CHAPTER ONE

JOINT ARRANGEMENT (IFRS 11)

Meaning and Type of Joint Arrangement
Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint
control involves the contractually agreed sharing of control and arrangements subject to joint control
are classified as either a joint venture (Representing a share of net assets and equity accounted) or a
joint operation (Representing rights to assets and obligations for liabilities).

A joint arrangement has the following characteristics: [IFRS 11:5]

 the parties are bound by a contractual arrangement, and

 the contractual arrangement gives two or more of those parties joint control of the arrangement.

A joint arrangement is either a joint operation or a joint venture. [IFRS 11:6]

ACCOUNTING FOR JOINT VENTURE

1.1.1. Nature of joint venture business

When two or more persons join together to carry out a specific business venture and share the profits on
an agreed basis it is called a 'joint venture'. Each one of them who join as a party to the joint venture is
called 'Co venturer. No Firm name is normally used for the joint venture business because its duration
is limited to a short period. Complexities of a business, lack of technical expertise, sometimes make it
difficult to undertake a business assignment individually like constructing a big building. The
alternative available is that two or more persons join hand to take up that assignment. Joining hand may
be for finance, for technical know-how, for sharing risk etc. When two or more persons join together to
carry out a specific business and share the profits on predetermined basis, it is known as a Joint
Venture. Joint venture is defined as a partnership confined to a particular adventure, speculation, course
of trade or voyage, and in which partners, either latent or known use no firm or social name, and incur
no responsibility beyond the limits of the adventure.

A joint venture occurs when two or more businesses join together to pursue a common project.

A joint venture is usually a temporary partnership without the use of a firm name, limited to carrying
out a particular business plan in which the persons concerned agree to contribute capital and to share
profits or losses. The parties in a joint venture are known as co-ventures and their liability is limited to
the adventure concerned for which they agree to contribute capital and share profits or losses. A joint

1
venture may consist of a joint consignment of goods, speculation in shares, underwriting of shares or
debentures, construction of a building, or any similar form of enterprise.
A joint venture is a contractual arrangement whereby two or more parties called ventures undertake an
economic activity that subject to joint control. The life of the venture is limited to that of the
undertaking, which may be of short- or long-term duration. The effect of a contractual arrangement is
to establish joint control over the joint venture, ensuring that no single venturer is in a position to
control the activity unilaterally.

Joint venture differs from a partnership in that it is limited to carrying out a single project such as,
production of a motion picture or construction of a building or dam.

Historically, joint ventures were used to finance the sale or exchange of a cargo or merchandise in a
foreign country. In an era when marine transportation and foreign trade involved may hazards,
individuals (venturers) would band together to undertake a venture of this type. The capital required
usually was larger than one person could provide, and the risks were too high to be borne alone.
Because of the risks involved and the relatively short duration of the project, no net income was
recognized until the venture was completed. At the end of the voyage, the net income or net loss was
divided among ventures, and their association was ended. In this traditional form,
 Accounting for joint venture did not follow the accrual basis
 Net income not determined at regular intervals
 Measurement and reporting of net income or loss awaited completion of the venture
In today’s business community, joint ventures are less common but still employed for many projects
such as:
 The acquisition, development, and sale of real property
 Exploration for oil and gas
 Construction of bridges, buildings, and dams

FEATURES OF JOINT VENTURE ACCOUNT

Some important features of joint venture business are as follows:
1. It is short duration special purpose partnership. Parties in venture are called co-venturers.
2. Co-venturers may contribute funds for running the venture or supply stock from their regular
business
3. Co-venturers share profit/loss of the venture at an agreed ratio likewise partnership.

2
 4. Generally, profit/loss of the venture is computed on completion of the venture.
5. Going concern assumption of accounting is not appropriate for joint venture accounting. There
does not arise problem of distinction between capital and revenue expenditure. Plant, machinery
and other fixed assets when used in venture are first charged to venture account at cost. On
completion of venture, such assets are revalued and shown as revenue of the venture. Thus,
accounting approach for measurement of venture profit is totally different.

DISTINCTION OF JV WITH PARTNERSHIP

Basis of Distinction Joint Venture Partnership
Scope It is limited to a specific Venture. It is not limited to specific venture.

