IFRS 11 and IAS 28

Joint Arrangements
and Investment in
Associates
1
This material is the property of Department of Accounting
and Finance, CoBE, AAU. Permission must be obtained from

Learning Objectives
At the completion of studying
chapter, you will be able to:

this

Definesjoint control;
Determiningthe typeof joint arrangement;
Accountfor
the
investment
in
a
joint
arrangement

List of Applicable Standards

Topic List

Standards

Joint Arrangement
Investment in Associates and Joint
Ventures
Disclosure of Interest in Other
Entities

IFRS 11
IAS 28
IFRS 12

Degree
of
influence
over
investees
& the relevant IFRS standards
Degree of
influence
Unilateral Control

Joint control (joint

arrangements)

Significant
influence

IFRS accounting
Account for investment according to
IFRS 10( Consolidated Financial
Statements)
Joint operation: Account for assets
and liabilities using IFRS 11 Joint
Arrangements.
Joint venture: Account for investment
using
the
equity
method
in
accordance with IAS 28
Account for investment using the
equity method in accordance with IAS
28

Joint Arrangements(IFRS
11)

The creation of joint arrangements ( corporation or

partnership joint ventures) is very common in projects
that typically:
Require significant funding
Involve significant project risk
Require
collaboration among investors to share
expertise and resources.
Has the following benefits:
Capital needed can be raised .
Transfer of technology and knowhow.
Provide raw materials for the Joint Arrangement .
Marketing
of the Joint Arrangement products
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particularly exported products

Joint Arrangement ( IFRS 11)

Basic Concepts and
Terminologies

Joint arrangement: is an arrangement of which

two or more parties have 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.

Identifying relevant activities

Who appoints
the Board
and key
management
personnel?
Who can
change the
strategic
direction of
the entity?

Relevant activities are those activities that significantly affect

the investee's return.

Joint arrangement cont

Unanimous consent: means that any party within the
arrangement can prevent any of the other parties from
making unilateral decisions without its consent.
Contractual
arrangement:
are
enforceable
agreements reached among the parties which are often
in writing.
However Joint arrangement
may not always be in
explicit ( no clear contract) and hence determined
by substance of the dealings between the parties
like :
From documented minutes of discussion,
From the articles of association, charters, bylaws and
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similar mechanisms.

How are relevant activities

directed primarily?

It dictates the standards to be applied to account investment.

The existence of joint control ( unanimous consent) may
explicitly stated in the contract ( partnership or Plc vehicle) Or
It is implied in the article of association and needs our judgment
to determine weather there exist a joint control.

Testing Existence of Joint control

Example 1: Three Factories ( Mathara, Wenji and Finchia) have

established another new sugar factory ( Shebelle Sugar factory)

on Wabe Shebelle river basin . Mathara has 55%, Wenji has 15%
and Finchia has 30% ownership rights in the new factory.
The contractual arrangement reached
between the parties
specifies that unanimous consent of all the parties is required to
make decisions about the entitys relevant activities .
Required: Assess the existence of joint control
By which standard shoud the three accounts their investment?
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The existence of joint control

( unanimous consent)
is not explicitly stated.
Example 2: Assume the previous data that the Shebelle
factory is established between Wanji and mathara only
and each has 50% of the voting rights (and equivalent
power) over the investees relevant activities.
The article of association between the two owners
indicate that at least 51% of the voting rights are
required to make decisions about the entitys relevant
activities.
Required:
Assess the existence of joint control
Which standard should be used to account investment
by the two?

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consent)
is not explicitly stated.

Example 3: Three Factories ( Mathara, Wenji and

Finchia) have established another new sugar
factory ( Shebelle Sugar factory) on Wabe
Shebelle river basin
Mathara 50% , Wenji 30% and Finchia 20% .
Their article of association indicate that at least
75% of the voting rights are required to make
decisions about the entitys relevant activities.
Required: Assess existence of a joint control?
Which relevant standard is used to account
investment made by the three factories?
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The existence of joint control

( unanimous consent) is not
explicitly stated.
Example 4
Three Factories
( Mathara, Wenji and Finchia) have
established another new sugar factory ( Shebelle Sugar
factory) on Wabe Shebelle river basin
Mathara 50% , Wenji 25%
and Finchia 25% . Their
article of association indicate that at least 75% of the
voting rights are required to make decisions about the
entitys relevant activities.
Required: Assess existence of a joint control?
Which relevant standard is used to account investment
made by the three factories?
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Types of Joint Arrangement

IFRS11 identifies two types of joint arrangements :

Joint operations or Joint ventures.
The key distinction between the two forms is the
parties rights and obligations under the joint
arrangement .
Joint Operation: is a joint arrangement whereby the
parties that have joint control have rights to the assets,
and obligations for the liabilities of the arrangement.
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.
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Types of Joint
Arrangement cont..

