A business combination achieved in stages

Chapter 35 – Joint Ventures Page 455 Recognition of these amounts should be included in the individual entity financial statements of each venturer because they are part of its activities. No further adjustment is therefore required in the preparation of the consolidated financial statements. [IAS 31.15] Illustration 2 An example of a jointly controlled operation is the construction of a new housing estate by a number of independent builders and specialist tradesmen, such as carpenters and plumbers. Each party provides a predetermined amount of labour to the construction and is required to provide the relevant materials and equipment needed to perform the work. Under an agreed contract, each party will receive a specified percentage of the revenue from the sale of the houses. This is an extension of each party’s normal operating activities and should therefore be recorded in their individual books and records as such.

4.2 Jointly controlled assets

A joint venture relationship may be established through the use of jointly controlled assets which are used to generate benefits to be shared by each of the venturers. Such arrangements do not involve the creation of a separate entity and the assets may be jointly owned, although the important attribute of such an arrangement is that the assets in question are jointly controlled. Typically each venturer receives an agreed share of the benefits generated by the operation of the assets and bears an agreed share of the expenses incurred. Each venturer in such an arrangement is again essentially using the assets as part of its normal operating activities and should therefore report them as part of those activities in its individual financial statements. In particular, a venturer should recognise its share of the jointly controlled assets, any liabilities that the entity has an obligation to meet and a share of the liabilities that are jointly incurred. Jointly incurred expenses and a share of the relevant income and expenses that are earned or incurred jointly should also be recognised by each venturer. [IAS 31.21] Illustration 3 A common use of jointly controlled assets is by entities in the oil production industry. Typically, they jointly control and operate an oil pipeline. The benefit of such an arrangement is that only one pipeline is needed, with each venturer using the pipeline to transport its own supply of oil and in return paying a proportion of the running costs of the pipeline i.e. the jointly controlled asset. No additional adjustments are required in the preparation of the consolidated financial statements since the individual entity financial statements of each venturer already reflect the economic reality of the arrangements.

4.3 Jointly controlled entities

The third broad type of joint venture arrangement is a jointly controlled entity. The identifying factor in this arrangement is that a separate legal entity is set up with ownership being shared by the venturers. The separate entity may take a number of forms. It may be an incorporated entity, a corporation or a partnership. The importance of the establishment of a separate entity is that it is able to enter into contracts and raise finance in its own right. As a separate legal entity it will also have to maintain its own accounting records and prepare and present its own financial statements.