6 Joint Arrangement

PFRS 11 prescribes the accounting for a joint arrangement

which is defined as a contractual arrangement over which two or
more parties have joint control. It is important that entities understand
the implications and interplay or both PFRS 10 and PFRS 11 to
ensure the proper assessment of and accounting for current and
future joint arrangements.

Names can be misleading. Some agreements that are

referred to as joint arrangements actually include arrangements
whereby one party has control of an entity. In these arrangements,
the entity with control would consolidate it and the other parties would
account for their interest in that entity based on the nature of their
investment. Other arrangements may not be referred to as joint
arrangements, but may still be joint arrangements as defined by
PFRS 11. In other words, the name of the agreement is not important
– it only matters whether it meets the definition of a joint arrangement,
as set out in PFRS 11.
LEARNING OUTCOMES:

After reading this module, the learner should be able to:

1. Define a joint arrangement and state its characteristics

2. Differentiate between a joint operation and a joint venture
3. Account for joint operations
4. Describe the accounting requirements for joint ventures.

TIME:

The time allotted for this module is 3 hours.

LEARNER DESCRIPTION

The participants in this module are Third Year BSA Students

MODULE CONTENTS:

KEY TERMS:

Terms Definition
Joint arrangement An arrangement of which two or more parties
have joint control

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.

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

Joint venture A joint arrangement whereby the parties that

have joint control of the arrangement have rights
to the net assets of the arrangement

Joint venture A party to a joint venture that has joint control of

that joint venture

Party to a joint arrangement An entity that participates in a joint arrangement,

regardless of whether that entity has joint control
of the arrangement
 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.

PFRS 11

PFRS 11 notes that a contractual arrangement is often, but not always, in writing
(although we expect unwritten agreements to be rare in practice). Statutory mechanisms
can create enforceable arrangements, either on their own or in conjunction with contracts
among the parties. A contractual agreement may be incorporated in the articles, charter
or by laws of the entity (or the separate vehicle – a new term that is a broader concept
than entity)

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
that assesses whether the parties, or a group of parties, control the arrangement (in
accordance with the definition of control in PFRS 10 Consolidated Financial Statements).

After concluding that all the parties, or a group of the parties, controls 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.

TYPES OF JOINT ARRANGEMENT

1. Joint operation – it 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.
2. Joint venture – it 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.
CLASSIYING JOINT ARRANGEMENTS
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.

Regardless of the purpose, structure or form of the arrangement, the classification

of joint arrangements depends upon the parties’ rights and obligations arising from the
arrangement.

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.

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.

FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT

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 revenues from the sale of the output by the joint operations; 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 to a joint operation in accordance with the relevant PFRS.

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 that party
has rights to the assets, and obligations for the liabilities, relating to the joint operation.

ACCOUNTING FOR THE JOINT OPERATION ITSELF

Where the joint operation is undertaken outside a formal structure, such as
corporation or partnership, separate accounting records do not need to be kept for the
joint operation. However, for accountability reasons, it is expected that the joint operation
agreement would require these records.
ACCOUNTING TREATMENT FOR A JOINT OPERATION (BY AN
UNINCORPORATED JOINT OPERATION)
If the joint operation does not sell the output produced, but rather distributes it to
the operators, there is no profit or loss account raised by the operation. In preparing
accounts for the joint operation, the main purpose is to accumulated costs as incurred.
These are capitalized into a work in progress account, which is transferred to the
operators as inventory. Further, the joint operation accounts provide information about
the assets and liabilities relating to the joint operation as well as the contributions from
the operators. Hence, a statement of financial position is the joint operation’s main
financial statement.

ACCOUNTING FOR JOINT OPERATIONS – PARTNERSHIP IN NATURE

1. Separate Records
- A full set of separate accounting records may be kept for the joint venture so that
the venturers can assess the performance of the venture (e.g. through regular
management accounts);
- Where the venture has a full set of accounting records, the transactions are
recorded in exactly the same way as for an ordinary business. A separate income
statement can be extracted from which each venture will be credited or debited
with his agreed share of the profit or loss.
- The venturers, may maintain separate records for transactions affecting them
through investment in Joint Venture account. The account is opened in individual
books of venturers and used as follows:
Debited for:
▪ Original and additional investment
▪ Services rendered to the venture or a compensatory basis
▪ Share in joint venture profits
Credited for:
▪ Capital withdrawals from joint venture
▪ Share in joint venture losses
▪ Cash settlement
In theory, it is possible for a jointly controlled operations to have a full set of records, but
this is rare in practice.