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Assessing separate entity as

JV or JO

The assessment(right to net asset or to specific

asset) is based on the following facts:
Structure of the arrangement
legal form of the arrangement.
The terms and conditions of the contractual
arrangement.
Other facts and circumstances.

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Example 1: Berta
and Satcon
construction
have
Determination
of separate
entity
as
jointly
formed aornew
company
joint
operation
joint
venture to undertake a

government project ( Addis Abeba Nairobi railway).

The new companys legal form is that Berta and Satcon
construction have rights to the assets, and obligations
for the liabilities of the entity.( the new company has
unlimited liablity)
Required: Determine weather the new entity is joint
operation or joint venture.

18

Example 2:
Sunshine real estate and china
construction companies, have set up a separate
vehicle (SCCC Company) which manufactures
constriction materials in Oromia special zone
According to SCCC s legal form, SUF has rights to its
own assets, and obligations for its own liabilities,
relating to the arrangement. (SCCC is Plc)
Is SUF a JO or a JV?

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Accounting
Arrangement

for

Joint

Accounting for investment in a Joint Arrangement is

dictated by the type of arrangement itself ( JO or JV)

If

the arrangement is joint operation, Joint operators

account for their rights to assets and obligations for
liabilities of joint arrangement according to the
contractual arrangement established between the parties
in their own financial statements.
If

the arrangement is joint venture, the Joint ventures

account for their interest in the entity based on equity
method of accounting(IAS28).
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21

22

Classification cont
Not structured
through a separate
vehicle *

Assess the parties rights

obligations
arising
from
arrangement .

Parties have rights to the assets

and obligations for the liabilities

Joint operation

Assessment
of
parties
rights
obligations

Structured through a
separate vehicle *

the
and

and
the

Parties have rights

to the net assets

Joint venture
Accounting reflects the

Accounting for assets,

Accounting for an
parties
rights and
liabilities, revenues and
investment using
obligations
expenses in accordance with
the equity method
the contractual arrangements
(*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities
recognised by statute, regardless of whether those entities have a legal personality.

Accounting for Joint

operation

Investors company account line-by-line their share of

assets, liabilities, expenses, and revenues of joint
operation according to the contract.
It requires that a joint operator recognizes line-by-line
the following in relation to its
interest in a joint
operation:
Its assets, including its share of any jointly held assets
Its liabilities, including its share of any jointly incurred
liabilities
Its revenue from the sale of its share of the output
arising from the joint operation
Its expenses, including its share of any expenses
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incurred jointly.

Accounting for Joint Venture

IFRS 11 and IAS 28 require joint ventures to be

accounted for using the equity method( single line
reporting)
Equity method : is a method of accounting whereby
the investor initially recognizes its investment at cost
and subsequent adjusted for :

the investors share in profit or loss of the investee,

the investors share in distribution made by the

investee.
Equity Method should be discontinued from the date
on which the joint venturer ceases to have joint control
over or have significant influence on a joint venture.
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Example :
XYZ Company is a company formed between Meta and
Finchia companies on Jan. 1, 2006 by investing Br. 320,000
each for a 50% interest in the joint arrangement . After
operating for a year, the new entity has summarized the
following financial statements. The two parties share
profits and losses equally.
XYZ Company/Income Statement
For the Year Ended December 31, 2006
Revenue
1,600,000
Less: Costs and expense
( 1,200,000)
Net Income
400,000
Net Income Division :
Meta
200,000
25
Finchia
200,000

XYZ Company/Statement of Joint venturers(operator) Capital

For the Year Ended December 31, 2006
Meta
Finchia
Investment on January 1
Br320000
Br320000
Add: Net Income
200,000
200,000
Jointventurers(operator) capital, Dec31,
Br520,000
Br520,000
XY Company/Balance Sheet

