A, B and C specifies that at least 75% of the voting rights are required to make decisions about the relevant activities. Even though A can block any decision, it does not control the arrangement because it needs the agreement of either B or C. In this example, A, B and C collectively control the arrangement. However, there is more than one combination of parties that can agree to reach 75% of the voting rights (i.e., either A and B or A and C). In such a situation, to be a joint arrangement the contractual arrangement between the parties would need to specify which combination of the parties is required to agree unanimously to decisions about the relevant activities of the arrangement. 3. An arrangement in which A and B each have 35% of the voting rights in the arrangement with the remaining 30% being widely dispersed. Decisions about the relevant activities require approval by a majority of the voting rights. A and B have joint control of the arrangement only if the contractual arrangement specifies that decisions about the relevant activities of the arrangement require both A and B agreeing. TYPE OF JOINT ARRANGEMENTS Joint arrangements are either joint operations or joint ventures: A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers. The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties to the arrangement. An entity determines the type of joint arrangement in which it is involved by considering the structure and form of the arrangement, the terms agreed by the parties in the contractual arrangement and other facts and circumstances. A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint venture or a joint operation. Separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognized by statute, regardless of whether those entities have a legal personality. A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, the contractual arrangement establishes the parties' rights to the assets, and obligations for the liabilities, relating to the arrangement, and the parties' rights to the corresponding revenues and obligations for the corresponding expenses.  COLLEGE OF ACCOUNTANCY AND FINANCE Page 4 ACCO 30103 – Advanced Financial Accounting and Reporting Example – Joint venture versus Joint operation iFone and Blakbery structure a joint arrangement in an incorporated entity, Cell. They each have a 50% ownership interest. The purpose of the arrangement is for Cell to manufacture parts for iFone and Blakbery’s own manufacturing processes. The arrangement ensures that the 2 parties operate the facility that produces the parts to their specifications. The legal form of Cell through which the activities are conducted, initially suggest that the assets and liabilities held in Cell are the assets and liabilities of Cell. The contractual agreement does not specify that iFone and/or Blakbery have rights to the assets and obligations for the liabilities of Cell. Therefore, based on the legal form of Cell and the terms to the contractual arrangement, the arrangement is a joint venture. However, consider the following aspects of the arrangement: The parties agreed to purchase all the output produced by Cell in the ratio of their ownership percentage. Cell may not sell its output to third parties, unless this is approved by iFone and Blakbery. The arrangement is intended to operate at a break-even level. That is, the selling price is set by both parties and is designed to cover the costs of production and administrative expenses incurred by Cell. From the above, the following facts and circumstances can be noted: The obligation of the parties to purchase all the output reflects the exclusive dependence of Cell upon the parties for the generation of cash flows therefore the parties have an obligation to fund the settlement of Cell’s liabilities. The facts that the parties have rights to all the output means that the parties are consuming and therefore have rights to all the economic benefits of the assets of Cell. The facts and circumstances indicate that the arrangement is a joint operation. If the parties changed the contractual arrangement so that Cell was able to sell its output to third parties. Such a change in facts and circumstances would require re-assessment of the classification and such facts and circumstances would indicate that the arrangement is a joint venture.  COLLEGE OF ACCOUNTANCY AND FINANCE Page 5 ACCO 30103 – Advanced Financial Accounting and Reporting FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENTS Joint operations A joint operator recognizes in relation to its interest in a joint operation: its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output of the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly. A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in accordance with the relevant IFRSs. The acquirer of an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 Business Combinations, is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that conflict with the guidance in IFRS 11. These requirements apply both to the initial acquisition of an interest in a joint operation, and the acquisition of an additional interest in a joint operation (in the latter