CA NITIN GOEL AS 27 CH 10W

FINANCIAL REPORTING OF INTEREST IN JOINT

VENTURES

This standard set out principles and procedures for accounting of interests
in joint venture and reporting of joint venture assets, liabilities, income
and expenses in the financial statements of venturers and investors
Coverage regardless of the structures or forms under which the joint venture
activities take place.
The provisions of this AS need to be referred to for consolidated financial
statement only when CFS is prepared and presented by the venturer.
Joint A contractual arrangement whereby two or more parties
venture undertake an economic activity, which is subject to joint
control
Joint It is the contractually agreed sharing of control over an
control economic activity
Definitions Control power to govern the financial and operating policies of an
economic activity so as to obtain benefits from it.
Venturer party to a joint venture and has joint control over that joint
venture
Investor An investor in a joint venture is a party to a joint venture and
does not have joint control over that joint venture.
The joint venture covered under this statement is governed on the basis
of contractual agreement. Non-existence of contractual agreement will
disqualify an organization to be covered in AS 27.
Joint ventures with contractual agreement will be excluded from the
scope of AS 27 only if the investment qualifies as subsidiary under AS 21,
in this case, it will be covered by AS 21.
Contractual agreement can be in the form of written contract, minutes of
discussion between parties (venturers), articles of the concern or by-laws
of the relevant joint venture. Irrespective of the form of the contract, the
content of the contract ideally should include the following points:
• 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.
Contractual
• Capital contributions by the venturers.
Arrangement
• The sharing by the venturers of the output, income, expenses or results
of the joint venture.
If contractual agreement is signed by a party to safeguard its right, such
agreement will not make the party a venturer. The contractual
arrangement may identify one venturer as the operator or manager of the
joint venture.

Example
IDBI gave loan to the joint venture entity of L&T and Tantia Construction,
they signed an agreement according to which IDBI will be informed for all
important decisions of the joint venture entity. This agreement is to protect
the right of the IDBI, hence just signing the contractual agreement will not
make investor a venturer.

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Example
Mr. A, M/s. B & Co. and C Ltd. entered into a joint venture, where according
to the agreement, all the policies making decisions on financial and
operating activities will be taken in a regular meeting attended by them or
their representatives. Implementation and execution of these policies will
be the responsibility of Mr. A. Here Mr. A is acting as venturer as well as
manager of the concern.

Example
X Ltd invested ₹ 100 crore as initial capital along with Y Ltd and Z Ltd in
GFH Ltd. The purpose of X Ltd making this investment is to grow the
business of GFH Ltd along with the other investors. All investors have a
right to attend to the meetings and to take decisions with respect to the
business of GFH Ltd. All investors are actively involved in running the
business of GFH Ltd and have a share in the returns generated by GFH Ltd
in an agreed proportion.
GFH Ltd is an example of a Joint Venture and X Ltd, Y Ltd and Z Ltd are all
Venturers. Similarly, just because contractual agreement has assigned
the role of a manager to any of the venturer will not disqualify him as
venturer.

Joint ventures may take many forms and structures, this Statement
identifies them in three broad types –
• Jointly Controlled Operations (JCO),
• Jointly Controlled Assets (JCA) and
Forms of Joint • Jointly Controlled Entities (JCE).
Ventures Any structure which satisfies the following characteristics can be
classified as joint ventures:
(a) 2 or more venturers are bound by a contractual arrangement and
(b) The contractual arrangement establishes joint control

Jointly Controlled Operations (JCO)

Under this set up, venturers do not create a separate entity for their joint venture business
but they use their own resources for the purpose. They raise any funds required for joint
venture on their own, they incur any expenses and sales are also realised individually.

Following are the key features of JCO:

a. Each venturer has his own separate business.
b. There is no separate entity for joint venture business.
c. All venturers are creating their own assets and maintain them.
d. Each venturer record only his own transactions without any separate set of books
maintained for the joint venture business. All the transactions of joint venture are
recorded in their books only.
e. There is a common agreement between all of them.
f. Venturers use their assets for the joint venture business.
g. Venturers met the liabilities created by them for the joint venture business.
h. Venturers met the expenses of the joint venture business from their funds.
i. Any revenue generated or income earned from the joint venture is shared by the
venturers as per the contract.

