Advanced Financial Accounting and Reporting (Afar) Accounting For Joint Arrangements

ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)
Accounting for Joint Arrangements
I. Relevant Financial Reporting Standards (Effective 2013)

 PFRS 11, Joint Arrangements
“A party to a joint arrangement determines the type of joint arrangement in which it is involved
by assessing its rights and obligations and accounts for those rights and obligations in
accordance with that type of joint arrangement.”
 PAS 28, Investments in Associates and Joint Ventures
“This prescribes the accounting for investments in associates and sets out the requirements
for the application of the equity method when accounting for investments in associates and
joint ventures.”
II. Definition of Related Terms

a. Joint Arrangement: An arrangement of which two or more parties have joint control
b. Joint Control: 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
c. Joint Operation: 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
d. Joint Venture: A joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement
e. Joint Venturer: A party to a joint venture that has joint control of that joint venture
f. Joint Operator: A party to a joint operation that has joint control of that joint operation
g. Party to a joint arrangement: An entity that participates in a joint arrangement, regardless of
whether that entity has joint control of the arrangement
h. 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
III. Determining the Appropriate Financial Reporting Standards
Y Control Alone? N
Consolidation Procedures -
PFRS 10 Joint Control? N
Y
Determine what type of Joint Significant

Arrangement under PFRS 11 influence? N
Y
Joint Joint Equity method under

operation venture PAS 28 PFRS 9
Recognize share in assets,

liabilities, expense and net Equity method
income under PAS 28
Adapted from IFRS 11, Joint Arrangements

IV. Determining the type of Joint Arrangement
Structured in a Separate
Vehicle?
N
Y
(1) Legal form of the SV, (2) Contractual

arrangements and (3) Other circumstatnces
Joint Arrangement give the parties right to the assets and
obligations to the liabilities?
Y N
Joint Venture
Adapted from IFRS 11, Joint Arrangements
V. Accounting for Joint Operations – PFRS 11
Joint Operations Joint Operators
Usual accounting for applicable transaction cycles Account for the share in the assets, liabilities and
(i.e., revenue, expense and financing cycles) comprehensive income accounts.
 Accounting for the joint operators’ share in assets, liabilities and comprehensive income
accounts is based on the contractual agreement as embodied in the joint arrangement. The
following are examples of applicable sharing schemes:
 Equally
 Arbitrary Ratio (60%:40%)
 Specific Identification (e.g., Cash – Joint Operator A; Inventories – Joint Operator B)
VI. Accounting for Joint Ventures – PAS 28

Joint Venture Joint Venturer
Usual accounting for applicable transaction cycles Account for the investment using the equity
(i.e., revenue, expense and financing cycles) method of accounting.
Investment in Joint Venture

*Cost of the Investment *Dividends
**Share in Joint Venture Net Income **Share in Joint Venture Net Loss
***Share in Joint Venture Other Comprehensive ***Share in Joint Venture Other Comprehensive
Income Loss
Investment in Joint Venture, Ending Balance
VII. Summary of Accounting Procedures for Parties to a JA

Consolidated Financial Separate Financial
Statements Statements
Joint Operators Recognise share in assets, liabilities and share in comprehensive
income accounts.
Joint Venturers Equity method (PAS 28) Cost method or PFRS 9
Other Parties to a JO Recognise share in assets, liabilities and share in comprehensive
(w/ contractual sharing income accounts.
arrangement)
Other Parties to JO Equity method (PAS 28) Cost method or PFRS 9
(w/ significant influence)
Other Parties to JO PFRS 9
(w/o sig. Influence)
Other Parties to JV Equity method (PAS 28) Cost method or PFRS 9
(with significant influence)
Other Parties to JV PFRS 9
(with significant influence)
References
KPMG IFRG Limited. (2012, February). Impact on mining companies: changes to joint venture accounting. Retrieved
from http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/ILine-of-Business-
publications/Documents/impact-on-mining-feb-2012.pdf
International Accounting Standards Board (IASB). (2011, May). IFRS 10: Joint Arrangements. International Financial
Reporting Standards.
International Accounting Standards Board (IASB). (2011, May). IAS 28: Investments in Associates and Joint
Ventures. International Financial Reporting Standards.
PRACTICAL
PROBLEM A. Alpha Company and Bravo Company entered into an agreement to put up a business for construction
of various projects. Consequently, they have established another entity, Charlie, that will be the one to enter in any
construction project in behalf of Alpha and Bravo. Both parties agreed to share in the rights over the assets and
obligations to the liabilities of the arrangement. Further contractual agreement is as follows: Assets and liabilities will
be shared equally between the two companies while any revenues and expenses will be shared in the ratio of 70:30,
for Alpha and Bravo, respectively.
The following transactions of the joint arrangement occurred during the year:
 Entered into a construction contract of P50,000,000
 Purchased equipment, P20,000,000 on account
 Materials purchased on account, P10,000,000
 Construction labor paid, P6,000,000
 Operating expenses paid, P3,000,000
 Received P50,000,000 contract price
Required: Journalize the transactions in each book of the operator.
PROBLEM B. ALGER and BERT entered into a joint arrangement using a separate vehicle AB. The legal form of
separate vehicle AB does not confer separation from the parties. The contractual terms of the joint arrangement are
as follows: ALGER has all the rights of the equipment as well as the obligation to pay the accounts payable of AB.
Both parties have rights to all other assets and liabilities of AB in proportion to their interest of 40:60 for ALGER and
BERT.
For the year ended December 31, 2017 the statement of financial position for AB is as follows:
Assets Liabilities & Equity
Cash P50,000 Accounts payable P300,000
Inventory 250,000 Other liabilities 100,000
Equipment 300,000 Equity 200,000
TOTAL ASSETS P600,000 TOTAL LIABILITIES and EQUITY P600,000
From their investment in joint operation, compute for the following

