INTEGRATED REVIEW CLASS IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Joint Arrangements

NATURE OF JOINT ARRANGEMENT

• A joint arrangement is an arrangement of which two or more parties have joint control.
• Essential elements in the definition of joint arrangement:
1. Contractual arrangement
2. Joint control

Contractual Arrangement
• This requires that all parties must collectively control the arrangement. No single party is in a position to
control unilaterally the joint arrangement.
• Generally, specifies the following:
(a) Purpose, activity and duration of the joint arrangement.
(b) Appointment of members of the board of directors or equivalent governing body.
(c) Decision-making processes such as matters requiring decisions from the parties, voting rights, and
required level of agreement for those matters.
(d) Capital contributions by the parties; and
(e) The sharing of assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement.

Note: In contrast with significant influence and control, joint control is obtained by an investor through contractual
agreement with fellow investors. No sole joint operator or venture obtains leverage over another joint operator or
joint venture in respect of voting rights over financial and operating decisions.

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.
• Key aspects of joint control are as follows:
(a) Contractually agreed
(b) Control and relevant activities
(c) Unanimous consent

CLASSIFICATION OF A JOINT ARRANGEMENT

• A joint arrangement is classified as either joint operation or a joint venture.
• The classification depends upon the rights and obligations arising from the joint arrangement.

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 of the arrangement.
• The parties are called joint operators.

Joint Venture
• A joint arrangement whereby the parties that have joint control of the arrangement have right to the net
assets of the arrangement.
• The parties are called joint venturers.

STRUCTURE OF JOINT ARRANGEMENT

Joint arrangements can either be structured or not structured through a separate vehicle.

Joint arrangements not structured through a separate vehicle

• A joint arrangement that is not structured through a separate vehicle is a joint operation.
• The contractual arrangement establishes the parties’ rights to the assets and liabilities relating to the
arrangement, and the parties’ rights to the corresponding revenues and obligations for the corresponding
expenses.
• Each joint operator recognizes in its financial statements the assets used, liabilities incurred, and
recognized its share of the revenues and expenses in accordance with the contractual arrangement.

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CPA Reviewer
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 Joint arrangements structured through a separate vehicle
• A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate
vehicle can be either a joint venture or a joint operation.
• Whether a party is a joint operator, or a joint venture depends on the party’s rights to the assets and
obligations for the liabilities, relating to the arrangement that are held in the separate vehicle. The
following factors need to be considered:
o Legal form of the separate vehicle
ü Must be assessed to determine whether it gives the parties rights to net assets, or rights to the
assets and obligations for the liabilities of the arrangement.
- If the parties conduct the joint arrangement through a separate vehicle whose legal form
causes the separate vehicle to be considered in its own right (i.e., the assets and liabilities
held in the separate vehicle are the assets and liabilities of the separate vehicle and not the
assets and liabilities of the parties), then the arrangement is a joint venture.
- If the parties conduct the joint arrangement in a separate vehicle whose legal form does not
confer separation between the parties and the separate vehicle (i.e., the assets and liabilities
held in the separate vehicle are the parties’ assets and liabilities) then the arrangement is a
joint operation.
o Contractual terms and conditions
ü Should be examined to determine if they provide the parties with rights to the net assets (joint
venture) or rights to the asset and liabilities (joint operation).
ü In case the legal form of the separate vehicle contradicts the contractual terms of the
arrangement, the latter will prevail.
o Other facts and circumstances

ACCOUNTING FOR JOINT OPERATIONS

• For a joint operation, the joint operator recognizes its:
ü Assets, including its share of any assets held jointly
ü Liabilities, including its share of any liabilities incurred jointly
ü Revenue from the sale of its share of the output arising from the joint operation and share of the
revenue from the sale of the output by the joint operation
ü Expenses, including its share of any expenses incurred jointly

ACCOUNTING FOR JOINT VENTURES

v An entity first applies IFRS 11 to determine the type of arrangement in which it is involved. If the entity
determines that has an interest in a joint venture, the entity shall recognize its interest in a joint venture
as an investment and shall account for that investment using the equity method.
ü Under the equity method, the investment is initially recognized at cost and subsequently adjusted for
the investor’s share in the changes in the equity of the investee. Such share includes the investor’s
share in the investee’s (1) profit or loss, (2) dividends declared, and (3) OCI.

FINANCIAL STATEMENT PRESENTATION

Investments accounted for under the equity method (i.e., investment in associate or joint venture) are presented
as non-current assets in the statement of financial position.

ACCOUNTING FOR SMEs

Classification Accounting treatment
Jointly controlled operations The venturer should recognize assets that it controls and liabilities it incurs as
well as its share of income earned and expenses that are incurred.

Jointly controlled assets The venturer should recognize its share of the assets and liabilities it incurs as
well as income it earns and expenses that are incurred.
Jointly controlled entities There is an option for the venturer to use:
ü Fair value model
ü Cost model
ü Equity model

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CPA Reviewer
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 Fair value model Cost model Equity model
Initial measurement Fair value Cost Cost
Treatment of transaction Expensed Capitalizable Capitalizable
costs
Subsequent Fair value at year-end Cost less impairment Carrying value less
measurement impairment
Fair value changes Profit or loss N/A N/A
Dividend income Profit or loss Profit or loss Deduction from the
investment account
Share in profit (loss) N/A N/A Share in profit –
Investment income and
Increase in the
investment account

Share in loss –
Investment loss and
Decrease in the
investment account

DISCUSSION PROBLEMS
Problem 1:
Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating entities as
component for their final products of cellular phones and tablets. The contractual agreement of the incorporating
entities provided that the decisions on relevant activities of ENTITY C will require the unanimous consent of both
entities. Entity A and Entity B have rights to the assets and obligations for the liabilities, relating to the arrangement.
The shares of MARVEL will be owned by Entity A and Entity B in the ratio of 60:40. At the end of first operation of Entity
C, the financial statements provided the following data:

Inventory P1,000,000 Accounts payable P2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the assets and
liabilities of Entity C:
• Entity A owns the land and incurs the loan payable of Entity C.
• Entity B owns the building and incurs the note payable of Entity C.
• The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of their capital interest
in Entity C.
• The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of P1,000,000 and
P2,000,000, respectively. As of the end of the first year, Entity A and Entity B were able to resell 30% and 60%
of the inventory coming from MARVEL to third persons.