Persons involved The persons carrying on business are called co- The persons carrying on business are
venturers called partners
Ascertainment of The profits/losses are ascertained at the end of The profits/losses are ascertained on
profit/loss specific venture (if venture continues for a an annual basis
short period) or on interim basis annually (if
venture continues for a longer period).
Name There is no need for firm name A partnership firm always has a
name.
Separate set of There is no need for a separate set of books. Separate set of books have to be
books The accounts can be maintained even in one of maintained.
the Co-venturer’s books only.
Accounting Accounting for joint ventures is done on Accounting for partnership is done
liquidation basis. on going concern basis.
Accounting for a Joint Venture
Co-venturers can maintain the accounts for joint venture in the manner that suits them in a situation
Generally, there are two ways to keep records of joint venture:
1. When separate set of books are maintained.
When size of the venture is fairly big, the co- venturers keep separate set of books of account
for the joint venture. Joint venture transactions are separate from their regular business
activities.
In the books of Joint Venture, the following accounts are opened.
1. Joint Bank Account.
3
 2. Joint Venture Account.
3. Personal Accounts of the Co-venturers or Co-venturers’ Accounts.
A. Joint Bank Account: the co-venturers open a separate bank account for the venture transactions
by making initial contributions. The bank account is generally operated jointly. Expenses are
met from this Joint Bank Account. Also, sales or collections from transactions are deposited to
this account.
However, sometimes the co-venturers may make direct payments and direct collections. on
completion of the venture the Joint Bank Account is closed by paying the balance to co- venturers.
B. Joint Venture Account: This account is prepared for measurement of venture profit. This
account is debited for all venture expenses and is credited for all sales or collections. Venture
profit/ loss is transferred to co-venturers’ accounts.
C. Co-venturers’ Accounts: Personal accounts of the venturers are maintained to keep record of
their contributions of cash, goods or meeting venture expenditure directly and direct payment
received by them on venture transactions. This account is also closed simultaneously with the
closure of joint bank account.
2. When no separate set of books are maintained.
When no separate set of books of account are maintained for joint venture, each venture maintains
accounts independently for the venture transactions.
The standard practice is to keep full records of own transactions as well as transactions of the co-
venture relating to the venture. But sometimes the parties to a venture keep record of their own
transactions only. In that case a Memorandum Joint Venture Account is prepared by the parties.

Accounting for a Corporate or LLC Joint Venture

Corporate joint venture refers to a corporation owned and operated by a small group of businesses (the
joint venturers) as a separate and specific business or project for the mutual benefit of the members of
the group. A government may also be a member of the group. An entity, which is a subsidiary of one of
the joint venturers, is not a corporate joint venture. According to the Accounting Principles Board,
investors should account for investments in common stock of corporate joint ventures by the equity
method in consolidated financial statements.
Arguments for establishing a separate set of accounting records for every corporate joint venture of
large size and long duration are:
• The complexity of modern business
• The emphasis on good organization and strong internal control
4
 • The importance of income taxes
• The extent of government regulation
In the stockholders’ equity accounts of the joint venture, each venturer’s equity account is credited for
the amount of cash or non-cash asset invested. The accounting records of such a corporate joint venture
include the usual ledger accounts for assets, liabilities, stockholders’ equity, revenue, and expenses. The
entire accounting process should conform to generally accounting practices, from the recording of
transactions to the preparation of financial statements.
The purpose of a corporate joint venture: is to share risks and rewards in developing a new market,
product or technology; to combine complementary technological knowledge; or to pool resources in
developing production or other facilities. A corporate joint venture also usually provides an
arrangement under which each joint ventures may participate, directly or indirectly, in the overall
management of the joint venture. Joint venturers thus have an interest or relationship other than as
passive investors. An entity that is a subsidiary of one of the joint venturers is not a corporate joint
venture. The ownership of a corporate joint venture seldom changes, and its stock is usually not traded
publicly. A noncontrolling interest held by public ownership, however, does not preclude a corporation
from being a corporate joint venture.

Investments in the common stock of joint venturers, or other investments accounted for by the equity
method, may be material in relation to the financial position or results of operations of the joint venture
investor. If so, it may be necessary for the investor to provide summarized information about the assets,
liabilities, and results of operations of its investees in its own financial statements. The required
disclosures should be presented individually for investments in joint ventures that are material in
relation to the financial position or results of operations of the investor. Alternatively, the required
disclosures can be grouped for investments that are material as a group but are not material individually

Accounting for an Unincorporated Joint Venture

Because the investor-venturer in an unincorporated joint venture owns an undivided interest in each
asset and is proportionately liable for its share of each liability, the provisions of Accounting Principle
Board may not apply in such cases. Investors in unincorporated joint ventures have, thus, the option of
using either the equity method of accounting or a proportionate share method of accounting for the
investments.

