Joint Arrangements by Antonio J. Dayag
Correlation of PFRS’s 9, 10, 11, 12, PAS 28
Principles of Investments in Joint Arrangement
Joint Arrangement ~ is an arrangement of which two or more parties have joint control (PFRS 11, part 4) Arrangement is described as an ACTIVITY or an OPERATION or a specific grouping of asset and liabilities, which may or may not form a legal entity. Characteristics: (PFRS 11, part 5) A. Parties are bound by contractual agreement B2- Contractual agreements can be evidenced in several ways. An enforceable contractual arrangement is often, but, not always in writing. It may be a contracted or documented discussion between the parties. B3- When joint arrangements are structured thru a separate vehicle, the contractual agreement or some aspects of contractual arrangement, in some causes is incorporated in the articles, charters or by-laws of the separate vehicle. B4- Contractual arrangement sets out the terms upon which the parties participate in the activity that is the subject of the arrangement. B. Contractual Arrangement gives two or more parties joint control of the arrangement. Joint Control~ is the contractual 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. (PFRS 11, part 7) First key aspect of joint control assess whether the contractual arrangement gives all the parties or a group of parties control the arrangement collectively. (PFRS 11, part 8)
Contractual Terms
Second key aspect of joint control is that it exists only when decisions about the relevant activities require unanimous consent of parties that control the arrangement collectively. (PFRS 11, part 9) Where a joint arrangement exists there is no single party that has control. (PFRS 11, part 10) Party with joint control of an arrangement can present any other parties or a group of parties from controlling the arrangement. (PFRS 11, part 10) There can be a joint arrangement even though not all parties have joint control of the arrangement. (PFRS 11, part 11) Judgment is needed to assets whether the parties, or a group of parties, have joint control of the arrangement, assessment shall be made by considering all facts and circumstances. (PFRS 11, part 12) If facts and circumstances change, an entity shall reassess whether I has joint control of the arrangement. B5- Asset control B6- Determine if joint control B8- When the minimum required proportion of the voting rights can be achieved by more than one combination of the parties agreeing together, that arrangement is not a joint arrangement unless stipulated by contractual arrangements B9- Protective rights only and not relevant activitiesnot a party with joint control B10- Arbitration of disputes does not prevent the arrangement from being jointly controlled/joint arrangement B11- If arrangement outside PFRS 11, an entity accounts for its interest in accordance with relevant PFRS such as PFRS 10, 28 or PFRS 9.
Voting Rights
*Joint Control ~ the parties collectively control the arrangement because they are the only combination of parties that can control and the parties must unanimously agree. In case 3, there is also a joint control because a single combination is sufficient to achieve the minimum proportion or voting rights. (25%>20%) **No Joint Control ~ multiple combination of parties could collectively control the arrangement, the contractual agreement does not specify which parties must agree, there is no unanimous consent. The arrangement is treated as an ASSOCIATE. (Case 2, both 25%, case 4, ONLY 70% and there are other parties)
PAS 31 vs. PFRS11
Accounting for Joint Operation
Where the joint operation is undertaken in a separate vehicle, separate accounting records do not need to be kept for the joint operation. Example: joint operation does not sell the output produced, but rather distributes it to the operators. No profit/loss account rose. Where the Operator contributes a non- current asset to the joint operation, the value of the contribution is effectively the fair value of that noncurrent asset. In contributing an asset, the operator is as if selling a proportion of that asset to the other joint operators and retaining a proportion for itself. If CA < FV, operator makes a profit.
Profit = FV- CA, of the proportion of the asset sold. If joint arrangement is a partnership in nature, separate accounting records do not need to be kept, each joint operator records all the joint operation transactions in their own books, whether he is a party to the transactions or not, joint operators must inform on time the other operators the transactions made by him. An account Investment in operation must be maintained. The following transactions affect the account:
Cash Settlement: computation of cash settlement upon termination,
Interest in Joint Operation
P xxx
profit
Add: Share in joint operation gain or xxx Total:
P xxx
Less: Withdrawals
xxx
Cash Settlement
P xxx
Accounting for Joint Venture A party that participates, but does not have joint control, a joint venture shall account for its interest in the arrangement in accordance with PAS 39/PFRS 9 financial instruments, unless it has Significant Influence (PAS 28). Joint venture agreement specifies each co-venture’s capital contribution, representation of the board of directors, and involvement, plus other relevant matters. A distinguishing characteristic of a joint venture is that no investor can make strategic decisions unilaterally. Joint control is not the same with profit sharing. Investment should be recorded at the fair value of the non-monetary assets transferred to the joint venture Only the gain represented by interests of the other nonrelated ventures should be recognized on the date of the contribution and if only the transaction has commercial substance as per PAS 16. Principles on business combinations accounting that do not conflict with te guidance in this PFRS include but are not limited to: 1. Measuring identifiable assets and liabilities at fair value, other than items for which exceptions are given in PFRS 3 and other PFRSs. 2. Recognizing acquisition-related costs as expenses in the periods in which the costs are incurred and the
