Financial Repor ting Joint Venture
J o i n t Ve n t u r e A c c o u n t i n g o n t h e M o v e
Robert Kirk outlines the requirements of IAS 31.
Background
In this month’s issue I am going to cover the topic of
joint venture accounting, a subject which is currently
under review by the International Accounting Standards
Board (IASB) and is likely to be altered in the next few
months once the current exposure draft is implemented.
IAS 31 was published in December 2003 and
provides guidance on how to account for joint ventures.
A joint venture is defined by IAS 31 as a contractual
agreement whereby two or more parties undertake an
economic activity which is subject to joint control. Joint
control represents a contractually agreed sharing of
control over an economic activity. A classic example of
this arrangement is the Airbus operation in Toulouse
which is jointly controlled by British Aeropace Plc and
four other joint venturers, all of which have to
consensually agree before any major operating decision
is undertaken.
There are two different accounting methods permitted
by the standard:
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Proportionate consolidation
This is a method of accounting and reporting whereby a
venturer’s share of each of the assets, liabilities, incomes
and expenses of a jointly controlled entity are combined
on a line-by-line basis with similar items in the venturer’s
financial statements or reported as separate line items.
Equity method
Initially the investment is carried at cost by a venturer
and adjusted thereafter for the post acquisition change
in the venturer’s share of net assets of the jointly
controlled entity. The income statement reflects the
venturer’s share of results of operations of the jointly
controlled entity.
IAS 31 at present favours proportionate consolidation
but permits equity accounting as an acceptable second
best solution when accounting for jointly controlled
entities.
IAS 31 identifies three broad types of joint venture
activity:
* jointly controlled operations
* jointly controlled assets; and
* jointly controlled entities
They all have the common characteristics of having
two or more joint venturers bound under contract and
establishing joint control.
Jointly Controlled Operations
Some joint ventures involve the use of assets and
other resources rather than the establishment of a
corporation, partnership or other entity. Each venturer
uses its own assets and incurs its own expenses and
raises its own finance.
The joint venture agreement usually provides a means
by which revenue from the sale of the joint product and
any expenses are shared among the venturers. An
example might be a joint venture to manufacture,
market and distribute jointly a particular product such as
an aircraft. Different parts of the manufacturing process
are carried out by each of the venturers and each
venturer takes a share of the revenue from the sale of
the aircraft but bears its own costs.
A venturer should recognise in its financial statements
the following:
(a) the assets it controls and the liabilities it incurs; and
(b) the expenses it incurs and its share of the income it
earns from the sale of goods or services by the joint
venture.

Effectively an entity is adopting proportionate consolidation
for such relationships.
Jointly Controlled Assets
Some joint ventures involve joint control by the venturers
over one or more assets which are dedicated for the
purposes of the joint venture. Each venturer may take a
share of the output and bear an agreed share of the
expenses incurred.
No corporation, however, is established. Many activities in
oil and gas and mineral extraction involve jointly controlled
assets e.g. an oil pipeline. Another example is the joint
control of property, each taking a share of the rents received
and bearing a share of the expenses.
Again, a venturer should recognise in its financial
statements:
(a) its share of jointly controlled assets, classified according
to their nature;
(b) any liabilities it has incurred;
(c) its share of any liabilities jointly incurred with other
venturers;
(d) any income from the sale or use of the share of the
output of the joint venture together with its share of
any expenses incurred;
(e) any expenses incurred re its interest in the joint
venture.
The treatment of jointly controlled assets should reflect
their substance and economic reality and usually the legal
form of the joint venture. Separate accounting records for
the joint venture may be limited to those expenses incurred
in common. Financial statements may not be prepared for
the joint venture but management accounts may be
needed to assess performance.
“Proportionate consolidation can only be
adopted from the date the entity acquires joint
control and it should be discontinued from the
date on which it ceases to have joint control
over a jointly controlled entity.”
Jointly Controlled Entities
The main type of joint venture is a jointly controlled entity.
In this case a corporation is established and operates as per
other legal entities except that there is a contractual
arrangement between the venturers that establishes joint
control over the economic activity of the entity.
A jointly controlled entity controls the assets of the joint
venture, incurs liabilities and expenses and earns income. It
may enter contracts in its own name and raise finance for
itself and each venturer is entitled to a share of the results
of the jointly controlled entity.
An example is when two entities combine their activities
in a particular line of business by transferring relevant assets
Financial Repor ting Joint Venture
and liabilities into a jointly controlled entity or it could be a
joint venture by establishing a joint entity with a foreign
government.
In substance they are often similar to jointly controlled
operations or jointly controlled assets. However, it does
maintain its own accounting records and prepares its
financial statements in the same way as other normal
entities in conformity with appropriate national regulations.
Each venturer usually contributes cash or other resources
to the jointly controlled entity. These contributions are
included in the accounting records of the venturer and
recognised in its financial statements as an investment in
the jointly controlled entity.
Financial Statements of a Venturer
Under IAS 31, a venturer should report its interest in a
jointly controlled entity using one of two reporting formats
for proportionate consolidation or using the equity method.
It is essential that a venturer reflects the substance and
economic reality of the arrangement. The application of
proportionate consolidation means that the consolidated
balance sheet of the venturer includes its share of the
assets it controls jointly and its share of the liabilities for
which it is jointly responsible. The consolidated income
statement includes the venturer’s share of the income and
expenses of the jointly controlled entity. Many of the
procedures are similar to consolidation procedures set out
in IAS 27.
There are different reporting formats to give effect to
proportionate consolidation but the most popular is to
combine a venturer’s share of each of the assets, liabilities,
income and expenses of the jointly controlled entity with
similar items in the consolidated statements on a line by
line basis. e.g. its share of inventory with inventory of the
consolidated group.
Proportionate consolidation can only be adopted from
the date the entity acquires joint control and it should be
discontinued from the date on which it ceases to have joint
control over a jointly controlled entity. This could happen
when the venturer disposes of its interest or when external
restrictions mean that it can no longer achieve its goals.
As an alternative, a venturer may report its interest in a
jointly controlled entity using the equity method as per IAS
28 Accounting for associates. The equity method is
supported by those who argue that it is inappropriate to
combine controlled items with jointly controlled items.
Originally, the standard took the view that it should not
recommend the use of the equity method because
proportional consolidation better reflects the substance
and economic reality of a venturer’s interest in a jointly
controlled entity. However, the latest exposure draft
(October 2007) has now decided to recommend the
demise of proportionate consolidation and has opted for
equity accounting only. As with proportionate consolidation
a venturer should discontinue the use of the equity method
from the date it ceases to have joint control.
An example of both approaches is provided on the
following page:
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 Financial Repor ting Joint Venture

