Subsequent measurement FOREIGN EXCHANGE

Chapter 35 – Joint Ventures Page 458 Intangibles own 30 JV 2 32 Current assets Inventories own 50 JV 4 54 Other own 80 JV 6 86 Current liabilities own 90 JV 9 99 Equity – as above 138 3 Equity method of accounting CUm Non-current assets Property, plant and equipment own 60 Intangibles own 30 Investment in JV cost CU1m + share of 8 post-acquisition increase in net assets per calculation of equity CU7m Current assets Inventories own 50 Other own 80 Current liabilities own 90 Equity – as above 138 Note how the recognition using different methods has a significant effect on the presentation of the financial position of AB. 5 Other Points in IAS 31

5.1 Investors separate financial statements

An interest in a jointly controlled entity should be accounted for in the individual financial statements of the venturer by applying the requirements of IAS 27 for separate financial statements. [IAS 31.46]

5.2 Transactions between a venturer and a joint venture

Where the venturer sells or contributes assets to a joint venture or purchases assets from a joint venture, an adjustment should be made for the amount of any profit generated that reflects a transaction internal to the entity. For example, if a venturer sells an asset to the joint venture for a profit and the asset continues to be held by the joint venture, the proportion of that asset that is consolidated includes an element of profit that was recorded by the venturer. In such circumstances only the profit that relates to the share of the asset that belongs to the other venturers should be retained. [IAS 31.48] A similar approach should be adopted for the purchase of assets from the joint venture; its Chapter 35 – Joint Ventures Page 459 share of any profit that has been recognised by the joint venture should not be recognised by the venturer until the assets are sold to an external party. [IAS 31.49] These adjustments are required for all transactions between a venturer and a joint venture regardless of the form that the joint venture arrangement takes; it is not limited to the creation of a separate joint venture entity.

5.3 Operators of joint ventures

A common feature in the contractual arrangements for a joint venture is to appoint a manager of the joint venture to act on behalf of all the venturers. Such a manager is usually paid a fee. Where such a fee is received, it should be treated in accordance with IAS 18 Revenue. [IAS 31.52] If one of the venturers acts as manager, this fee should be treated separately from its share of the joint venture profit or loss.

5.4 Investors of a joint venture

An investor in a joint venture arrangement does not share joint control over the joint venture. The investment should be recognised in accordance with IAS 39 as a financial asset or, if the investor has ‘significant influence’ over the policy decisions of the joint venture, as an associate under IAS 28. [IAS 31.51] 6 Non-monetary Contributions by Venturers IAS 31 requires that an adjustment is made where transactions take place between the venturer and a joint venture, profit has been recognised and the asset is still held by one of the parties. However, IAS 31 does not specifically mention the treatment required where a venturer contributes a non-cash asset, such as a piece of machinery, to a joint venture entity in return for equity in that joint venture. The Standing Interpretations Committee issued SIC 13 Jointly controlled entities – non-monetary contributions by venturers to address this particular issue. The same principle as described above for the adjustment of transactions between the venturer and the joint venture should be applied in such circumstances. The venturer should only recognise the gain or loss that relates to the other venturer’s share. The excluded part represents a transaction by the venturer with itself. Additionally, no part of the gain or loss should be recognised where the significant risks and rewards associated with the non-cash asset have not been transferred to the joint venture entity, where the amount cannot be measured reliably or where the non-cash asset transferred is similar, in its nature, to that contributed by the other venturers. 7 The future of IAS 31 The IASB issued an Exposure Draft on joint arrangements in September 2007. It is expected that this will lead to a replacement standard to IAS 31, rather than a revision to IAS 31, in the second half of 2008. The project was undertaken as part of the IASB’s project to reduce the number of differences between IFRSs and US generally accepted accounting policies GAAP. The objective of the project is to improve the accounting for joint arrangements as well as improving the quality of information being reported. The current proposal is to remove the option to use proportionate consolidation when recognising a jointly controlled entity and instead require the use of the equity method. The proposals also consider the existing definition of a joint venture and the differences between a joint venture entity and direct interests in assets and liabilities of a joint arrangement.