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Chapter 8

Chapter 8. Interests In Joint Ventures. Joint Venture Defined. Paragraph 3055.03(c) A joint venture is an economic activity resulting from a contractual arrangement whereby two or more venturers jointly control the economic activity. Other Terminology.

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Chapter 8

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  1. Chapter 8 Interests In Joint Ventures

  2. Joint Venture Defined • Paragraph 3055.03(c) A joint venture is an economic activity resulting from a contractual arrangement whereby two or more venturers jointly control the economic activity.

  3. Other Terminology • Paragraph 3055.03(b) Joint control of an economic activity is the contractually agreed sharing of the continuing power to determine its strategic operating, investing and financing policies. • Paragraph 3055.03(e) A venturer is a party to a joint venture, has joint control over that joint venture, has the right and ability to obtain future economic benefits from the resources of the joint venture and is exposed to the related risks.

  4. Forms of Organization • Jointly Controlled Operations • Uses assets or other resources of individual venturers • Does not involve the formation of a separate enterprise

  5. Forms of Organization • Jointly Controlled Assets • Joint ownership or control of one or more assets • Does not involve the formation of a separate enterprise

  6. Forms of Organization • Jointly Controlled Enterprise • Involves separate corporation or partnership • The separate enterprise owns or controls the assets

  7. Classification Example A Owns 60% B Owns 20% C Owns 15% D Owns 5% Joint Venture

  8. Classification Example • If No Agreement • A classifies as subsidiary • B classifies as significantly influenced (probably) • C and D classify as available for sale or held for trading

  9. Classification Example Agreement A and D do not participate in management. B and C have joint control B and C would classify as joint venture A and D would classify as available for sale or held for trading

  10. Accounting Methods • Paragraph 3055.17 Interests in joint ventures should be recognized in the financial statements of the venturer using the proportionate consolidation method. (January, 1995)

  11. Accounting Methods • IAS No. 31 allows the use of either proportionate consolidation or the equity method

  12. Accounting Methods The Future It is likely that Proportionate Consolidation will be eliminated, with the equity method required

  13. Cessation Of Joint Control Unilateral Control – Section 1590 Subsidiaries Joint Control Loss of Participation – Section 3051 or 3855 Discontinued Operations - Section 3475

  14. Differential Reporting • Paragraph 3055.47An enterprise that qualifies under “Differential Reporting”, Section 1300, may elect to use either the equity method or the cost method to account for its interests in joint ventures that would otherwise be accounted for using the proportionate consolidation method in accordance with paragraph 3055.17. All interests in joint ventures should be accounted for using the same method. (January, 2002)

  15. Differential Reporting • Paragraph 3055.48 A loss in value of an interest in a joint venture not proportionately consolidated that is other than a temporary decline should be accounted for in accordance with the requirements of “Investments”, Paragraphs 3051.18 - .22. (October, 2006)

  16. Differential Reporting • Paragraph 3055.49 Interests in joint ventures not proportionately consolidated should be presented separately in the balance sheet. Income or loss from those interests should be presented separately in the income statement. (January, 2002) • Paragraph 3055.50 An enterprise that has applied one of the alternative methods permitted by paragraph 3055.47 should disclose the basis used to account for interests in joint ventures. (January, 2002)

  17. Non-Cash Capital Contributions • Influenced by several Handbook sections • 3831 – Non-Monetary Transactions • 3840 – Related Party Transactions • 3063 – Impairment Of Long-Lived Assets • 3064 – Goodwill and Other Intangible Assets

  18. Losses On Non-Monetary Capital Contributions • Paragraph 3055.26 When a venturer transfers assets to a joint venture and receives in exchange an interest in the joint venture, any loss that occurs should be charged to income at the time of the transfer to the extent of the interests of the other non-related venturers. When such a transaction provides evidence of a decline that is other than temporary in the carrying amount of the relevant assets, the venturer should recognize this decline by writing down that portion of the assets retained through its interest in the joint venture. (January, 1995)

  19. Losses On Non-Monetary Capital Contributions A venturer has land with a current fair market value of $450,000 and an original cost of $600,000. The venturer transfers this land to a joint venture in return for a 1/3 interest in the enterprise.

  20. Losses On Non-Monetary Capital Contributions • Minimum loss of $100,000 [(2/3)($600,000 - $450,000)] must be recognized and charged to income • If transfer provides evidence of non-temporary decline in value, would recognize and charge to income the remaining $50,000

  21. Gains On Non-Monetary Capital Contributions • Paragraph 3055.27 When a venturer transfers assets to a joint venture and receives in exchange an interest in the joint venture, any gain that occurs should be recognized in the financial statements of the venturer only to the extent of the interests of the other non-related venturers, and accounted for in accordance with paragraphs 3055.28 and 3055.29. (January, 1995)

  22. Gains On Non-Monetary Capital Contributions A venturer has land with a current fair market value of $700,000 and an original cost of $500,000. The venturer transfers this land to a joint venture in return for a 40 percent interest in the enterprise.