Example – Castlerock Plc

The following financial statements relate to Suggested solution – Castlerock Plc
Castlerock, a public limited company.
How should the investment in Castlerock plc be treated in the consolidated
Income Statement for year ended
balance sheet and income statement?
31 December 2007
£m £m Equity Accounting
Turnover 212 The investment should be disclosed as a single line under IAS 31, if
Cost of sales (170) adopting equity accounting, as follows:
Gross profit 42
Distribution costs 17 Calculation of goodwill
Administration expenses 8 (25) At 1 January 2007 –
17 fair value of assets
Other operating income 12
29 £m
Exceptional item (10) Property, plant and equipment 30
Finance costs (4) Current assets 31
Profit on ordinary activities before tax 15 Current liabilities (20)
Income tax (3) Non current liabilities (8)
12 33
Balance Sheet at Shareholding 30% x £33m 9.9
31 December 2007 £m £m Fair value of investment 14
Non current assets Goodwill (bal fig.) 4.1
Property, plant and
equipment 30
£m
Goodwill 7
Disclosure in balance sheet (Extract)
37
Cost of investment 14
Current assets 31
Post-acquisition profits 3.9
Current liabilities (12)
30% x (£32m–£10m share capital - £9m retained reserves)
Net current assets 19
Additional depreciation charge (1.2)
Total assets less current labilities 56
(2 years x 20% x (£30m fair value – £20m cost)) x 30%
Non current liabilities (10)
Investment in joint venture 16.7
46
Equity and reserves
Alternative disclosure
Called up share capital
Share of net assets 36
Ordinary share capital 10
(£46m–£10m share of inventory profits)
Share premium account 4
Revaluation of property, plant and equipment 10
Retained profits
Additional depreciation (4)
(36 – 4 dividend paid) 32
(£10m x 20% x 2 years)
46
42
(i) Castlederg, a public limited company, acquired 30 per cent of the ordinary
share capital of Castlerock Plc at a cost of £14 million on 1 January 2006.
Shareholding 12.6
The share capital of Castlerock has not changed since acquisition when the
retained profit of Castlerock was £9 million. Two other venturers each own (30% x £42m)
35% of the entity and all three have joint control over the operating activities Share of goodwill 4.1
of the investee. Investment in joint venture 16.7
(ii) At 1 January 2006 the following fair values were attributed to the net assets of The alternative disclosure is more correct since it does
Castlerock Plc but not incorporated in its accounting records. not disclose any element of profit as part of the investment.
£m
Property, plant and Disclosure in the income statement (Extract)
equipment 30 (carrying value £20m)
£m
Goodwill (estimate) 10
Share of operating profit in joint venture 5.1
Current assets 31
(30% x £29m – £3m inter-co. profit - £0.6.m depreciation)
Current liabilities 20
Exceptional item – joint venture (3.0)
Non current liabilities 8
(30% x £10m)
(iii)During the year to 31 December 2007, Castlerock sold goods to Castlederg to
Finance costs–joint venture (1.2)
the value of £35 million. The inventory of Castlederg Plc at 31 December
(30% x £4m)
2007 included goods purchased from Castlerock Plc on which the company
made a profit of £10 million. Tax on profit on ordinary activities of Joint venture (0.9)
(v) The policy of all companies in the Castlederg group is to depreciate tangible (30% x £3m)
fixed assets at 20 per cent per annum on the straight-line basis.