case, previously held interests are not remeasured). Note: The requirements above were introduced by Accounting for Acquisitions of Interests in Joint Operations, which applies to annual periods beginning on or after 1 January 2016 on a prospective basis to acquisitions of interests in joint operations occurring from the beginning of the first period in which the amendments are applied. A party that participates in, but does not have joint control of, a joint operation shall also account for its interest in the arrangement in accordance with the above if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. Joint ventures A joint venturer recognizes its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard. A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence over the joint venture, in which case it accounts for it in accordance with IAS 28 (as amended in 2011). Disclosure Requirements IFRS 12 Disclosure of Interests in Other Entities outlines the disclosures required such as: Significant judgements and assumptions An entity discloses information about significant judgements and assumptions it has made (and changes in those judgements and assumptions) in determining: [IFRS 12:7] 1. that it controls another entity  COLLEGE OF ACCOUNTANCY AND FINANCE Page 6 ACCO 30103 – Advanced Financial Accounting and Reporting 2. that it has joint control of an arrangement or significant influence over another entity 3. the type of joint arrangement (i.e. joint operation or joint venture) when the arrangement has been structured through a separate vehicle. Interests in joint arrangements and associates An entity shall disclose information that enables users of its financial statements to evaluate: 1. the nature, extent and financial effects of its interests in joint arrangements and associates, including the nature and effects of its contractual relationship with the other investors with joint control of, or significant influence over, joint arrangements and associates 2. the nature of, and changes in, the risks associated with its interests in joint ventures and associates. Summary: Joint Operation vs Joint Venture  COLLEGE OF ACCOUNTANCY AND FINANCE Page 7 ACCO 30103 – Advanced Financial Accounting and Reporting IFRS for SMEs for Joint Arrangements 1. For investments in jointly controlled entities, there is an option for the venturer to use: Cost model (except if there is a published quotation – then must use fair value through profit or loss) Equity method Fair value through profit or loss. 2. For jointly controlled operations, the venturer should recognize assets that it controls and liabilities it incurs as well as its share of income earned and expenses that are incurred. 3. For jointly controlled assets, the venturer should recognize its share of the assets and liabilities it incurs as well as income it earns and expenses that are incurred. PROBLEMS 1. On January 1, 2022, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity B will have right to the net assets of Entity C. Entity A and Entity B invested P1,000,000 and P1,500,000 respectively, equivalent to 40:60 capital interest of Entity C. The financial statements of Entity C provided the following data for its two-year operation: Net Income (Loss) Dividends Declared 2022 200,000 100,000 2023 (2,000,000) - Determine the following: a. What is the type of joint arrangement presented in the case? b. What is the balance of Investment in Entity C to be reported by Entity A in its Statement of Financial Position on December 31, 2022? c. What is the balance of Investment in Entity C to be reported by Entity B in its Statement of Financial Position on December 31, 2022? 2. Bohemian Company has a joint venture, Bridge Limited, with two other parties, in which it has one third (1/3) interest. Bridge Limited’s main activity is the construction of bridges spanning motorways. Bohemian has advanced funds of P5,000 to Bridge Limited which, according to a bank covenant, will be repaid to Bohemian after settlement of all other obligations of Bridge Limited. Bohemian has agreed to advance a further P2,000 to Bridge Limited over the next two years. The assets and liabilities of Bridge Limited are as follows. Non-current assets 30,000 Current assets 6,000 Total assets 36,000 Non-current liabilities 24,500 Current liabilities 5,500 Total liabilities 30,000 Equity 6,000 Revenue 8,000  COLLEGE OF ACCOUNTANCY AND FINANCE Page 8 ACCO 30103 – Advanced Financial Accounting and Reporting Profit 2,700 Determine the following: a. Bohemian’s net interest in the joint venture b. Bohemian’s share of profit 3. Ranto and Santo formed a joint venture to acquire and sell a special type of merchandise. Ranto is to manage the venture and to furnish the capital. The participants are to share equally any gain or loss on the joint venture. On April 1, 2022, Santo sent Ranto P10,000 cash, which was all used to purchase merchandise. On April 27, one half of the merchandise was sold for P7,200 cash. Ranto paid the cost of delivering merchandise to customers which amounted to P260. No further transactions occurred until the end of the month. How much is the profit (loss) of the venture for the month of April? 