PFRS 11, Joint Arrangement

Module 4

Instructor: Mr. Almario G. Parco, Jr., CPA, MBA

Intended Learning Outcomes
• 1. To differentiate joint operations and joint venture.
• 2. To account for investments in joint operations.
Overview
• Definition of Joint Arrangement
• Definition of Joint Control
• Types of Joint Arrangements
• Accounting for Joint Arrangement
Characteristics of a joint arrangement (JA)
• The parties are bound by a contractual arrangement.
• The contractual arrangement gives two or more of those parties joint control of the
arrangement.
• 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.” (PFRS 11)
Joint Control
• 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.
• "unanimous consent"  any party can prevent any of the other parties from making unilateral decisions
(about the relevant activities) without its consent.
• In contrast with significant influence and control, an investor obtains joint control over an investee through
a contractual agreement with fellow investors. Financial and operating decisions relating to. the joint
arrangement's activities require the consent of each of the parties sharing joint control. No single party
obtains leverage over another in respect of voting rights over financial and operating decisions.
• Joint control exists when all the parties sharing joint control over the arrangement act collectively
(together) in directing the activities that significantly affect the returns of the arrangement.
Joint Control
• Ah an arrangement is considered a joint arrangement even if not all of the parties to the
arrangement have joint control. It is sufficient that at least two of those parties share joint
control.
• PFRS 11 distinguishes between:

a. parties that have joint control of a joint arrangement (referred to as joint operators or joint
venturers -see discussion below), and

b. parties that participate in, but do not have joint control of, a joint arrangement.

Party to a joint arrangement is "an entity that participates in a joint arrangement, regardless of
whether that entity has joint control of the arrangement." (PFRS 11 Appendix A)
 * * *

* However, in the separate financial statements, investment in associates, subsidiaries, and joint
ventures are accounted for either; (a) at cost, (b) at FV in accordance of PFRS 9, or (c) or using the
equity method.
Joint Control – Example (1/3)
• Three parties establish an arrangement with the following voting rights:
A- 50%; B - 30%; and C - 20%.
• The contractual arrangement between A, B and C specifies that at least
75% the voting rights are required to make decisions about the relevant
activities of the arrangement.
Joint Control – Example (1/3)
• Three parties establish an arrangement with the following voting rights:
A- 50%; B - 30%; and C - 20%.
• The contractual arrangement between A, B and C specifies that at least
75% the voting rights are required to make decisions about the relevant
activities of the arrangement.

ANSWER: Joint Control between A & B

Joint Control – Example (2/3)
• An arrangement has three parties: A- 50%, and Band C each have
25%.
• The contractual arrangement between A, B and C specifies that at least
75% of the voting rights are required to make decisions about the
relevant activities.
Joint Control – Example (2/3)
• An arrangement has three parties: A- 50%, and Band C each have
25%.
• The contractual arrangement between A, B and C specifies that at least
75% of the voting rights are required to make decisions about the
relevant activities.

ANSWER: Control between A, B & C

However, contractual arrangement would need to specify which

combination of the parties is required to agree unanimously for it to be
classified as joint arrangement.
Joint Control – Example (3/3)
An arrangement in which A and B each have 35% of the voting rights
in the arrangement with the remaining 30% being widely dispersed.

Decisions about the relevant activities require approval by a majority

of the voting rights.
Joint Control – Example (3/3)
An arrangement in which A and B each have 35% of the voting rights
in the arrangement with the remaining 30% being widely dispersed.

Decisions about the relevant activities require approval by a majority

of the voting rights.

ANSWER: Joint Control between A & B, only if:

the contractual arrangement specifies that decisions about the relevant

activities of the arrangement require both A and B agreeing.
Types of Joint Arrangements
• 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.
• Joint venture – is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called
joint venturers.

JOINT OPERATION: JOINT VENTURE:

RIGHTS TO & OBLIGATIONS FOR RIGHTS TO:

ASSETS = LIABILITIES + EQUITY

Structure and legal form of the joint
arrangement
a. A joint arrangement that is not structured through a separate vehicle is a joint
operation.

b. 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.