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 Financial Repor ting Joint Venture

X: Denotes Castlederg Plc results for the year Disclosure

Proportionate consolidation Under IAS 31, a venturer should disclose the aggregate
If Castlederg adopted proportionate consolidation the following would be recorded: amount of the following contingent liabilities, unless the
Consolidated income statement probability of loss is remote, each separately:
£m
(a) any contingent liabilities incurred in relation to its
Consolidated income statement (Extract)
interest in joint ventures and its share in each contingent
Turnover: Group and share of joint ventures X + 53.1 liability incurred jointly with other venturers;
(£212m gross less inter-company turnover £35m x 30%)
(b) its share of contingent liabilities of the joint ventures
Cost of sales
(£170m less inter company turnover £35m plus inter co profit
for which it is contingently liable; and
£10m x 30% + depreciation 0.6m) X + ( 44.1) (c) those contingent liabilities that arise because the
Distribution costs venturer is contingently liable for the liabilities of the
(£17m x 30%) X + ( 5.1) other venturers of a joint venture.
Administration expenses
(£8m x 30%) X + ( 2.4) Items (a) to (c) should be disclosed separately.
Other operating income A venturer should also disclose the aggregate amount of
(£12m x 30%) X + 3.6 the following commitments regarding interests in joint
Exceptional items ventures separately from other commitments:
(£10m x 30%) X + (3.0)
(a) any capital commitments re joint ventures and its
Finance costs
(£4m x 30%) X + (1.2) share in capital commitments incurred jointly with other
venturers; and
Taxation
(£3m x 30%) X + (0.9) (b) its share of capital commitments of the joint ventures
themselves.
Consolidated balance sheet (Extract)
A venturer should disclose a listing and description of
Property etc X + 12.9 interests in significant joint ventures and the proportion
(£37m + £10m revaluation–£4m additional depreciation= £43m x 30%) of ownership interest held in jointly controlled entities.
Current assets X + 6.3 An entity that adopts line by line reporting for
(£31m – £10m inter-company profit on stocks = £21m x 30%) proportionate consolidation or the equity method should
Goodwill X + 4.1 disclose the aggregate amounts of each of its current
Current liabilities X + (3.6) assets, long-term assets, current liabilities, long-term
(£12m x 30%) liabilities, income and expenses related to interests in
Non current liabilities X + (3.0) joint ventures.
(£10m x 30%) A venturer that does not publish consolidated
Net assets X + 16.7 accounts, because it has no subsidiaries, should disclose
the above information as well.
Two excellent examples of good disclosure in Ireland
Transactions between a Venturer and a
are provided by McInerney Property Holdings Plc and
Joint Venture UTV Plc, the former adopting equity accounting and the
When a venturer contributes or sells assets to a joint latter proportionate consolidation.
venture, recognition of any portion of a gain or loss
should reflect the substance of the transaction. While the McInerney Property Holdings Plc Year
assets are retained by the joint venture and provided the ended 31st December 2006
venturer has transferred the significant risks and rewards
of ownership, the venturer should recognise only that Interests in Joint Ventures
portion of the gain or loss which is attributable to the A joint venture is a contractual arrangement whereby
interests of the other venturers. The venturer should the Group and other parties undertake an economic
recognise the full amount of any loss when the sale activity that is subject to joint control and the strategic
provides evidence of a reduction in the NRV of current financial and operating policy decisions relating to the
assets or an impairment loss. activities of the joint venture require the unanimous
consent of the parties sharing control.
When a venturer purchases assets from a joint venture
the venturer should not recognise its share of the profits Joint venture arrangements that involve the
of the joint venture until it resells the assets to an establishment of a separate entity which each venturer
independent party. A venturer should recognise its share has an interest are referred to as jointly controlled
of the losses in the same way as profits except the losses entities. The Group reports its interests in jointly
should be recognised immediately when they represent controlled entities using the equity method. The net
a reduction in the NRV of current assets or an amount of the Group’s share of the assets and liabilities
impairment loss under IAS 36. of jointly controlled entities is disclosed in the
consolidated balance sheet as Interests in Joint Ventures.