services are received, with the exception that the For other entities the exemption from the equity costs to issue debt or equity securities are recognized method applies only if the entity is a parent that is in accordance with PAS 32 and IFRS 9 exempted from preparing consolidated financial 3. Recognizing deferred tax assets and deferred tax statements or if the following conditions are met: liabilities that arise from the initial recognition of 1. The entity is a wholly-owned subsidiary or partialassets or liabilities, except for deferred tax owned subsidiary of another entity and its other liabilities that arise from the initial recognition of owners are informed about and do not object to not goodwill. applying he equity method 4. Recognizing the excess of the consideration 2. Entity’s debt or equity instruments are not traded in transferred over the net of acquisition date amounts a public market 3. Entity did not file or not in the process of filing it’s of the identifiable assets acquired and the liabilities FS with the SEC or any regulatory organization for assumed, if any, as goodwill 5. Testing for impairment a cash-generating unit to the purpose of issuing any instrument in the public which goodwill has been allocated at least annually, market. 4. The ultimate or any intermediate parent produces and whenever there is an indication that the unit CFS available for public use that complies with may be impaired, as required by PAS 36 The consolidated statement of financial position is PFRSs. Downstream Transactions, when a joint venture prepared by: 1. Including the interest in the joint venture at a purchases assets from a joint venture, the joint venture cost plus share of post-acquisition in total should not recognize its share of the profit made by the comprehensive income joint venture on the transactions in question until it sells 2. Including group share of the post-acquisition the asset to an independent third party until profit is total comprehensive income in the realized consolidated equity Upstream Transactions, Joint venture may sell or The consolidated income statement and other contribute assets so making a profit or loss. Any such comprehensive income will include: gain or loss should however, only be recognized to the 1. The consolidated share in the joint venture’s extent that it reflects the substance of the transaction net or loss Only the gain attributable to the interest of the other 2. The consolidated share in the joint venture’s joint venture should be recognized in the financial other comprehensive income statements. Use of equity method should be discontinued from Full amount of any loss should be recognized when the the date on which the venture ceases to have joint transaction shows evidence that the net realizable control over, or have significant influence, on a joint value of current assets is less than the cost or there is venture. an impairment loss. PFRS 12 addresses all disclosure requirements in Other principle of eliminating unrealized profits or respect of interests in other entities and it is losses in proportion to the investor’s ownership applicable to an entity that has an interest in any interest in the joint venture also applies to other combination of the following: subsidiaries, joint intercompany transactions, such as transfer or sale of arrangements, associates and unconsolidated PPE. structured entities. Adjustments to eliminate the investor’s proportionate PFRS 11 prescribes that a joint venture shall share of unrealized profit or loss on any intercompany recognize its interest in a joint venture as an transaction need to be made to the balances of the investment and shall account for that investment particular accounts in which the effects of unrealized using equity method in accordance with PAS 28, P/L are recorded Investment in Associates and Joint Ventures, unless Joint Venture Losses exempted from applying the equity method as When the equity method being used by the Joint specified in that standard. Venture’s share of losses of the joint venture equals or The Equity Method of Accounting exceeds its interest in joint venture, it should In the separate financial statements of an investor, discontinue including its share of further losses. investment in joint ventures and associate are accounted Investment is recorded at zero value. at cost or at fair value. Under either measurement basis, After the interest is reduced to zero, additional losses the investor recognizes dividend income when right to should only be recognized where the joint venture has receive dividend has been established. incurred obligations, or made payments on behalf of the Exemptions from the Equity Method: joint venturer. In general, joint ventures should be accounted for Goodwill and Impairment Testing using the equity method Any Impairment loss id recognized in accordance 1. For certain entities, they may elect to measure their with PAS 36 Impairment of assets for joint venture as investments in associates and joint venture at fair a dingle asset. value through profit or loss in accordance with PAS There is no separate testing for impairment of 39/PFRS 9. goodwill, as it form forms part of the CA of an 2. When availed, such entities need not apply the investment in Joint venture and is not separately equity method for the Standard but they must recognized disclose their involvements in accordance with Any reversal of that impairment loss is recognized in PFRS 12. accordance with PAS 36 to the extent of the
recoverable amount of investment that subsequently increased. Goodwill does not arise when the joint venture is first established. Goodwill may arise of an investor purchases its interest in a joint venture from other investors and it pays a premium over its share in the net assets.
Investme nt Subsidiar y
Associate
Summary of the Accounting Treatment required at each Criteri Investor’s Separate FS Consolidated FS
Joint Venture
Contro l
(51% or more) Signifi cant Influen ce
(20%50%) Joint Contro l
Other Investme nt
Required Treatment in CFS
a
Any Impairment loss attributable to the goodwill of joint venture shall be recognized as impairment loss of investment in associate or joint venture in profit or loss, and the corresponding amount should be credited to the carrying amount of the investment in joint venture.
(20%50%) Asset held for accreti on of wealth
PAS 27: Investments carried at: 1. Cost 2. PFRS 9/PAS39 3. Using Equity Method
PAS 27: Investments carried at: 1. Cost 2. PFRS 9/PAS39 3. Using Equity Method
PAS 27: Investments carried at: 1. Cost 2. PFRS 9/PAS39 3. Using Equity Method
PFRS 10: Investment is eliminated and net assets of subsidiary are consolidated with those of the parent
PAS 28/PFRS 10: Investment is accounted for using the equity method
PAS 28/PFRS 10/PFRS 11: Investment is accounted for using the equity method
PFRS 9
PFRS 9
Full Consolidation
Equity Accounting
Equity Accounting
As for single company accounts
Levels of reporting for Consolidated Financial Statements (CFS) Purpos
