Accounting For Joint Arrangements WORKSHOP

ELEVEN, WEEK 11
WHAT YOU SHOULD BE ABLE TO DO AFTER THIS DISCUSSION
You should be able to:
➢ Understand what a joint arrangement is.
➢ Be aware of tests that be applied to determine the existence of
control.
➢ Be aware that a joint arrangement can be classified as a joint venture
and a joint operation.
➢ Know how to account for a joint venture and a joint operation.
➢ Be aware of the disclosure requirements of AASB12 Disclosure other
Interest in Other Entities.
 ACCOUNTING FOR JOINT ARRANGEMENTS
NATURE OF JOINT ARRANGEMENTS: -
A joint arrangement is an arrangement of which two or more parties have joint control.

CHARACTERISTICS: -
➢ A joint arrangement has the following characteristics.
➢ The parties are bound by a contractual arrangement
➢ The contractual arrangement gives two or more of those parties joint control of the arrangement.

▪TYPES OF JOINT ARRANGEMENT:

➢ A joint arrangement is either:
➢ A Joint Operation - is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and
obligations for the liabilities, relating to the arrangement. Those parties are called joint operators.
➢ A Joint Venture - is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the
arrangement. Those parties are called joint venturers.
JOINT CONTROL;
➢ Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require
the unanimous consent of the parties sharing control.
FINANCIAL STATEMENT OF PARTIES TO A JOINT ARRANGEMENT:
➢ Joint Operators shall recognise in relation to its interest in a joint operation, its assets including its share of any assets held jointly; its liabilities including
its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from
the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly

➢ A Joint Venturer shall recognise its interest in a joint venture as an investment and shall account for that investment using the equity method
in accordance with AASB 128.
 ACCOUNTING FOR JOINT ARRANGEMENTS

BASIS FOR CLASSIFYING JOINT ARRANGEMENTS:

This requires the assessment of rights and obligations arising from the arrangement:
➢ An entity shall consider the following:
➢The structure of the joint arrangement – A joint arrangement structured through
a separate vehicle is A Joint Venture and A Joint Operation has no separate
vehicle.
➢When the joint arrangement is structured through a separate vehicle:
➢The legal form of the separate vehicle
➢The terms of the contractual arrangement
➢When relevant other facts and circumstances

SEPARATE VEHICLE:
➢ A separately identifiable financial structure, including separate legal entities or entities
recognised by statute, regardless of whether those entities have a legal personality
 REVIEW QUESTION ONE

What is the difference between a joint venture and a joint operation?.

Suggested Solution:
Difference:
➢ The difference between joint venture and joint operation relates to the rights and obligations associated with
the joint arrangement for parties to the contract.

Joint Operation:
➢ Rights to assets and obligations for liabilities
➢ Share all interests relating to assets in specified proportion
➢ Share all obligations, liabilities, costs and expenses in specified proportions
➢ Allocation of revenues and expenses on the basis of relative performance

Joint Venture:
➢ Rights to net assets of the arrangement
➢ Assets brought into the arrangement or subsequently acquired is the asset of the arrangement
➢ The joint arrangement is liable for the debt and liabilities of the arrangement
➢ Contractual arrangement specifies each party’s share of profit or loss
 REVIEW QUESTION TWO

Does the required accounting treatment for an interest in a joint operation differ from the requirements for an
interest in a joint venture and, if so, how do these requirements differ?
Suggested Solution:
The required accounting treatment for joint operation and joint venture differs.
➢ Joint Operation:
➢A party to a joint operation shall account for its share of assets, liabilities and expenses it incurs and
revenue from its share of the output
➢No consolidation adjustments
➢ Joint Venture
➢A party to a joint venture shall account for its interest in the venture using the equity method
 REVIEW QUESTION THREE

How should the joint operators’ share of assets in the joint operation be disclosed?
Suggested Solution:
Share of assets in the joint operation to be disclosed
➢ Assets arising from a joint operator’s share in the items employed in a joint operation are normally included in the
joint operator’s statement of financial position with other assets that have a similar nature or function
➢ Liabilities incurred by a joint operator as a result of its interest in a joint operation are included with other liabilities
of the joint operator that have a similar nature
➢ The line-by-line method is the approach used
 REVIEW QUESTION FOUR

On 1 July 2018 Oiley Ltd enters into a joint arrangement with Goldey Ltd. Both parties commit themselves to a contractual
arrangement in which Oiley Ltd contributes plant and machinery, and Goldey Ltd contributes cash of $8 million. The
machinery contributed by Oiley Ltd has a carrying amount of $6 million and a fair value of $8 million. All current and
future contributions are to be based on a 50:50 split, as are the future distributions of output.
REQUIRED
Provide the journal entries to account for the joint operators’ contributions to the joint operation
Suggested Solution
➢ In the books of Goldey Ltd (To recognise contribution of cash)
➢ Dr Plant and machinery 4 000 000
➢ Cr Cash 4 000 000
➢ In the books of Oiley Ltd (To recognise contribution of machinery)
➢ Dr Cash 4 000 000
➢ Cr Plant and machinery 3 000 000
➢ Cr Gain on disposal of machinery 1 000 000
➢ Optional entry in Oiley’s books
➢ Dr Machinery 1 000 000
➢ Cr Revaluation surplus 1 000 000
 REVIEW QUESTION FIVE

