General principle FOREIGN EXCHANGE

Chapter 35 – Joint Ventures Page 453 Chapter 35 JOINT VENTURES 1 Business Context Investments can take a number of different forms. Typically where one entity acquires the majority of the voting rights in another, it gains control. However, in some industries and in particular circumstances, it is more beneficial to share such investments with other interested parties. By sharing the investment, each investor contributes different skills; alternatively the arrangement benefits all parties through reduced costs. Such arrangements are commonly known as joint ventures. Joint venture arrangements are quite common in the investment property sector. For example, British Land plc reported a number of significant joint ventures holding £2.9billion of properties in its financial statements for the year ended 31 March 2007. Such arrangements were said to provide British Land access to properties that were not otherwise on the market and to reduce the risks associated with property investment and development. 2 Chapter Objectives This chapter deals with the financial reporting by an investing entity where it has joint control over another entity. In such circumstances the investing entity is described as a ‘venturer’ and the investee is described as a joint venture of the investor. On completion of this chapter you should be able to:  understand the objectives and scope of IAS 31 Interests in joint ventures;  interpret the important terminology and definitions which relate to such investments;  understand the key principles relating to the recognition and measurement of such investments;  demonstrate knowledge of the principal disclosure requirements of IAS 31; and  apply knowledge and understanding of IAS 31 in particular circumstances through basic calculations. 3 Objectives, Scope and Definitions of IAS 31 IAS 31 sets out the accounting requirements in relation to interests in joint ventures and the appropriate recognition of joint venture assets, liabilities, income and expenses in the financial statements of investors. [IAS 31.1] A joint venture is where two or more parties described as venturers act together under contractual arrangements to carry out activities that are under their joint control, i.e. the parties agree to share control and to require unanimous agreement for all strategic decisions. Control is the power to govern the financial and operating activities of an economic activity so as to obtain benefits. An entity that invests in a joint venture but does not have joint control is known simply as an ‘investor’. IAS 31 does not apply where the venturer is a venture capital organisation or where the joint venture interest is owned by a mutual fund or unit trust or similarly structured entity and such investments have been accounted for under IAS 39 Financial instruments: recognition and measurement. Under IAS 39 the investment will be either measured at fair value or classified as a financial asset ‘held for trading’. [IAS 31.1] Chapter 35 – Joint Ventures Page 454 The presence of a contractual arrangement to share control is the principal factor in determining whether a joint venture relationship exists. Illustration 1 An entity is set up to build a bridge over a river. Once the bridge is built, the entity will be wound up. Ten contractors invest in the equity of the entity. Contractors 1 to 6 own 13 each and contractors 7 to 10 own 5.5 each. There exists a contractual arrangement whereby all the strategic financial and operating decisions relating to the bridge building project have to be taken unanimously by contractors 1 to 3 and 7 to 9. Contractors 1 to 3 and 7 to 9 have joint control over the joint venture entity. Each of them is therefore a venturer in the bridge building entity. Contractors 4 to 6 and 10 are not involved in the contractual arrangement and are therefore only investors in the joint venture. There are exemptions from compliance with IAS 31 where the joint venture investment is classified as ‘held for sale’ in accordance with IFRS 5 Non-current assets held for sale and discontinued operations and should therefore be accounted for in accordance with that standard. Where the venturer is not required to prepare consolidated financial statements under IAS 27 Consolidated and separate financial statements it should treat the joint venture in accordance with IAS 27. In addition, an exemption applies where the venturer is a wholly owned subsidiary or partially owned but the minority interest shareholders have been notified of the intention not to apply the requirements of IAS 31 and they have not objected and the venturer does not have debt or equity instruments traded in a public market nor is in the process of issuing debt or equity in a public market and the venturer’s parent prepares consolidated financial statements that are publicly available and are prepared in accordance with IFRS. [IAS 31.2] 4 The Three Forms of Joint Venture In practical terms there are a number of forms a joint venture investment can take, but IAS 31 identifies only three broad types: jointly controlled operations, jointly controlled assets and jointly controlled entities.

4.1 Jointly controlled operations

In a jointly controlled operation a separate entity is not set up, but the parties to the transaction share the activities that are to be carried out. Effectively, the venturers pool resources and provide expertise to the overall operations. Each venturer will use its own property, plant and equipment in carrying out the activities and will incur its own expenses and liabilities. Each venturer will also be responsible for raising its own finance. The contractual arrangements between the entities which create this form of joint venture investment will normally set out how the revenues and expenses will be shared. The substance of such an arrangement is that each venturer is carrying on its own activities as essentially a separate part of its own business, since there is no separate entity. The accounting for the joint venture should therefore reflect the economic substance of this arrangement by recognising the assets that the venturer controls. The venturer’s own property, plant and equipment that it uses to carry out activities of the jointly controlled operation, any liabilities that it retains obligation for and the expenses that it incurs should be recognised by the entity. Each venturer should also recognise its share of income generated by the jointly controlled operations.