JOINT ARRANGEMENT (IFRS 11)

A joint arrangement is an agreement of which two or more parties have joint control.

A joint arrangement has the following characteristics:

(a) The parties are bound by a contractual arrangement. An enforceable

contractual arrangement is often, but not always in writing, usually in the form of a
contract between the parties. Joint arrangements may be structured through a separate
vehicle. When joint arrangements are structured through a separate vehicle, the
contractual arrangements will in some cases be incorporated in the articles, or by-laws
of the separate vehicle.

(b) The contractual arrangement gives two or more of those parties joint control
of the arrangement.

Separate vehicle is a separately identifiable financial structure, including separate legal

entities or entities recognized by statute, regardless of whether those entities have a
legal personality. This maybe in the form of a partnership or corporation.

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.

TYPES OF JOINT ARRANGEMENT

 Joint arrangements are established for a variety of purposes (eg as a way for
parties to share costs and risks, or as a way to provide the parties with access to
a new technology or new markets), and can be established using different
structures and legal forms. Examples of joint arrangements are construction
services, shopping center operated jointly, joint manufacturing and distribution of
a product, bank operated jointly, and oil and gas exploration, development and
production activities.

A joint arrangement is either a joint operation or a joint venture.

  Joint Operation 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. To manage the activities of the joint arrangement, joint operators may
appoint an operator or manager, who will be an employee of the joint operators.

 Joint Venture A joint venture is a joint arrangement whereby the parties that
have joint control of the arrangement have right to the net assets of the
arrangement. Those parties are called joint ventures. This type is usually
structured through a separate vehicle (a partnership or corporation).

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. A joint
arrangement that is not structured through a separate vehicle is a joint operation.

ACCOUNTING PROCEDURES

For Joint operations

A joint operator shall recognize in relation to its interest in a joint operation:

(a) Its assets, including its share of any assets held jointly;

(b) Its liabilities, including its share of any liabilities incurred jointly;

(c) Its revenue from the sale of its share of the output arising from the joint
operation;

(d) Its share of the revenue from the sale of the output by the joint operation; and

(e) Its expenses, including its share of any expenses incurred jointly.

When a joint operator sold or contributed assets to the joint operation, the joint operator
shall recognize gains and losses resulting from such transaction only to the extent of the
other parties’ interest in the joint operation. If such transaction provides evidence of a
reduction in the net realizable value of the assets to be sold or contributed to the joint
operation or of an impairment loss of those assets, those losses shall be recognized full
by the joint operator.

When a joint operator purchases assets from the joint operation, it shall not recognize
its share of the gains and losses until it resells those assets to outsiders. When such
transactions provide evidence of a reduction in the net realizable value of the assets to
be purchased or of an impairment loss of those assets, a joint operator shall recognize
its share of those losses.

For Joint Ventures

A joint venture shall recognize its interest in a joint venture as an investment and shall
account for that investment using the equity method.

Under the equity method, on initial recognition the investment in joint venture is
recognized at cost, and the carrying amount is increased or decreased to recognize the
venturer’s share of the profit or loss of the joint arrangement after the date of
acquisition. Distributions received from the joint arrangement reduce the carrying
amount of the investment. The venturer’s share of the profit or loss is recognized in the
venture’s profit or loss.

Investment in Joint Ventures for Small and Medium-sized Entities (SMEs)

Small and Medium-sized Entities (SMEs). These are entities:

(a). With total assets of between P3 million to P350 million and total liabilities of
between 3 million to P250million.
(b). That publish general purpose financial statements for external users.
(c). That are not in the process of filing their financial statements for the purpose
of issuing any class of instruments in a public market; and
(d). That do not have public accountability.

An entity has public accountability if:

 (a). Its debt or equity instruments are traded in a public market or in the process
of issuing such instruments for trading in a public market.
(b). It holds assets in a fiduciary capacity for a broad group of outsiders as one of
its primary business. This is typically the case for financing companies, insurance
companies, brokers and dealers of securities, and investment banks.