2. No separate records

- Often, due to the short life time or size of the joint venture, it is not considered
worthwhile opening a new set of records for what may only be a few transactions.
 In this case, each venture will record transactions on behalf of the venture in his
own records, alongside his other business dealings.
- An account called Joint Venture is maintained to take the place of all nominal
accounts. The following transactions that affect the account would be as follows:

Joint Venture
Merchandise contribution Merchandise withdrawals
Purchases Merchandise returns
Freight-in Purchase returns and
allowances
Sales returns and allowances Purchase discounts
Sales discounts Sales
Expenses Other income

- If Joint venture is completed, the balance of the joint venture account represents
the profit or loss. Credit balance represents profit and a debit balance represent
loss
- If joint venture is uncompleted, meaning there are still unsold merchandise, profit
or loss is a balancing figure between the balance of the joint venture account
before profit distribution and the cost of the unsold merchandise (the required debit
balance of the joint venture account after profit or loss distribution)

CASH SETTLEMENT

Cash settlement may also be represented by the venturer’s account balance after
recording investments, withdrawals and share in venture gain. A debit balance represents
cash to be paid in final settlement while a credit balance represents cash to be received.
The recording of cash settlement on the books of each venturer requires that:
a. All accounts, except personal accounts, be brought to zero balance.
b. Any unaccounted debit or credit is cash to be received or paid.

To make cash settlement to ventures upon termination of a complemented venture,

cash settlement may be computed as follows:

Investments Pxx
Add: Share in venture gain xx
Total Pxx
Less: Withdrawals xx
Cash Settlement Pxx
JOINT VENTURES
A joint venture recognizes its interest in a joint venture as an investment and shall
account for that investment using the equity method in accordance with PAS 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 PFRS 9 Financial instruments
unless it has significant influence over the joint venture, in which case, it accounts for its
accordance with PAS 28 (as amended in 2011)

ONLINE READING MATERIALS:

• Read in complete detail PFRS/IFRS 11 at

https://www.iasplus.com/en/standards/ifrs/ifrs11
• Read in complete detail IAS 28 at
https://www.iasplus.com/en/standards/ias/ias28-2011
• Read in complete detail Section 15 of IFRS for SMEs at
https://www.iasplus.com/en/standards/other/ifrs-for-smes
• Read Chapter 9 of the Advanced Accounting by Antonio Dayag

ONLINE VIDEO LINKS AND MATERIALS:

• Watch the online video lecture of the course instructor uploaded at NEO LMS
and to the class shared Google drive (if applicable).
• For supplemental lessons, watch the online video of Amit Sharma at
https://www.youtube.com/watch?v=RcWlXnIlVcg

TEST YOUR KNOWLEDGE:

Refer to Ubian LMS for Activity and Quiz

LESSON REFERENCES:

Dayag, Antonio J. (2020), Advanced Financial Accounting (A Comprehensive:

Conceptual & Procedural Approach) Good Dreams Publishing. Sampaloc, Manila
Deloitte (2020). IAS 28 Investments in Associates and Joint Ventures. Iasplus.com.
Retrieved from: https://www.iasplus.com/en/standards/ias/ias28-2011

Deloitte (2020). IFRS 11 – Joint Arrangements. Iasplus.com. Retrieved from:

https://www.iasplus.com/en/standards/ifrs/ifrs11
Deloitte (2020). IFRS for Small and Medium Enterprises (SMEs). Iasplus.com. Retrieved
from: https://www.iasplus.com/en/standards/other/ifrs-for-smes
Millan, Zeus Vernon B. (2020). Accounting for Special Transactions. CHAPTER 8:
Separate Financial Statements. Bandolin Enterprise. #21 Paramount Vill., Sto.
Tomas, Baguio City
Sharma, Amit (2019, July 19) Joint Arrangements Retrieved from:
https://www.youtube.com/watch?v=RcWlXnIlVcg