On 1 July 2018 Toxic Ltd enters into a joint arrangement with Sludge Ltd. Both parties commit themselves to a
contractual arrangement in which Toxic Ltd contributes plant and machinery with a fair value of $20 million;
Sludge Ltd contributes cash of $10 million and land with a fair value of $10 million, which is considered to be
a good site for the extraction of minerals. The cash that is contributed is used partly to acquire some additional
machinery at a cost of $7 million, with the balance of the cash on hand to meet operational requirements.
Additional information
• The machinery contributed by Toxic Ltd has a carrying amount of $21 million (cost $30 million;
accumulated depreciation $9 million) and a fair value of $20 million.
• The land contributed by Sludge Ltd has a carrying amount of $8 million and a fair value of $10 million.
• All current and future contributions are to be based on a 50:50 split, as are the future distributions of
output.
For the year ending 30 June 2019, the joint operation’s manager prepares the following statement of financial
position, cash flow statement and statement of pre-production costs. To date, no minerals have been removed,
although the joint operators do consider that economically recoverable reserves exist. All production costs have
been transferred to an asset account called ‘mining assets under construction’ in anticipation of amortising the
asset as production commences.
Statement of costs of production for year ending 30 June 2019
$000
Direct costs
Wages 800
Materials 600
Management fees 600
Other 200
2 200
Statement of cash flows for year ending 30 June 2019
$000 $000
Cash flows from operations
Payments
– Wages 700
– Materials 500
– Other 200
– Management fee 200 (1 600)
Cash flows from investing activities
Acquisition of machinery (7 000)
Cash flows from financing activities
From joint venturer, Sludge Ltd 10 000
Cash on hand 30 June 2019 1 400
Joint operation statement of financial position as at 30 June 2019
$000
Current assets
Cash on hand 1 400
Non-current assets
Mining assets under construction 2 200
Plant and machinery 27 000
Land 10 000
Total assets 40 600

less Current liabilities

Accounts payable 600
Net assets 40 000
Represented by:
Interests of participants
Toxic Ltd 20 000
Sludge Ltd 20 000
40 000
REQUIRED
(a) Prepare the journal entries that would appear in the joint operators’ own journals to record the establishment of the joint operation on 1
July 2018.
(b) Prepare the journal entries that would appear in the joint operators’ own journals to record the joint operation’s transactions for the year to
30 June 2019
Suggested Solution:
• Workings:
➢ MACHINERY
➢ Profit from disposal = Fair value – Carrying amount = 20,000,000 – 21,000,000 = -1,000,000 (loss)

➢ LAND
➢ Profit from disposal = Fair value – Carrying amount = 10,000,000 – 8,000,000 = 2,000,000
➢ Share profit or loss in the ratio of 50:50
• 1 July 2018:
• The journal entry to record the establishment of the joint operation would be
• In Toxic Ltd’s accounts (To recognise share of cash and land)
• Dr Cash 5 000 000
• Dr Land 5 000 000
• Dr Loss on sale of machinery 500 000
• Dr Accumulated depreciation 4 500 000
• Cr Machinery 15 000 000
• In Toxic Ltd’s accounts (To recognise revaluation)
• Dr Accumulated depreciation 4 500 000
• Cr Machinery 4 500 000

• Dr Loss on revaluation of machinery 500 000

• Cr Machinery 500 000
Suggested Solution:
In Toxic Ltd’s accounts (To recognise share of newly acquired
machinery) Dr Machinery 3 500 000
Cr cash3 500 000

1 July 2018
The journal entry to record the establishment of the joint operation would be
In Sludge Ltd’s accounts (To recognise share of machinery)
Dr Machinery 10 000 000
Cr Cash 5 000 000
Cr Land 4 000 000
Dr Profit on disposal of land 1 000 000
In Sludge Ltd’s accounts (To recognise
revaluation) Dr Land 1 000 000
Cr Revaluation 1 000 000

In Sludge Ltd’s accounts (To recognise share of newly acquired

machinery) Dr Machinery 3 500 000
Cr cash3 500 000
Suggested Solution:
(B)
The following entries would appear in both Toxic Ltd’s and Sludge Ltd’s accounts on 30 June
2019 Dr Mining assets under construction 1 100 000
Cr Cash 800 000
Cr Accounts payable 300 000