5
Illustration: Assume that A Company and B Company each invested Br. 400,000 for a 50% interest in
unincorporated joint venture in January 19X9. Condensed financial statements for AB Company for
19X9 were as follows:

AB Company (A joint venture)

Income Statement
For the Year Ended December 31, 19X9
Revenue 2,000,000
Less: Cost and Expenses 1,500,000
Net Income 500,000
Division of net income
A Company 250,000
B Company 250,000
Total 500,000

AB Company (A joint venture)

Statement of Venturer’ Capital
For the Year Ended December 31, 19X9
A Company B Company Combined
Investment, Jan. 2 400,000 400,000 800,000
Add: Net income 250,000 250,000 500,000
Venturers’ Capital,
End of Year 650,000 650,000 1,300,000

AB Company (A joint venture)

Balance Sheet
December 31, 19X9

Assets
Current Assets 1,600,000
Other Assets 2,400,000
Total Assets 4,000,000

Liabilities & Venturers’ Capital

Current Liabilities 800,000
Long term Debt 1,900,000

Venturers’ Capital:
A Company 650,000
B Company 650,000 1,300,000
6
Total Liabilities & Capital 4,000,000

Under the equity method of accounting, both A Company and B Company prepare the following
journal entries for the investment in the AB Company:
1999
Jan 2 Investment in AB Company (Joint Venture) ……………400,000
Cash……………………………………………………….400,000
To record investment in joint venture

Dec 31 Investment in AB Company (Joint Venture) ……..250,000

Investment Income…………………………………..250,000
To record share of AB Company net income (500,000*.5)

Under the proportionate share method of accounting, in addition to the foregoing journal entries,
both A Company and B Company prepare the following journal entry for their respective shares of the
assets, liabilities, revenue, and expenses of AB Company:

1999
Dec 31 Current Assets (50%) ……….………800,000
Other Assets (50%) …………….…1,200,000
Costs and Expenses (50%) …….…….750,000
Investment Income …………..……250,000
Current Liabilities (50%) ………………….400,000
Long term Debt (50%) …………………….950,000
Revenue (50%) ……………………….….1,000,000
Investment in AB Co (Joint Venture) ……...650,000
To record proportionate share of joint venture’s assets, liabilities, revenue, and expenses.

Use of the equity method of accounting for unincorporated joint ventures is consistent with APB
Opinion No. 18 but information on material assets and liabilities of a joint venture may be relegated to
a note to financial statements resulting in off-balance sheet financing. The proportionate share method
of accounting for unincorporated joint ventures avoids the problems of off-balance sheet financing but
has the questionable practice of including portions of assets such as plant assets in each venturer’s
balance sheet.
Exercise-1

7
Assume R and S enters in to a joint venture to import a Russian timber into Ethiopia. On 1st January,
1998, they opened a joint bank account with a commercial bank of Ethiopia, R contributing birr 20,000
and S contributing birr 10,000. They agreed to share incomes in the ratio of the capital introduced by
them. On 15th, February,1998, they remitted to a manufacturer in January birr 25,000 for the goods
received and incurred an expense of birr 800 for freight, insurance etc. The goods were sold for birr
33,000 for which the selling expenses were as follows; warehouse rent birr 200, commission payable to
S on the gross number of sales 10% and miscellaneous expense of birr 300.
Required: record journal entries and the necessary ledger accounts showing the final distribution of
cash among the co-venturers.

Exercise-2

Assume R and N were participant in a Joint venture, sharing profits and losses in the proportion of 2/5
and 3/5 respectively. Each party maintains a complete record in his own book. R supplied inventory to
the value of birr 15,000 and incurs expenditure of birr 600 on them, and N supplies inventory to the
extent of birr 12,000 and his expenses amounts to birr 900. R sells all goods for birr 36,000 for which
he is entitled to receive a commission at 5% and N sells for birr 30,000.
Required: record journal entries and the necessary ledger accounts showing the final distribution of
cash among the co-venturers.

Exercise-3

Assume X and Y enter into a joint venture to manufacture product ‘A’ by considering the current
demand. On 1st September, 2002, they opened a joint bank account with Dashen Bank, Shashemene
branch, X contributing birr 50,000 and Y contributing birr 40,000. They agreed to share income/losses
in the ration of 5:4 to X and Y respectively. On 5 th, September, 2002, they paid a total of birr 30,000 to
manufacture the product and incurred an expense of birr 1,000 for freight. The manufactured products
were sold for birr 60,000 for which selling expenses were as follows; commission payable to X on the
gross amount of sales 10% and miscellaneous expense of birr 500.

Required: Record journal entries and the necessary ledger account showing the final distribution of
cash among the co-venturers.