REQUIRED:
1. What is the amount of total assets to be reported by Entity A concerning its interest in Entity C?
A. 3,000,000
B. 3,600,000
C. 5,000,000
D. 5,400,000

2. What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C?
A. 1,800,000
B. 2,200,000
C. 2,400,000
D. 2,800,000

Brian Christian S. Villaluz, CPA, MBA

CPA Reviewer
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 3. What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C?
A. 2,100,000
B. 2,300,000
C. 2,500,000
D. 3,000,000

Problem 2:
On January 1, 2025. Margaux Inc. invested P2,150,000 cash in a joint venture for 50% interest. For the years ended
December 31, 2025, 2026 and 2027, the joint venture reported the following net incomes (losses) and dividend
distributions:

Year Net Income (Net Loss) Dividend Distribution

2025 P1,000,000 P300,000
2026 (6,000,000) -
2027 4,000,000 800,000

1. What is the balance of the investment in joint venture account in the books of Margaux Inc. on December
31, 2025?
A. 2,000,000
B. 2,150,000
C. 2,500,000
D. 2,650,000

2. How much is the share in net loss or investment loss to be reported by Margaux Inc. for the year ended
December 31, 2023?
A. 2,000,000
B. 2,350,000
C. 2,500,000
D. 3,000,000

3. How much is the investment income to be reported by Margaux Inc. for the year ended December 31,
2027?
A. 1,100,000
B. 1,500,000
C. 1,600,000
D. 2,000,000

Problem 3:
On January 1, 2025, BLAST Inc., a small and medium enterprise (SME), invested P300,000 cash in a joint venture for
30% interest. Transaction costs of 10% of the purchase price were incurred by BLAST Inc.

On December 31, 2025, the joint venture reported net income of P500,000 and declared and paid cash dividends of
P100,000. Also on that date, the fair value of the investment in joint venture is P400,000 and the estimated cost to
sell is 10% of the fair value. The value in use of the investment is estimated at P380,000.

Required:
1. What amount should be reported as "Investment in Joint Venture" on December 31, 2025, if the equity
method is applied?
A. 330,000
B. 380,000
C. 400,000
D. 450,000

2. What amount should be reported as "Investment in Joint Venture" on December 31, 2025, if the cost model
is applied?
A. 330,000
B. 380,000
C. 400,000
D. 450,000

Brian Christian S. Villaluz, CPA, MBA

CPA Reviewer
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 3. What amount should be reported as "Investment in Joint Venture" on December 31, 2025, if the fair value
model is applied?
A. 330,000
B. 380,000
C. 400,000
D. 450,000

THEORIES

1. The essential elements of a joint arrangement include:

I. Contractual agreement
II. Joint control
III. Establishment of a separate vehicle

A. I only
B. II only
C. I and II
D. I, II and III

2. Joint control is defined as:

A. The power to participate in the financial and operating policy decisions of another entity.
B. The power to govern the financial and operating policies of another entity so as to obtain benefits from
its activities.
C. The contractually agreed sharing of control of an arrangement which exists only when decisions about
relevant activities require majority consent of the parties sharing control.
D. The contractually agreed sharing of control of an arrangement which exists only when decisions about
relevant activities require unanimous consent of the parties sharing control.

3. The main consideration when classifying a joint arrangement into either joint operation or joint venture is:
A. the existence of a contractual arrangement resulting to a joint control by all or some of the contracting
parties.
B. the existence or non-existence of a separate vehicle.
C. the duration of the contractual arrangement - a relatively short-term agreement is classified as a joint
operation.
D. the nature of the rights and obligations of the parties arising from the arrangement.

4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have right to
the total assets and obligations for the total liabilities relating to the arrangement.
A. Joint venture
B. Jointly controlled asset
C. Joint operation
D. Joint business

5. It is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement.
A. Joint operation
B. Joint venture
C. Joint undertaking
D. Joint entity

6. The parties to a joint venture are called:

A. Joint operators
B. Joint venturers
C. Investors
D. Incorporators

Brian Christian S. Villaluz, CPA, MBA

CPA Reviewer
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 7. What is the classification of the joint arrangement when the assets and liabilities relating to the arrangement
are held by a separate vehicle or when the arrangement is established with a separate vehicle?
A. It shall be classified as joint venture.
B. It shall be classified as joint operation.
C. Neither joint venture nor joint operation.
D. It can be either a joint operation or joint venture depending on the legal form of the separate vehicle,
terms of the contractual arrangement or other relevant facts and circumstances.

8. A joint arrangement that is structured without separate vehicle is a

A. Joint operation
B. Joint venture
C. Joint asset
D. Joint entity

9. Under PFRS 11, how shall the joint venture account for its Investment in Joint Venture?
A. Equity method
B. Fair value method under PFRS 9
C. Cost method
D. Proportionate consolidation

10. Under PFRS for SMEs, how shall the venturer account for its Investment in Joint Venture?
A. Equity method.
B. Cost method.
C. Fair value through profit or loss under PFRS 9.
D. Any of the above.
---END---

Brian Christian S. Villaluz, CPA, MBA

CPA Reviewer
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