4. On January 5, 2022, Bruno Company signed a joint venture arrangement with Mars Company for the production of souvenirs. Bruno Mars Company is established to carry on the business venture, with each venturer contributing P1,562,500 for equal shares in the company’s 200,000, P15.625 par value shares. They will share profits equally. On December 31, 2022, the financials of Bruno Mars Company follow: Cash 64,500 Accounts Payable 906,250 Accounts Receivable 500,000 Share Capital 3,125,000 Inventory 781,250 Retained Earnings 95,700 Plant and Equipment 2,397,500 Accumulated Depreciation (156,250) Total 4,127,000 Total 4,127,000 Revenues 625,000 Expenses 481,250 Net Income 143,750 Retained Earnings, beginning - Cash Dividends (48,000) Retained Earnings, ending 95,750 The financial statements of Bruno Company, one of the venturer, for the same period follow: Cash 637,500 Revenues 13,500,000 Accounts Receivable 600,000 Expenses 11,600,000 Inventory 1,050,000 Profit 1,900,000 Plant and Equipment 4,875,000 Liabilities 1,050,000 Accumulated Depreciation (875,000) Share Capital 3,750,000 Investment in Joint Venture 1,562,500 Retained Earnings 1,150,000 Total 7,850,000 Total 7,850,000 Prepare the financial statements of Bruno Company for 2022. 5. On October 1, 2022, X, Y, and Z formed a joint venture for the sale of merchandise. X was designated as the managing venturer. Profits and losses are to be divided as follows: X – 60%; Y – 15%, and Z – 25%. On December 31, 2022, the venture was terminated, the participants agreed to recognize profit or loss on the venture to date. The cost of inventory on hand is determined at P47,000. The joint  COLLEGE OF ACCOUNTANCY AND FINANCE Page 9 ACCO 30103 – Advanced Financial Accounting and Reporting venture account has a debit balance of P68,000 before adjustment for venture inventory and profit. No separate set of books is maintained for the joint venture and the participants record in their individual books all the venture transactions. Determine the following: a. Before profit or loss distribution, assuming Y has a credit capital balance of P9,450, how much is the amount due to (from) Y in the final settlement? b. Before profit or loss distribution, assuming Z has a debit capital balance of P11,875, how much is the amount due to (from) Z in the final settlement? 6. On July 1, 2022, A, B and C formed a joint venture for the sale of merchandise. A was designated as the managing venturer. Profits and losses are to be divided as follows: A – 50%; B – 25%, and C – 25%. On October 1, 2022, though the joint venture is still uncompleted, the participants agreed to recognize profit or loss on the venture to date. The cost of inventory on hand is determined at P25,000. The Joint Venture account has a debit balance of P15,000 before the distribution of profit or loss. No separate set of books is maintained for the joint venture and the participants record in their individual books all the venture transactions. Determine the following: a. How much is the profit or loss of the joint venture for the period? b. Assuming the joint venture account has a credit balance of P30,000, how much is the profit or loss for the period? 7. D, E and F formed a joint venture to sell personalized shirts during the campaign period. The books of F, being the manager, is used by the joint venture. Their transactions during the period are summarized below: September 12 Investment of merchandise by B 119,000 September 14 Investment of cash by E 45,000 September 17 Investment of cash by F 30,000 September 19 Investment of merchandise by E 98,000 September 20 Freight in 9,000 September 20 Cash sales 285,000 September 21 Cash sales 78,000 September 29 Withdrawal of merchandise by E 18,000 October 5 Purchases 49,000 October 10 Withdrawal of cash by D 16,000 October 21 Selling expenses 7,000 October 28 Unsold merchandise charged to D 10,000 The contractual arrangements include distribution of gains and losses as follows: D – 25%, E – 35%, and F – 40%. The venture is completed and terminated on October 31, 2022. In the final settlement, how much would each venturer receive? 8. On January 3, 2022, Adorable Company, an SME, acquired 25% interest of the Equity of Love Company for P200,000. Adorable share in the joint control over the relevant activities of the joint venture in relation to its operation. Transaction costs of 3% of the purchase price were incurred by Adorable. On December 31, 2022, Love declared dividends of P30,000 for the year 2022. The dividends are to be paid in 2023. The net income for the year is P80,000.  COLLEGE OF ACCOUNTANCY AND FINANCE Page 10 ACCO 30103 – Advanced Financial Accounting and Reporting Published price quotation do not exist for the shares of Love. Using the appropriate valuation techniques, Love determined the fair value of its investment in Love Company at December 31, 2022 as P230,000. Cost to sell are estimated at 5% of the fair value of investment. Determine the following: a. How much is the amount to be reported in P&L by Love Company in 2022 under different model? b. How much is the carrying value of Investment in Joint Venture as of December 31, 2022 under different model?