  23. Gains On Non-Monetary Capital Contributions • Can recognize gain of $120,000 [(60%)($700,000 - $500,000)] • Would not be included in income unless the contributor received some cash

  24. Gains On Non-Monetary Capital Contributions

  25. Gains On Non-Monetary Capital Contributions • Gains can only be taken into income to the extent that the venturer receives cash or other assets that do not represent an equity interest in the venture • Income inclusion based on the ratio of the cash received to the fair value of the asset

  26. Gains On Non-Monetary Capital Contributions A venturer has land with a current fair market value of $800,000 and an original cost of $500,000. The venturer transfers this land to a joint venture in return for a 40 percent interest in the enterprise, plus cash of $100,000.

  27. Gains On Non-Monetary Capital Contributions • Can recognize a gain of $180,000 [(60%)($800,000 - $500,000)] • Can take $37,500 into income

  28. Gains On Non-Monetary Capital Contributions

  29. Gains On Non-Monetary Capital Contributions • If cash paid to contributor involves bank financing: • Venturer’s share of financing removed from consideration received • Reduces the amount of gain that can be included in income

  30. Intercompany Transactions An investee sells merchandise to an investor for $40,000. As the merchandise cost $25,000 there is a profit of $15,000. • If investee is a subsidiary: • Eliminate the expense, the revenue, and the profit • Investor and investee are one entity

  31. Intercompany Transactions An investee sells merchandise to an investor for $40,000. As the merchandise cost $25,000 there is a profit of $15,000. • If investee is significantly influenced: • Leave the expense and revenue • Eliminate the profit • Investor and investee are separate but not arm’s length

  32. Intercompany Transactions An investee sells merchandise to an investor for $40,000. As the merchandise cost $25,000 there is a profit of $15,000. • If investee is a joint venture and investor is arm’s length with other venturers • Only the investor’s share of expenses, revenues, and profits is eliminated

  33. Downstream Transactions • Paragraph 3055.36When a venturer sells assets to a joint venture in the normal course of operations and a gain or loss occurs, the venturer should recognize the gain or loss in income to the extent of the interests of the other non-related venturers. When such a transaction provides evidence of a reduction in the net realizable value, or a decline in the value, of the relevant assets, the venturer should recognize the full amount of any loss in income. (January, 1995)

  34. Downstream Transactions Example Dondor has a 40 percent interest in Dondee, a joint venture. During the year Donder sells merchandise with a cost of $20,000 to Dondee for $28,000.

  35. Downstream Transactions

  36. Upstream Transactions • Paragraph 3055.37When a venturer purchases assets from a joint venture in the normal course of operations, the venturer should not recognize its share of the profit or loss of the joint venture on the transaction until the assets are sold to a third party. However, when the transaction provides evidence of a reduction in the net realizable value, or a decline in the value of the relevant assets, the venturer should recognize its share of the loss in income immediately. (January, 1995)

  37. Upstream Transactions Example Dondor has a 40 percent interest in Dondee, a joint venture. During the year Dondee sells merchandise with a cost of $20,000 to Dondor for $28,000.

  38. Upstream Transactions

  39. Disclosure • Paragraph 3055.41 A venturer should disclose the total amounts and the major components of each of the following related to its interests in joint ventures: • (a) current assets and long-term assets; • (b) current liabilities and long-term liabilities; • (c) revenues, expenses and net income; • (d) cash flows resulting from operating activities; • (e) cash flows resulting from financing activities; and • (f) cash flows resulting from investing activities. (January, 1995)

  40. Disclosure • Paragraph 3055.42A venturer should disclose its share of any contingencies and commitments of joint ventures and those contingencies that exist when the venturer is contingently liable for the liabilities of the other venturers of the joint ventures. (January, 1995)

  41. International Convergence • IAS No. 31 – Interests In Joint Ventures

  42. IAS No. 31 • Scope • Excludes venture capital organizations • Excludes mutual funds, unit trusts, and investment linked insurance funds

  43. IAS No. 31 • Accounting Method • Current IAS No. 31 allows either equity method or proportionate consolidation • Proposed changes would eliminate the use of proportionate consolidation (IFRS Exposure draft) • U.S. standards do not allow use of proportionate consolidation

  44. IAS No. 31 • Intercompany Transactions • IAS No. 31 does not distinguish between capital contributions and other intercompany transactions. • Rules are similar except IAS No. 31 does not limit the amount of gain to be taken into income on capital contributions

  45. The End

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