CHAPTER ONE

Overview of accounting for

joint ventures and public
enterprises
 Characteristics of Joint Ventures
 A joint venture is an association of two or more than two persons who
have combined for the execution of a specific transaction and divide the
profit or loss, therefore, in the agreed ratio.
 A joint venture differs from a partnership in that it is limited to carrying
out a single project, such as production of a motion picture or
construction of building.
• Example: A and B have undertaken the job of construction of a school
building. Such an association for some specific purpose will be termed as
a joint venture and each one of them will be termed as a co-venturer.
• The venture will be over as soon as the transaction is over i.e. the school
building is completed.
 Joint Ventures versus Partnership
• Similarities:
 Both have some business activity whose profit (or loss) is
agreed to be shared by two or more persons.
 Both are associations of two or more persons
 Differences:
 A partnership covers or is meant to cover a long period whereas a
joint venture is established only for a specific purpose sought to be
achieved in a short period.
 Joint ventures are highly risky businesses while partnerships have
less risk. This arises from the nature of operation.
 Huge capital investment is required for joint ventures; whereas
small capital investment is most often sufficient for partnerships.
o On account of this lesson, joint venture is also sometimes termed as a
‘temporary partnership’.
 Cont.…
• Historically, joint ventures used to finance the sale or exchange of a
cargo of merchandise in a foreign country.
• In an area when marine transportation and foreign trade involved many
hazards, individuals (venturers) would bend together to undertake a
venture of this type.
• The capital required usually was larger than a person could provide,
and the risks were too high to be borne alone.
• Because of the risks involved and the relatively short duration of the
project, no net income was recognized until the venture was
completed.
• At the end of the voyage, the net income or net loss was divided
among the venturers, and their association was ended.
•
 Cont.…
• In its traditional form, the accounting for a joint venture
did not follow the accrual basis of accounting.
• The assumption of continuity was not appropriate; instead
of the determination of net income at regular intervals,
the measurement and reporting of net income or loss is
usually postponed to the completion of the venture.
 Present-Day Joint Ventures
 In today’s business community, joint ventures are less
common but still are employed for many projects such as:
1.The acquisition, development, and sale of real property;
2.Exploration for oil and gas; and
3.Construction of bridges, buildings and dams
 Types of Joint Ventures
1. Small Joint Ventures:
 No joint venture maintains books of accounts.
 Each venturer record their own incomes and expenses in
own accounts (venturer’s account)
 Memorandum account is used to calculate profit or loss
 Profit is taken back to venture’s account
 A journal entry for cash receipt and payment for equal
amount will be made
 Large Joint Ventures
Corporate joint venture “refers to a corporation owned and
operated by small group of business as a separate and specific
business or project for the mutual benefit of the members of
the group.
• Large joint ventures may be corporate or unincorporated.
• It produces its own full set of accounts.
• A government may also be a member of the group.
 The purpose of a corporate joint venture frequently is:
To share risks and rewards in developing a new market,
 To share product or technology;
 To combine knowledge; or to pool resources in developing
production or other facilities.
 It provides an in the overall management of the joint
venture. arrangement under which each joint venturer may
participate, directly or indirectly .
 Accounting for Joint venture
• At present, International accounting Standards permit the
use of two alternative accounting methods:
 The proportionate consolidation method, or
 Equity Method
The IAS concludes that the equity method best enables
investors in corporate joint ventures to reflect the underlying
nature of their investment in those ventures.
 Therefore, investors should account for investments in
common stock of corporate joint ventures by the equity
method.
 Cont..
• The equity method uses the following accounting
procedures:
 The cost of acquisition (original investment in common
stock) is recorded by increasing investment account.
 The investor’s investment account is increased as the joint
venture earns and reports income
 The investor’s investment account is decreased whenever
withdrawal is made & losses are incurred.
 Accounting for Joint venture
• Example: Assume that A company and B company invested Br.
320,000 each for 50% interest in AB joint venture on January
1,2002. The condensed financial statements for the joint venture
AB company, for 2002 were as follows:
AB company (Joint Venture)
