Recognition and measurement of goodwill

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. Chapter 35 – Joint Ventures Page 460 8 Disclosures A venturer is required to disclose a list and description of all significant joint ventures that it has an interest in and the proportion of those interests. In addition, where joint venture amounts are not reported separately in the financial statements, the venturer should disclose the aggregate of its share of current assets, long-term assets, current liabilities, long-term liabilities, income and expenditure. [IAS 31.56] The method under which joint ventures have been recognised should be clearly identified as being either proportionate consolidation or equity accounting. [IAS 31.57] In addition, a number of disclosures are required in respect of contingent liabilities unless they are remote and capital commitments in relation to the joint venture investment. These disclosures include information not only on the venturer’s contingent liabilities and capital commitments that have arisen as a result of the joint venture relationship but also on its share of those amounts of the joint venture itself. [IAS 31.54, 31.55] 9 Chapter Review This chapter has been concerned with the accounting requirements for investments which give rise to joint control over investees. This chapter has covered:  the scope of IAS 31;  the definitions: joint venture, joint control, jointly controlled operations, jointly controlled assets and jointly controlled entities;  the method of accounting for each type of joint venture;  proportionate consolidation and the equity method for jointly controlled entities;  adjustments required for transactions between the venturer and the joint venture; and  the disclosure requirements of IAS 31.