1. Total assets of A in his separate statement of financial position
a. 410,000 c. 180,000
b. 420,000 d. 190,000
2. Total assets of B in his separate statement of financial position

a. 410,000 c. 180,000
b. 420,000 d. 190,000
3. Total liabilities of A in his separate statement of financial position

a. 150,000 c. 320,000
b. 60,000 d. 340,000
4. Total liabilities of B in his separate statement of financial position?

a. 150,000 c. 320,000
b. 60,000 d. 340,000
PROBLEM C. ALBERT and BAGAYAO entered into a joint arrangement using a separate vehicle TANG-A for the
purpose of acquiring a building. The contractual arrangement is that entity TANG-A will have joint control of the
activities and that entity TANG-A will have the rights to the assets and obligations of the arrangement. The following
are the transactions that happened during 2017 and 2018:
For 2017:
 ALBERT and BAGAYAO invested a total of P50,000,000 and their interest in the venture is 60:40,
respectively
 Acquired equipment on account, P2,000,000
 Entity BAGAYAO acquired land at a cost of P5,000,000
 Operating expenses for the year is P2,500,000
 Constructed a building at a cost of P25,000,000
 Rent income from tenants P8,000,000
 Net income or loss is in accordance with their interest
For 2018:
 Rent income from tenants P9,500,000
 Operating expenses for the year is P800,000
 Dividends declared and paid P3,500,000
Compute for the following:

5. Net income or loss of entity TANG-A for the year ended December 31, 2017
a. P5.4M c. P5.6M
b. P5.5M d. P5.7M
6. Net income or loss of entity TANG-A for the year ended December 31, 2018
a. P8.2 M c. P8.7 M
b. P8.3 M d. P8.8 M
7. Share of ALBERT and BAGAYAO in the net income or loss of TANG-A for the year ended December
31, 2017
a. P2.2M & P3.3M c. P3.3M & P2.2M
b. P3.3M & P2.3M d. P2.3M & P3.4M
8. Interest of ALBERT and BAGAYAO as of December 31, 2017

a. P22.2M & P33.3M c. P33.3M & P22.2M
b. P33.3M & P22.3M d. P22.3M & P33.4M
9. Interest of ALBERT and BAGAYAO as of December 31, 2018

a. P27.2M & P32.3M c. P37.13M & P24.12M
b. P36.42M & P24.28M d. P22.13M & P33.41M
==========END OF HANDOUTS==========

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Accounting for Joint Arrangements

I. Relevant Financial Reporting Standards (Effective 2013)

II. Definition of Related Terms

III. Determining the Appropriate Financial Reporting Standards

Determine what type of Joint Significant

Joint Joint Equity method under

Recognize share in assets,

Adapted from IFRS 11, Joint Arrangements

(1) Legal form of the SV, (2) Contractual

VI. Accounting for Joint Ventures – PAS 28

Investment in Joint Venture

VII. Summary of Accounting Procedures for Parties to a JA

Required: Journalize the transactions in each book of the operator.

TOTAL ASSETS P600,000 TOTAL LIABILITIES and EQUITY P600,000

From their investment in joint operation, compute for the following

2. Total assets of B in his separate statement of financial position

3. Total liabilities of A in his separate statement of financial position

4. Total liabilities of B in his separate statement of financial position?

Compute for the following:

8. Interest of ALBERT and BAGAYAO as of December 31, 2017

9. Interest of ALBERT and BAGAYAO as of December 31, 2018

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