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Since the jointly controlled operation is not purchasing assets or raising finance in its own
right, the assets and liabilities used in the activities of the joint venture are those of the
ventures. As such, they are accounted for in the financial statements of the venture to which
they belong.
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:
(a) the assets that it controls and the liabilities that it incurs; and
(b) the expenses that it incurs and its share of the income that it earns from the joint
venture.
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 (JCA)

Separate legal entity is not created in this form of joint venture but venturer owns the
assets jointly, which are used by them for the purpose of generating economic benefit to
each of them. They take up any expenses and liabilities related to the joint assets as per
the contract.
Following points can be concluded:
• There is no separate legal identity.
• There is common control over the joint assets.
• Venturers use this asset to derive some economic benefit to themselves.
• Each venturer incurs separate expenses for their transactions.
• Expenses on jointly held assets are shared by the venturers as per the contract.
• In their financial statement, the venturer shows only their share of the asset and total
income earned by them along with total expenses incurred by them.
• Since 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.
• Financial statements may not be prepared for the joint venture, although the venturers
may prepare accounts for internal management reporting purposes so that they may
assess the performance of the joint venture.

❖ In JCO, venturers use their own assets for joint venture business but
in JCA they jointly own the assets to be used in joint venture.
❖ JCO is an agreement to jointly carry on the operations to earn income
Difference
whereas, JCA is an agreement to jointly construct and maintain an
between JCO
asset to generate revenue to each venturer.
& JCA
❖ Under JCO all expenses and revenues are shared at an agreed ratio, in
JCA only expenses on joint assets are shared at the agreed ratio.

Jointly Controlled Entities (JCE)

This is the format where a venturer creates a new entity for their joint venture business. 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.

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All the venturers pool their resources under new banner and this entity purchases its own
assets, create its own liabilities, expenses are incurred by the entity itself and sales are
also made by this entity. The net result of the entity is shared by the venturers in the ratio
agreed upon in the contractual agreement.
Each venturer usually contributes cash or other resources to the jointly controlled entity.
These contributions are included in accounting records of the venturer and are recognised
in its separate financial statements as an investment in the jointly controlled entity.
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.

Consolidated Financial Statements of a Venturer

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.
Proportionate consolidation method is to be followed except in the following cases:
(a) Investment is intended to be temporary because the investment is acquired and held
exclusively with a view to its subsequent disposal in the near future. And
(b) joint venture operates under severe long-term restrictions, which significantly impair
its ability to transfer funds to the venturers.
In both the above cases, investment of venturer in the share of the investee is treated as
investment according to AS 13.
A venturer should discontinue the use of this method from the date that:
(a) It ceases to have joint control in the joint venture but retains, either in whole or in part,
its investment.
(b) The use of the proportionate consolidation method is no longer appropriate because
the joint venture operates under severe long-term restrictions that significantly impair
its ability to transfer funds to the venturer.
From the date of discontinuing the use of the proportionate consolidation method,
a) If interest in entity is more than 50%, investments in such joint ventures should be
accounted for in accordance with AS 21, Consolidated Financial Statement.
b) If interest is 20% or more but upto 50%, investments are to be accounted for in
accordance with AS 23, Accounting for Investment in Associates in Consolidated
Financial Statement.
c) For all other cases investment in joint venture is treated as per AS 13, Accounting for
Investment.
d) For this purpose, the carrying amount of the investment at the date on which joint
venture relationship ceases to exist should be regarded as cost thereafter.
Following are the features of Proportionate Consolidation Method:
❖ Stress is given on substance over form i.e., more importance is given to the share of
venturers in the profit or loss of the venture from the share of assets and liabilities
rather than the nature and form of the joint venture.
❖ Venturer’s share of joint assets, liabilities, expenses and income are shown on the
separate lines in the consolidated financial statement.
❖ Most of the provisions of Proportionate Consolidation Method are similar to the
provisions of AS 21
❖ As far as possible the reporting date of the financial statements of jointly controlled
entity and venturers should be same. If practically it is not possible to draw up the
financial statements to such date and, accordingly, those financial statements are drawn

