So, What Exactly Is A Joint Venture? – FAQ | IFRS

So, what exactly is a joint venture?

Joint ventures are economic arrangements between two or more parties where key strategic decisions are made unanimously by the entities (the “venturers”) that share control. Key strategic decisions would include decisions that significantly impact sales and purchases of goods and services; research and development of new products; acquisitions and disposals; and the funding structure of the venture. Joint ventures may appear in incorporated or unincorporated form (i.e. a joint venture need not result in the creation of a separate legal entity). “Strategic alliances” in which companies agree to work together to promote each other’s products or services may also be considered joint ventures.

How are joint ventures classified and accounted for? So, what exactly is a joint venture?

A legal entity is classified as a “jointly controlled entity”, a joint venture formed by contractual arrangements but which is not a separate legal entity is classified as “jointly controlled operations”.

Both are accounted for using the equity method or in rare cases using the cost method.

Under the equity method of accounting, the investment in the joint venture is presented as one line item in the balance sheet and income statement. It is initially recorded at cost and is subsequently increased or decreased to reflect changes in the venturer’s share of the joint venture’s net assets. The equity accounting method is actually set out in IAS 28 Investments in Associates since the method is the same for associates and joint ventures.

Under IFRS 11 Joint arrangements accountting for jointly controlled entities using the proportionate consolidation method is prohibited. So, what exactly is a joint venture?

The second main impact of IFRS 11 is that any jointly controlled entities under IAS 31 are classified as joint operations under IFRS 11. Such entities would previously have been equity accounted or proportionately consolidated under IAS 31 whereas under IFRS 11 the venturer’s share of the joint operation’s underlying assets, liabilities, revenues and expenses will be recognised. Most jointly controlled entities under IAS 31 are joint ventures under IFRS 11 since separate legal entities generally imply that the assets, liabilities, revenues and expenses belong to the entity itself, with each venturer’s interest being a share of the net assets rather than direct rights to the underlying balances. Nevertheless, there will be some jointly controlled entities under IAS 31 which prove to be joint operations under IFRS 11.

Some accounting complexities arise when companies use joint ventures to develop new products, enter new markets or use joint ventures as a source of financing.

The key points illustrated: So, what exactly is a joint venture?

  • In licensing and distribution arrangements, it is important to distinguish between supply arrangements, joint operations and jointly controlled entities.
  • Joint ventures in subscription-based businesses are sometimes equity accounted as net liabilities.
  • The holding structure of an overseas joint venture can affect foreign exchange translation.
  • Contribution of assets into a joint venture can cause an immediate income statement gain.
  • Debt waiver by a joint venture must be assessed carefully to determine if an income statement gain arises.

This list of scenarios is not designed to be exhaustive; but will hopefully provide food for thought as companies consider how to account for new and future joint ventures.

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