Separate vehicle - "a separately identifiable financial structure, including separate legal
entities or entities recognized by statute, regardless of whether those entities have a legal
personality." (PFRS 11.Appendix A)
Example
On July 2019, Metro Pacific Water (MPW) launched its largest joint venture company to date,
the Metro Pacific Iloilo Water (MPIW) Corporation. MPIW is a joint venture company formed
by MPW and its partner local water district, the Metro Iloilo Water District (MIWD). MPIW
will operate, rehabilitate, maintain, and expand the water distribution system and establish
wastewater management facilities in Metro Iloilo, which is comprised of Iloilo City and seven
adjacent municipalities. https://metropacificwater.com/news/joint-ventures-in-the-philippines/

 Joint Arrangement 
Example
On July 2019, Metro Pacific Water (MPW) launched its largest joint venture company to date,
the Metro Pacific Iloilo Water (MPIW) Corporation. MPIW is a joint venture company formed
by MPW and its partner local water district, the Metro Iloilo Water District (MIWD). MPIW
will operate, rehabilitate, maintain, and expand the water distribution system and establish
wastewater management facilities in Metro Iloilo, which is comprised of Iloilo City and seven
adjacent municipalities. https://metropacificwater.com/news/joint-ventures-in-the-philippines/

 Joint Arrangement 

 Separate Vehicle
Accounting for joint operation transactions
• Separate accounting records may or may not be required for the joint operation itself
and financial statements may or may not be prepared for the joint operation. However,
the joint operators may prepare management accounts so that they may assess the
performance of the joint operation.
Joint operations
• Financial reporting by joint operators

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

1. its assets, including its share of any assets held jointly;

2. its liabilities, including its share of any liabilities incurred jointly;

3. its revenue from the sale of its share of the output arising from the joint operation; Line by line
consolidation
4. its share of the revenue from the sale of the output by the joint operation; and

5. its expenses, including its share of any expenses incurred jointly.

Joint Operation – No separate vehicle

Microsoft Excel
Worksheet
Joint Operation – separate vehicle

Microsoft Excel
Worksheet
Joint Venture
• Joint ventures
• An entity first applies PFRS 11 to determine the type of arrangement it is involved in. If
the arrangement is a joint venture, the entity recognizes its interest as an investment and
account for it using the equity method under PAS 28 Investments in Associates and
Joint Ventures.
• Under the equity method, the investment is initially recognized at cost and subsequently
adjusted for the investor's share in the investee's changes in the equity, such as
• (1) profit or loss,
• (2) other comprehensive income,
• (3) dividends, and
• (4) results of discontinued operations
Illustration: Equity method
On Jan. 1, 20x1, ABC Co. entered into a joint arrangement classified as a joint venture.
ABC acquired its 30% interest in Joint Venture, Inc. (JV, Inc.) for P500,000. During the
year, JV, Inc. reported Pl,000,000 profit and P200,000 other comprehensive income, i.e., a
total comprehensive income of Pl,200,000. JV, Inc. declared dividends of P600,000.

Requirement:

1. Net investment income

2. Carrying amount as of Dec 31, 20x1

Microsoft Excel
Worksheet
Illustration: Equity method

Microsoft Excel
Worksheet
Transactions between a venturer and a joint
venture
• Gains and losses resulting from "upstream'' and "downstream'' transactions between an
investor and a joint venture are recognized in the investor's financial statements only to
the extent of unrelated investors' interests in the joint venture.
PFRS for SMEs: Section 15 Investments in
Joint Ventures
• A joint venture is "a contractual arrangement whereby two or more parties undertake
an economic activity that is subject to joint control." (PFRS for SMEs 15.13)
• An entity considers any potential voting rights that are currently exercisable and held by
the entity and/or its co-venturers when determining the existence of joint control.
• A joint venture is classified in one of the following:

a. Jointly controlled operation

b. Jointly controlled asset

c. Jointly controlled entity

Jointly controlled operation
• A jointly controlled operation is one whereby:

a. The joint venture's operation involves the use of the venturers' assets and other
resources rather than the establishment of a separate entity.

b. Each venturer uses its own assets and incurs its own liabilities and expenses, but takes
a share in the joint venture's income and expenses incurred in common.

c. The joint venture's activities may be carried out by the venturer's employees alongside
the venturer's similar activities.

A venturer recognizes the assets it controls, the liabilities and expenses that it incurs and
its share in the joint venture's income.
Jointly controlled assets
• A jointly controlled asset involves joint ownership over the assets contributed to, or
acquired for the purpose of, the joint venture and dedicated to the purposes of the joint
venture, rather than the establishment of a separate entity.
• A venturer recognizes the assets that it controls plus its share in the jointly controlled
assets classified according the nature of the assets, the liabilities and expenses it incurs
plus its share in any liabilities and expenses incurred jointly with the other venturers,
and its share in the joint venture's income or output.
Jointly controlled entities
• A jointly controlled entity involves the establishment of a separate entity (e.g., a
corporation) in which each venturer has an interest. The separate 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.
• A venturer accounts for all its investments in jointly controlled entities using one of the
following:

a. Cost model

b. Equity method

c. Fair value model

• End of slides