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up to different reporting dates, adjustments should be made in joint venturer’s books for
the effects of significant transactions or other events that occur between the jointly
controlled entity’s date and the date of the venturer’s financial statements. In any case,
the difference between reporting dates should not be more than six months.
❖ Accounting policies followed in the preparation of the financial statements of the jointly
controlled entity and venturer should be uniform for like transactions and other events
in similar circumstances. If accounting policies followed by venturer and jointly
controlled entity are not uniform, then adjustments should be made in the items of the
venturer to bring it in line with the accounting policy of the joint venture.
❖ Any asset or liability should not be adjusted by another liability or asset. Similarly any
income or expense cannot be adjusted with another expense or income. Such
adjustment can be made only when legally it is allowed to adjust them and such items
does lead to settlement of obligation or writing off of assets.
❖ On the date when interest in joint entity is acquired, if the interest of venturer in net
assets of the entity is less than the cost of investment in joint entity, the difference will
be recognized as goodwill in the consolidated financial statement and if net asset is more
than cost of investment, then the difference is recognized as capital reserve

Transactions between Venturer and Joint Venture

When venturer transfers or sells assets to Joint Venture, the venturer should recognise
only that portion of the gain or loss which is attributable to the interests of the other
venturers. The venturer should recognise the full amount of any loss only when the
contribution or sale provides evidence of a reduction in the net realisable value of current
assets or an impairment loss.
When the venturer from the joint venture purchases the assets, venturer will not
recognized his share of profits in the joint venture of such transaction unless he disposes
off the assets. A venturer should recognise his share of the losses resulting from these
transactions in the same way as profits except that losses will be recognised in full
immediately only when they represent a reduction in the net realisable value of current
assets or an impairment loss.
In case the joint venture is in the form of separate entity (i.e., JCE) then provisions of above
the Para will be followed only for consolidated financial statement and not for venturer’s
own financial statement. In the books of venturer, profit or loss from such transactions are
recognised in full.

Example
A and B established a separate vehicle i.e. entity J, wherein each operator has a 50%
ownership interest and each takes 50% of the output. On formation of the joint venture, A
contributed a property with fair value of ₹ 110 crore and agreed to contribute his experience
over the years towards this venture; and B contributed equipment with a fair value of ₹ 120
crore. The carrying values of the contributed assets were ₹ 100 crore and ₹ 80 crore,
respectively.

Answer
A – Gain in consolidated financial statements
A’s share in the fair value of assets contributed by entity B (50% × 120) 60
A’s share in the carrying value of asset contributed by A to the joint venture (50% × 100) (50)
Gain recognised by A 10

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The investors who don’t have joint control over the entity recognized his
share of net results and his investments in joint venture as per AS 13. In
the consolidated financial statement, it is recognized as per AS 13, AS 21
or AS 23 as appropriate.
Other Points Payment to operators is recognized as an expense in CFS and in the books
of operators as per AS 9, Revenue Recognition. The operator may be any
of the venturers, in this case any amount received by him, as management
fees for the service will be recognized as stated above in this Para.

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:
a. 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;
b. Its share of the contingent liabilities of the joint ventures themselves
for which it is contingently liable; and
c. Those contingent liabilities that arise because the venturer is
contingently liable for the liabilities of the other venturers of a joint
venture.

A venturer should disclose the aggregate amount of the following

commitments in respect of its interests in joint ventures separately from
Disclosure
other commitments:
a. 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
b. Its share of the capital commitments of the joint ventures themselves.

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.
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.

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ASSIGNMENT QUESTIONS
Question 1 (ICAI Study Material)
Mr. A, Mr. B and Mr. C entered into a joint venture to purchase a land, construct and
sell flats. Mr. A purchased a land for ₹ 60,00,000 on 01.01.2021 and for the purpose he took
loan from a bank for ₹ 50,00,000 @ 8% interest p.a. He also paid registering fees ₹ 60,000
on the same day. Mr. B supplied the materials for ₹ 4,50,000 from his godown
and further he purchased the materials for ₹ 5,00,000 for the joint venture.
Mr. C met all other expenses of advertising, labour and other incidental expenses which
turnout to be ₹ 9,00,000.
On 30.06.2021 each of the venturer agreed to take away one flat each to be valued at ₹
10,00,000 each flat and rest were sold by them as follow: Mr. A for ₹ 40,00,000;
Mr. B for ₹ 20,00,000 and Mr. C for ₹ 10,00,000. Loan was repaid on the same day by Mr.
A along with the interest and net proceeds were shared by the partners equally.
You are required to prepare the draft Consolidated Profit & Loss Account and Joint Venture
Account in the books of each venturer.