Income Statement
Dec. 31,2002
Revenue ---------------------- Br. 1,600,000
Less: Costs & expenses ---- 1,200,000
Net Income ------------------- Br. 400,000
 Cont..
AB company (JV)
Statement of Venture's Capital
For year ended Dec. 31,2002
A Company B company
Combination
Investment’s Jan, 1,2002 ---- br. 320,000 br. 320,000 br.
640,000
Add: Net Income ------------- 200,000 200,000
400,000
Venture’s Capital, Dec. 31,2002 --- 520,0000 520,000
1,040,000
 Cont.…
ABC company (JV)
Balance Sheet
For year ended Dec. 31,2002
Assets
Current assets ---------------- br. 1,280,000
Other assets ------------------ 1,920,000
Total assets ------------------- br. 3,200,000
Liability & Vent. Cap
Current liability -------------- br. 640,000
Long term liability ----------- 1,520,000
Venture Capital
A Company ------------------ 520,000
B Company ------------------ 520,000 br. 1,040,000
Total Liab & Cap ------------ br. 3,200,000
 Cont.…
• Thus, based on the forgoing information the necessary
accounting entries using the two alternative methods would be
as follows:
A. Each venture’s journal entries under the equity method is:
I. Recognition of investments in a joint venture 2002
Jan.1 Investment in AB Company ----- 320,000
Cash ------------------------------- 320,000
II. Recognition of proportionate share in earnings of a JV. 2002.
Dec. 31 Investment in AB company ------- 200,000
Investment Income -------------- 200,000
 Cont.…
• In addition to the entries under the equity method, the following
consolidation entry is required for each venture in case of the
proportionate consolidation method.
• Dec.31,2002.
Current assets (1,280,000*0.5) --------------- 640,000
Other assets ( 1,920,000*0.5) ---------------- 960,000
Costs and Expenses ( 1,200,000*0.5) ------- 600,000
Investment income ( 400,000*0.5) --------- 200,000
Current Liabilities (640,000*0.5) --------- 320,000
Long-term Liabilities ( 1,520,000*0.5) -- 760,000
Revenue (1,600,000*0.5) ------------------ 800,000
Investment in AB company ---------------- 520,000
 Public Enterprises
• Benefits of Public Enterprises
• The operation of public enterprises is highly beneficial to
the economy. The contribution of public enterprises can be
viewed from two perspectives:
I. Economic benefit
II. Social benefit
 Accounting for public enterprises
• Accounting for public enterprises must be based on clear understanding
of the underlying assumptions to be made on the character of public
enterprise, and the type or structural relationship established.
• The workable assumptions in this case are:
 The public enterprise is involved in profit.
 The economic performance of the public enterprise is measured by
its financial profitability.
 Financial profitability is determined by Net income or surplus.
 Financial profitability must be distinguished from social profitability
that should be measured also additionally where possible.
 Formation of Public Enterprise
• Example: The government formed XYZ Enterprises with
Authorized capital of birr 50,000,000 in accordance with the
requirement of proc. No. 25/1992 with investment of the
following assets:
Cash Birr 15,000,000
Equipment (Fair value) 700,000
The journal entry for the formation of XYZ enterprise would
be as follows:
 Operation of Public Enterprises
• In order to look at the accounting for the operation of public
enterprise assume the following information for XYZ Enterprise:
XYZ Enterprise
Trial Balance
Dec. 31,2006
Cash ------------------------------------- Birr 10,050,000
Account Receivable ---------------- 2,600,000
Property, Plant & Equipment ---- 2,200,000
Accumulated Depreciation ------- Br 50,000
Accounts Payable ------------------- 150,000
Notes Payable ---------------------- 200,000
State Capital ------------------------ 15,700,000
Sales ---------------------------------- 5,000,000
Operating Expense ---------------- 2,950,000
Purchases -------------------------- 3,300,000
Total --------------------------------- 21,100,000 21,100,000
 Cont..
• Additional Information
 Ending inventory is Birr 1,600,000
 The BOD decided to establish other reserves of Birr 100,000
from the net income of the year.
 Profit tax rate is 35%.
 Legal reserve 5% of profit.
Required
On the basis of the forgoing information prepare
 income statement for year end Dec. 31,2006.
 Balance sheet & Journal entries to close the income summary
account
 Privatization of public Enterprises
• Privatization can be defined as the act of reducing the role
of government, or increasing the role of the private sector,
in an activity or in the ownership of assets.
• This is to say, the public enterprises are being privatized
with the view to increasing private sector participation in
the market and improving their performance.
• Types and processes of privatization could differ from one
country to another.
 In general, the main objectives of privatization:

 Achieving wider share ownership,

 Introducing more competition,
 Changing the public-private sector mix,
 Improving the performance of public enterprises

END OF CHAPTER ONE