Joint Ventures defined

Section 15 of IFRS for SMEs defines joint venture as a contractual arrangement
whereby two or more parties undertake an economic activity that is subject to joint
control. Joint ventures can take the form of jointly controlled operations, jointly
controlled assets, or jointly controlled entities.

The above definition is different from the definition in IFRS 11 (Joint arrangements) and
IFRS 28 (Investments in associates and joint ventures). However, they share the
following characteristics:
(a) A contractual arrangement exists between the parties involved in the venture;
and
(b) The contractual arrangement establishes joint control.

ACCOUNTING PROCEDURES
 Jointly Controlled Operations

The operation of this type involves the use of the assets and the other resources of the
parties (venturer) rather than the establishment of a corporation, partnership or other
entity, or a financial structure that is separate from the parties themselves. Each party
uses its own property, plant and equipment and carries its own inventories. It also incurs
its own expenses and liabilities and raises its own finance, which represent its own
obligations. The activities nay be carried out by a manager, who is an employee of the
parties. The agreement usually provides a means by which the revenue and expenses
incurred in common are shared among the parties.
  Jointly Controlled Assets

This type involves the joint control, and often the joint ownership, by the parties
(venturers) of one or more assets contributed to, or acquired for the purpose of, the joint
venture and dedicated to the purposes of the joint venture.

 Jointly Controlled Entities

A jointly controlled entity is a joint venture that involves the establishment of a

corporation, partnership or other entity in which each venture has an interest. The entity
operates in the same way as other entities, except that a contractual arrangement
between the venturers establishes joint control over the economic activity of the entity.

Measurement

Section 15 (Investments in Joint Ventures) of the IFRS for SMEs requires an entity to
choose one of the following three models to account for its investments in joint ventures:

(a) Cost Model. The investment in a joint venture is measured at cost (including
transaction costs) less any accumulated impairment loss. However, an investor using
the cost model is required to use the fair value model for any investment in a joint
venture for which a published price quotation exists. The investor shall recognize
distributions received from the investment as income without regard to whether the
distributions are from accumulated profits of the jointly controlled entity arising before or
after the date of acquisition.

(b) Equity Method. The investments in a joint venture is initially recognized at the
transaction price (including transaction costs) and adjusted thereafter for the
postacquisition change in the investor’s share of profit or loss and other comprehensive
income of the joint venture.

(c) Fair Value Model. The investment in joint venture is initially recognized at the
transaction price (excluding transaction costs). After initial recognition, at reporting date,
the investment in joint venture is measured at fair value. Changes in fair value are
recognized in profit or loss. However, an investor using the fair value model is required
to use the cost model for any investment in joint venture for which it is impractical to
measure fair value reliably without undue cost or effort.

Cost of Acquisition

The cost of acquisition in exchange for the control of the acquire includes the fair value
of assets given, liabilities incurred or assumed and equity instruments issued by the
acquirer, plus any directly attributable costs.

Transactions between a venture and a joint venture

When a venture contributes or sells assets to a joint venture, recognition of any portion
of a gain or loss from the transaction shall reflect the substance of the transaction.
While the assets are retained by the joint venture and provided the venture has
transferred the significant risks and rewards of ownership, the venture shall recognize
only that portion of the gain or loss is attributable to the interests of the other venturers.
The venture shall recognize the full amount of any loss when contribution or sale
provides evidence of an impairment loss. When a venturer purchases assets from a
joint venture, the venture shall not recognized its share of the profits of the joint venture
from the transaction until it resells the assets to an independent party. A venture shall
recognize its share of the losses resulting from these transactions in the same way as
profits except that losses shall be recognized immediately when they represent an
impairment loss. The above principles are similar to the principles of accounting for
Joint Operation type of Joint Arrangement (IFRS 11)

References:

https://www.pkf.com/media/10031255/ifrs-11-joint-arrangements-summary.pdf

2016 Edition Advance Accounting By: Baysa & Lupisan (Page 187 – 216)