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 Financial Repor ting Joint Venture

The Group’s share of the profits and losses after interest and tax of jointly Investments (continued)
controlled entities is disclosed as Share of Results from Joint Ventures in
the consolidated income statement. (c) Joint Ventures

Any goodwill arising on the acquisition of the Group’s interest in a jointly During the year ended 31 December 2006 there were two joint
controlled entity is accounted for in accordance with the Group’s venture companies, First Radio Sales Limited and Digital Space Limited
accounting policy for goodwill (see below). Where the Group transacts (2005: Absolute Radio (UK) Limited, Digital Space Limited and First
with its jointly controlled entities, unrealised profits and losses are Radio Sales Limited). The revenue, expenditure, asset and liability
eliminated to the extent of the Group’s interest in the joint venture. information relating to those joint ventures proportionately consolidated
in the Group accounts is disclosed below.
Aggregate amounts relating to Joint Ventures included in non-
current assets: The latest developments - ED 9 Joint
2006 2005 Arrangements (September 2007)
€’000 €’000
In September 2007 the IASB issued an exposure draft ED 9 Joint
Total Assets 99,125 74,153 Arrangements in which it proposes to eliminate the proportionate
Total Liabilities (91,693) (62,867) consolidation option.
Total Net Assets 7,432 11,286
ED 9 sets out requirements for recognition and disclosure of interests in
Net Interest in Joint Ventures 3,877 4,660
joint arrangements. Its objective is to enhance the faithful representation
of joint arrangement and it achieves this by requiring an entity:
Aggregate amounts relating to Joint Ventures included in Income
Statement: (a) to recognise its contractual rights and obligations arising from its joint
2006 2005 arrangement. The precise form of arrangement is no longer the most
€’000 €’000 significant factor in determining the appropriate accounting treatment;
and
Revenue 15,895 2,864
Expenses (14,098) (2,940) (b) to provide enhanced disclosures about its interest in joint
Profit / (Loss) 1,747 (76) arrangements.
Group’s Share of Profit / (Loss) 1,064 (21) It forms part of the short term convergence project currently being
undertaken by the IASB and American Financial Accounting Standards
Board (FASB) and will lead to current IAS 31 being superceded.
Interests in Joint Ventures
The Group has a number of joint venture entities which are used to Main features of ED 9
finance specific projects. A list of all significant joint ventures, including the The core principle of ED 9 is that all parties to a joint arrangement should
name, country of incorporation, proportion of ownership and nature of recognise their contractual rights and obligations arising from the joint
operations, is provided in note 46 on page 77. arrangement.
Details of land commitments held in joint ventures are provided in note The definitions are similar to IAS 31 in that a joint arrangement is a
41. contractual arrangement whereby two or more parties undertake an
economic activity together and share decision making relating to the
UTV Plc Year ended 31st December 2006 activity. There are still three types – joint operations, joint assets and joint
Investment in joint venture ventures.

A joint venture is an entity in which the Group holds an interest under ED 9 requires a party to recognise its contractual rights and obligations as
a contractual arrangement where the Group and one or more other assets and liabilities. Contractual rights to individual assets and contractual
parties undertake an economic activity that is subject to joint control. obligations for expenses represent interests in joint operations or joint
assets.
The Group’s interest in its joint ventures is accounted for by
proportionate consolidation, which involves recognising a proportionate The major recommendation is that an interest in a joint venture must use
share of the joint venture’s assets, liabilities, income and expenses with the equity method.
similar items in the consolidated financial statements on a line-by-line ED 9 also requires disclosure of a description of the nature of operations
basis. The reporting dates of the joint venture and the Group are identical it conducts through joint arrangements as well as a description of and
and both use consistent accounting policies. summarised financial information relating to its interests in joint ventures.
Attributable to Joint Ventures:
2006 2005 Conclusion
€’000 €’000 The latest exposure draft will certainly force many listed Irish companies
Revenue 1,268 978 to readdress the subject of joint venture accounting. A large number of
Operating costs (988) (1,011) companies such as UTV Plc have switched over from adopting equity
Finance income 15 3 accounting to proportionate consolidation on first adoption of
Profit / (loss) before tax 295 (30) international financial reporting standards but this process will inevitably
Taxation (6) (1) have to be reversed in the next two years. At this stage we are not sure
Profit / (loss) for the year 289 (31) when the revised standard will be published but is unlikely it would be
Current assets 546 365 adopted for any entities reporting before the end of 2009.
Current liabilities 156 106
Robert Kirk is a Professor of Financial Reporting at the University of
Non-current liabilities - -
Ulster.

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