Classifying and measuring the identifiable net assets acquired

Chapter 35 – Joint Ventures Page 456 A jointly controlled entity controls its own assets, incurs its own expenses and liabilities and generates its own income. Each venturer will typically be entitled to a predetermined proportion of the profits made by the joint venture entity. Illustration 4 Joint venture entities are often set up to pool resources where operations are very similar in a separate line of business. Assets are combined and operated jointly from the joint venture entity. Such entities are particularly common in the telecommunications industry. Where a venturer has an interest in a jointly controlled entity, it is required to recognise in its consolidated financial statements its share of the entity either by proportionate consolidation or by equity accounting. Proportionate consolidation involves consolidating the venturer’s share of the individual line items of the joint venture’s financial statements, whereas equity accounting reports the change in the venturer’s share of the joint venture entity’s net assets each period. [IAS 31.30, 31.38]

4.3.1 Proportionate consolidation

Proportionate consolidation is where the venturer’s share of the joint venture’s assets, liabilities, income and expenditure is combined line by line with the venturer’s own items. [IAS 31.3] Proportionate consolidation uses the principles used in the full consolidation process required by IAS 27 for the reporting of subsidiaries. The different proportions that are consolidated in respect of a subsidiary and a joint venture represents the different levels of control held by the parent entity. In a subsidiary, the parent has ultimate control and therefore 100 of a subsidiary’s net assets and results are consolidated, whereas control is shared in a joint venture, so only the venturer’s share is consolidated. The venturer may present the effects of proportionate consolidation in one of two ways. The first is by combining the proportion of the joint venture results and financial position on a line by line basis with that of the venturer’s financial statements. This method results in single figures being presented for each line item. The alternative method is to split each line item between that which relates to the venturer and that which represents the proportion of the joint venture entity.

4.3.2 Equity method

As an alternative to proportionate consolidation, a joint venture entity may be accounted for by applying the equity method. The equity method of accounting is used to account for investments in associates under IAS 28 Investments in associates. It requires the initial investment to be recorded at cost and adjusted each period for the venturer’s share of the change in the net assets and results of the joint venture entity. [IAS 31.3] IAS 31 permits the use of the equity accounting method although it recommends the use of proportionate consolidation. A venturer should cease accounting for a joint venture entity under either method when it ceases to have joint control over the joint venture. If the venturer obtains complete control of the joint venture, then it should be accounted for in accordance with IAS 27 from that date. [IAS 31.36, 31.41, 31.45] On the date on which an entity ceases to have joint control over an entity, any retained interest in the investment should be measured at fair value. At this date, the investor should also recognise in profit or loss the difference between the carrying amount of the investment Chapter 35 – Joint Ventures Page 457 held prior to the significant influence being lost and the fair value of any retained investment plus any proceeds received. [IAS 31.45, 31.45A] Illustration 5 AB controls a number of subsidiaries and therefore prepares consolidated financial statements. AB is also a venturer in JV, a jointly controlled entity in which AB owns 25. AB acquired its share of JV at a cost of CU1m on the creation of JV. At that time JV had net assets of CU4m. Hence, there was no goodwill to be recognised. A summarised draft statement of financial position of the AB Group AB and its subsidiaries, but not its interest in JV, and JV is as follows: AB JV group CUm CUm Non-current assets Property, plant and equipment 60 20 Intangibles 30 8 Investment in JV 1 - Current assets Inventories 50 16 Other 80 24 Current liabilities 90 36 131 32 CUm The equity in AB group plus JV can be calculated as: AB group 131 JV post-acquisition 32 – 4 x 25 7 138 The three layouts for the AB group consolidated statement of financial position including JV are as follows: 1 Proportionate consolidation: line by line CUm Non-current assets Property, plant and equipment 60+ 25 x 20 65 Intangibles 30 + 25 x 8 32 Current assets Inventories 50 + 25 x16 54 Other 80 + 25 x 24 86 Current liabilities 90 + 25 x 36 99 Equity – as above 138 2 Proportionate consolidation: share shown separately CUm CUm Non-current assets Property, plant and equipment own 60 JV 5 65