Question 2 (ICAI Study Material)

A Ltd., B Ltd. and C Ltd. decided to jointly construct a pipeline to transport the gasfrom
one place to another that was manufactured by them. For the purpose following
expenditure was incurred by them: Buildings ₹ 12,00,000 to be depreciated @ 5% p.a.,
Pipeline for ₹ 60,00,000 to be depreciated @ 15% p.a., computers and other electronics for ₹
3,00,000 to be depreciated @ 40% p.a. and various vehicles of ₹ 9,00,000 to be depreciated
@ 20% p.a.
They also decided to equally bear the total expenditure incurred on the maintenance of
the pipeline that comes to ₹ 6,00,000 each year.
You are required to show the consolidated balance sheet and the extract of Statement of
Profit & Loss and Balance Sheet for each venturer.

Solution:
Consolidated Balance Sheet
Note (₹)
I Equity and liabilities
Shareholders’ funds:
Share Capital 1 71,40,000
71,40,000
II Assets
Non-current Assets
Property, Plant and Equipment: 2 71,40,000
71,40,000

Notes to Accounts
(₹)
1. Share capital
A Ltd. 23,80,000
B Ltd. 23,80,000
C Ltd. 23,80,000 71,40,000
2. Property, Plant and Equipment Land & Building:
A Ltd. 3,80,000

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CA NITIN GOEL AS 27 CH 10W

B Ltd. 3,80,000
C Ltd. 3,80,000 11,40,000
Plant & Machinery:
A Ltd. 17,00,000
B Ltd. 17,00,000
C Ltd. 17,00,000 51,00,000
Computers:
A Ltd. 60,000
B Ltd. 60,000
C Ltd. 60,000 1,80,000
Vehicles:
A Ltd. 2,40,000
B Ltd. 2,40,000
C Ltd. 2,40,000 7,20,000

In the Books of A Ltd.

Extract of statement of Profit & Loss
Particulars Note No. ₹
Depreciation and amortisation expense 1 4,20,000
Other operating Expenses (Pipeline Expenses) 2,00,000

Extract of Balance Sheet

Note No. ₹
Assets
Non-current assets
Property, Plant and Equipment 2 23,80,000

Notes to Accounts
₹ ₹
1. Depreciation and amortisation expense
Land & Building 20,000
Plant & Machinery 3,00,000
Computers 40,000
Vehicles 60,000 4,20,000
2. Land & Building 4,00,000
Less: Depreciation (20,000) 3,80,000
Plant & Machinery 20,00,000
Less: Depreciation (3,00,000) 17,00,000
Computers 1,00,000
Less: Depreciation (40,000) 60,000
Vehicles 3,00,000
Less: Depreciation (60,000) 2,40,000
23,80,000

In the Books of B Ltd. & C Ltd.: Same Presentation as in case of A Ltd.

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Question 3 (ICAI Study Material)

A Ltd. a UK based company entered into a joint venture with B Ltd. in India, wherein B Ltd.
will import the goods manufactured by A Ltd. on account of joint venture and sell them in
India. A Ltd. and B Ltd. agreed to share the expenses & revenues in the ratio of 5:4
respectively whereas profits are distributed equally. A Ltd. invested 49% of total capital but
has an equal share in all the assets and is equally liable for all the liabilities of the joint
venture. Following is the trial balance of the joint venture at the end of the first year:
Particulars Dr. (₹) Cr. (₹)
Purchases 9,00,000
Other Expenses 3,06,000
Sales 13,05,000
Property, Plant and Equipment 6,00,000
Current Assets 2,00,000
Unsecured Loans 2,00,000
Current Liabilities 1,00,000
Capital 4,01,000
Closing inventory was valued at ₹ 1,00,000.
You are required to prepare the Consolidated Financial Statement.

Solution:
Consolidated Profit & Loss Account
Particulars Note No. (₹ )
Revenue from operations 1 13,05,000
Total Revenue (A) 13,05,000
Less: Expenses
Purchases 2 9,00,000
Other expenses 3 3,06,000
Changes in inventories of finished goods 4 (1,00,000)
Total Expenses (B) 11,06,000
Profit Before Tax (A-B) 1,99,000

Consolidated Balance Sheet

Note No. (₹)
I Equity and liabilities
1. Shareholders’ funds:
Share Capital 5 4,01,000
Reserves and Surplus 6 1,99,000
2. Non-current liabilities
Long term borrowings 7 2,00,000
3. Current Liabilities 8 1,00,000
9,00,000
II Assets
Non-current Assets
Property, Plant and Equipment 9 6,00,000
Current Assets
Inventories 10 1,00,000
Other current assets 11 2,00,000
9,00,000

