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AS 27 Financial Reporting of Interests in Joint ventures

AS 27 Financial Reporting of Interests in Joint ventures. In the previous articles, we have given AS 25 Interim Financial Reporting and AS 22 Accounting For Taxes on Income. Today we are providing the complete details of accounting standard 27 financial reporting of interests in joint ventures I;e objective, Applicability, Scope, definitions, forms of a joint venture, jointly controlled operations, jointly controlled assets, jointly controlled entities, separate and consolidated financial statements of a venturer and disclosure. At the end of this article, you can also download AS 27 notes by ICAI.

AS 27 Financial Reporting of Interests in Joint ventures

Accounting Standard 27 Financial Reporting of Interests in Joint ventures

Objective

The objective of this Standard is to set out principles and procedures for accounting for interests in joint ventures and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors.

Scope

1. This Statement should be applied in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place.

2. The requirements relating to accounting for joint ventures in consolidated financial statements, contained in this Statement, are applicable only where consolidated financial statements are prepared and presented by the venturer

Definitions

For the purpose of this Standard, the following terms are used with the meanings specified:

1) A  joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.

2) Joint control is the contractually agreed sharing of control over an economic activity.

3) Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.

4) A venturer is a party to a joint venture and has joint control over that joint venture.

5) An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.

6) Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.

Forms of Joint Venture:

Joint ventures take many different forms and structures. This Statement identifies three broad types – jointly controlled operations, jointly controlled assets and jointly controlled entities – which are commonly described as, and meet the definition of, joint ventures. The following characteristics are common to all joint ventures:

(a) two or more venturers are bound by a contractual arrangement; and

(b) the contractual arrangement establishes joint control.

Contractual Arrangement of Accounting Standard

1) The contractual arrangement may be evidenced in a number of ways, for example by a contract between the venturers or minutes of discussions between the venturers. In some cases, the arrangement is incorporated in the articles or other by-laws of the joint venture. Whatever its form, the contractual arrangement is normally in writing and deals with such matters as:

  • the activity, duration and reporting obligations of the joint venture;
  • the appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers;
  • capital contributions by the venturers; and
  • the sharing by the venturers of the output, income, expenses or results of the joint venture.

2) The contractual arrangement establishes joint control over the joint venture. Such an arrangement ensures that no single venturer is in a position to unilaterally control the activity. The arrangement identifies those decisions in areas essential to the goals of the joint venturewhich require the consent of all the venturers and those decisions which may require the consent of a specified majority of the venturers.

3) The contractual arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies which have been agreed to by the venturers in accordance with the contractual arrangement and delegated to the operator.

4) In some exceptional cases, an enterprise by a contractual arrangement establishes joint control over an entity which is a subsidiary of that enterprise within the meaning of Accounting Standard (AS) 21,Consolidated Financial Statements. In such cases, the entity is consolidated under AS 21 by the said enterprise, and is not treated as a joint venture as per this Statement. The consolidation of such an entity does not necessarily preclude other venturer(s) treating such an entity as a joint venture.

Jointly Controlled Operations:

1) The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own fixed assets and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture’s activities may be carried out by the venturer’s employees alongside the venturer’s similar activities. The joint venture agreement usually provides means by which the revenue from the jointly controlled operations and any expenses incurred in common are shared among the venturers.

2) An example of a jointly controlled operation is when two or more venturers combine their operations, resources and expertise in order to manufacture, market and distribute, jointly, a particular product, such as an aircraft. Different parts of the manufacturing process are carried out by each of the venturers. Each venturer bears its own costs and takes a share of the revenue from the sale of the aircraft, such share being determined in accordance with the contractual arrangement.

3). In respect of its interests in jointly controlled operations, a venturer should recognise in its separate financial statements and consequently in its consolidated financial statements:

  • the assets that it controls and the liabilities that it incurs; and
  • the expenses that it incurs and its share of the income that it earns from the joint venture.

4) Because the assets, liabilities, income and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the
venturer presents consolidated financial statements.

5) Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture. However, the venturers may prepare accounts for internal management reporting purposes so that they may assess the performance of the joint venture.

Jointly Controlled Assets:

1) In respect of its interest in jointly controlled assets, a venturer should recognise, in its separate financial statements, and consequently in its consolidated financial statements:

  • its share of the jointly controlled assets, classified according to the nature of the assets;
  • any liabilities which it has incurred
  • its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;
  • any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and
  • any expenses which it has incurred in respect of its interest in the joint venture.

2) In respect of its interest in jointly controlled assets, each venturer includes in its accounting records and recognizes in its separate financial statements and consequently in its consolidated financial statements:

  • its share of the jointly controlled assets, classified according to the nature of the assets rather than as an investment, for example, a share of a jointly controlled oil pipeline is classified as a fixed asset;
  • any liabilities which it has incurred, for example, those incurred in financing its share of the assets;
  • its share of any liabilities incurred jointly with other venturers in relation to the joint venture;
  • any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and
  • any expenses which it has incurred in respect of its interest in the joint venture, for example, those related to financing the venturer’s interest in the assets and selling its share of the output.

Because the assets, liabilities, income and expenses are already recognized in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements.

Jointly Controlled Entities:

1) A jointly controlled entity is a joint venture which involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.

2) A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns income. It may enter into contracts in its own name and raise finance for the purposes of the joint venture activity. Each venturer is entitled to a share of the results of the jointly controlled
entity, although some jointly controlled entities also involve a sharing of the output of the joint venture.

3) An example of a jointly controlled entity is when two enterprises combine their activities in a particular line of business by transferring the relevant assets and liabilities into a jointly controlled entity. Another example is when an enterprise commences a business in a foreign country in
conjunction with the government or other agency in that country, by establishing a separate entity which is jointly controlled by the enterprise and the government or agency.

4) Many jointly controlled entities are similar to those joint ventures referred to as jointly controlled operations or jointly controlled assets. For example, the venturers may transfer a jointly controlled asset, such as an oil pipeline, into a jointly controlled entity. Similarly, the venturers may
contribute, into a jointly controlled entity, assets which will be operated jointly. Some jointly controlled operations also involve the establishment of a jointly controlled entity to deal with particular aspects of the activity, for example, the design, marketing, distribution or after-sales service of the product.

5) A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled entity.

Separate Financial Statements of a Venturer

1) In a venturer’s separate financial statements, interest in a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13, Accounting for Investments.

2) Each venturer usually contributes cash or other resources to the jointly controlled entity. These contributions are included in the accounting records of the venturer and are recognised in its separate financial statements as an investment in the jointly controlled entity.

Consolidated Financial Statements of a Venturer

1) In its consolidated financial statements, a venturer should report its interest in a jointly controlled entity using proportionate consolidation except

  • an interest in a jointly controlled entity which is acquired and held exclusively with a view to its subsequent disposal in the near future; and
  • an interest in a jointly controlled entity which operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturer.

Interest in such a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13, Accounting for Investments.

Disclosure

1) A venturer should disclose the aggregate amount of the following contingent liabilities, unless the probability of loss is remote, separately from the amount of other contingent liabilities:

  • any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures and its share in each of the contingent liabilities which have been incurred jointly with other venturers;
  • its share of the contingent liabilities of the joint ventures themselves for which it is contingently liable; and
  • those contingent liabilities that arise because the venturer is contingently liable for the liabilities of the other venturers of a joint venture.

2) A venturer should disclose the aggregate amount of the following commitments in respect of its interests in joint ventures separately from other commitments:

  • any capital commitments of the venturer in relation to its interests in joint ventures and its share in the capital commitments that have been incurred jointly with other venturers; and
  • its share of the capital commitments of the joint ventures themselves.

3) A venturer should disclose a list of all joint ventures and description of interests in significant joint ventures. In respect of jointly controlled entities, the venturer should also disclose the proportion of ownership interest, name and country of incorporation or residence.

4)A venturer should disclose, in its separate financial statements, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.

Click Here to download AS 27 notes by ICAI.

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