Combined
Br640000
400,000
Br1,040,000

December 31, 2006

Assets
Current Assets
Other Assets
Total Assets
Liabilities & Venturers Capital
Current Liabilities
Long-Term Liabilities
Total Liabilities
Venturers(oporators) Capital:
Meta
Finchia

Total Liabilities & Venturers Capital

$1,280,000
1,920,000
$3,200,000
$640,000
1,520,000
$2,160,000
$520,000
520,000

$1,040,000
$3,200,000

Mata /Income Statement

For the Year Ended December 31, 2006
Revenue
4,000,000
Investment income
200,000
Less: Costs
( 2,200,000)
Net Income
2,000,000

Meta Company s separate

Financial statements.
Mata B/Sheet 12/31/2006

Assets
Current Assets
Investment in XYZ Co.
Other Assets
Total Assets
Liabilities & owners equity
Current Liabilities
Long-Term Liabilities
Total Liabilities
Dec31,2006,Capital:
Total Liabilities & owners equity

$1,200,000
520,000
2,080,000
$3,800,000
$500,000
1,800,000
2,300,000
$1,500,000
$3,800,000

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ASSUMTION 1: XYZ is joint

Operation(partnership)
To record investment made in XYZ investments
January 1,2006. Investment in XYZ Company
320,000
Cash
320,000
To record earnings in a joint operation
Dec, 31,2006
Investment in XYZ Company
200,000
Investment income
200,000
Investors( joint operators) account line-by-line its share of assets,
liabilities, expenses, and revenues of joint operation based on the
contractual arrangement reached among themselves as follows:

Dec, 31,2006

Current assets
640,000
Other assets
960,000
Investment income
200,000
Costs and expenses
600,000
Current liabilities
Long-term Debt
Revenue
Investment in XYZ Company

320,000
760,000
800,000
520,000

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Working paper for combined

financial report
Meta
company

Income
statement
Sales
Investment
income
Costs and
expense

share in
XYZ JO

4,000,000

Eliminati
on

800,000

(200,000)

(2,200,000)

(600,000)

Net income
Balance sheet

2,000,000

200,000

Current assets
Investment in xyz
JO

1,280,000

640,000

520,000
2,000,000

(520,000)

200,000

Total

4,800,00
0
0
2,800,00
0
2,000,0
00

1,920,00
0
0 29
2,960,00

ASSUMTION 2: XYZ is joint

venture(Plc)
To record investment made in XYZ investments
January 1,2006. Investment in XYZ Company
320,000
Cash
320,000
To record earnings in a joint operation
Dec, 31,2006
Investment in XYZ Company
200,000
Investment income
200,000

The venturer companys interest in the joint venture is

presented in its own report using single account called
Investment in joint venture, not on a line by lines base as
follows:
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Metehara Company , Statements

Income statement
Sales
4,000,000
Investment income
200,000
Costs and
expenses
(2,200,000)
Net income
2,000,000
Balance sheet

Current assets
1,280,000
Investment in XYZ
JV
520,000
2,000,000
Other assets
Total assets
3,800,000
Current liability
500,000
Long term liability
1,800,000
Dec31,06,capital
1,500,000

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Company
)
JO
Sales

JV

4,800,000

Investment income

Costs and expense

2,800,000

Net income

2,000,000

Balance sheet
Current assets
Investment in xyz JO

Sales
Investment income

4,000,000
200,000

Costs and expense

Net income

(2,200,000)
2,000,000

Balance sheet
1,920,000
0

Current assets
Investment in xyz JO

Other assets

2,960,000

Other assets

Total assets

4,880,000

Total assets
Current liability
Long term liablity
Dec31,06,capital
Total lia & capital

Current liability

820,000

Long term liablity

2,560,000

Dec31,06,capital
Total lia & capital

1,500,000
4,880,000

1,280,000
520,000
2,000,000
3,800,000
500,000
1,800,000
1,500,000
3,800,000
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Parties
in
a
joint
arrangement but doesnt
have joint control

A party that participates in, but does not have

joint control over a joint venture is required to
account for its interest in the arrangement in
accordance:

With IFRS 9 financial instruments if it has no

significant influence, or
In accordance with IAS 28( equity method) if
it has significant influence over the joint
venture.

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Joint operator's transactions

with its joint operation

Discussion
Compare commercial code JV with IFRS
joint arrangement definition and
classification.

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The End

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