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Notes to Accounts
Particulars (₹)
1. Revenue from operations
Sales: 7,25,000
A Ltd. 5,80,000 13,05,000
B Ltd.
2. Purchases:
A Ltd. 5,00,000
B Ltd. 4,00,000 9,00,000
3. Other Expenses:
A Ltd. 1,70,000
B Ltd. 1,36,000 3,06,000
4. Closing Inventory:
A Ltd. 50,000
B Ltd. 50,000 1,00,000
5. Share Capital:
A Ltd. 1,96,490
B Ltd. 2,04,510 4,01,000
6. Reserve & Surplus:
Profit & Loss Account
A Ltd. 99,500
B Ltd. 99,500 1,99,000
7. Long term Borrowing:
Unsecured Loans
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000
8. Current Liabilities:
A Ltd. 50,000
B Ltd. 50,000 1,00,000
9. Property, Plant & Equipment:
A Ltd. 3,00,000
B Ltd. 3,00,000 6,00,000
10. Inventories:
A Ltd. 50,000
B Ltd. 50,000 1,00,000
11. Other Current Assets:
A Ltd. 1,00,000
B Ltd. 1,00,000 2,00,000

Question 4 (ICAI Study Material)

A Ltd. entered into a joint venture with B Ltd. on 1:1 basis and a new company C Ltd. was
formed for the same purpose and following is the balance sheet of all thethree companies:
Particulars A Ltd. B Ltd. C Ltd.
Share Capital 10,00,000 7,50,000 5,00,000
Reserve & Surplus 18,00,000 16,00,000 12,00,000
Loans 3,00,000 4,00,000 2,00,000
Current Liabilities 4,00,000 2,50,000 1,00,000
Property, Plant and Equipment 30,50,000 26,25,000 19,50,000

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Investment in JV 2,50,000 2,50,000 -

Current Assets 2,00,000 1,25,000 50,000
Prepare the balance sheet of A Ltd. and B Ltd. under proportionate consolidationmethod.

Question 5 (ICAI Study Material)

JVR Limited has made investments of ₹ 97.84 crores in equity shares of QSR Limited
in pursuance of Joint Venture agreement till 2021-22 (i.e., more than 12 months). The
investment has been made at par. QSR Limited hasbeen in continuous losses for the last
2 years. JVR Limited is willing to reassess the carrying amount of its investment in QSR
Limited and wish to provide for diminution in value of investments. However, QSR Limited has
a futuristic and profitable business plans and projection for the coming years.
Discuss whether the contention of JVR Limited to bring down the carrying amount of
investment in QSR Limited is in accordance with the Accounting Standard.

Solution:
As per para 26 of AS 27 “Financial Reporting of Interests in Joint Ventures”, in a venturer’s
separate financial statements, interest in a jointly controlled entity should be accounted for
as an investment in accordance with AS 13 ‘Accounting for Investments’.
As per para 17 of AS 13 “Accounting for Investments”, long-term investments are
usually carried at cost. However, when there is a decline, other than temporary, in the value
of a long-term investment, the carrying amount is reduced to recognize the decline. Indicators
of the value of an investment are obtained by reference to its market value, the investee’s
assets and results and the expected cash flows from the investment. Thetype and extent
of the investor’s stake in the investee are also taken into account. However, where there is a
decline, other than temporary, in the carrying amounts of long-term investments, the
resultant reduction in the carrying amount is charged to the profit and loss statement.
Since the investment was made in the year 2021-2022 i.e., more than a year, it is a
long-term investment. In the given case, though the QSR Ltd. is in continuous losses for past
2 years, yet it has a futuristic and profitable business plans and projections for the coming
years. Here, one of the indicators i.e. ‘losses incurred to the company’ may lead to
diminution inthe value of the shares while the other indicator that ‘the company has positive
expected cash flows from its business plans’ does not lead to decline in the value of shares.

Considering both the facts, in case the expectation of profitable businessplans and positive
cash flows is based reliable presumptions (such as tender in favour of QSR Ltd., strong
order book etc.), the decline will be regarded as temporary in nature and the investment
in equity shares will continue to be carried at cost only.

However, should the aforesaid presumptions be based on projections without reasonable

evidence backing the claims, the decline could be regarded as non-temporary in nature in
which case the write down of the carrying amount become necessary in line with AS 13,
thereby implying the contention of QSR Ltd. to be correct.

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