Chapter Four

Accounting for Investment in

Joint Arrangement(Joint operation, joint
venture ) and Associates

1
 Learning Objectives

At the completion of studying this chapter, you will be able to:

 Defines joint control and associate
 Determine the type of joint arrangement;
 Understand how to account for the investment in a joint arrangement
 Understand how to account for the investment in associate

2
 List of Applicable IFRS Standards

Topic List Standards

Joint Arrangement IFRS 11

Investment in Associates and Joint Ventures IAS 28

Consolidated Financial Statements IFRS-10

Financial Instruments IFRS-9

3
 Investment
 An entity may conduct its business through strategic investments in
other entities.
 IFRS broadly distinguishes three types of such strategic investment:
 The investor entities controls the investee company

 The investor entities jointly control the investee company with one

or more third parties; and

 The investor entities has significant influence over investee

company

4
Determining the accounting standards for
Investment in other entities
(Interaction of IFRS 9, 10, 11, 12 and IAS 28)

Outright control?

Yes No

Consolidation (IFRS 10) Joint control?

Yes No

Determine type of joint Significant influence?

arrangement (IFRS 11)
Yes No

Joint Operation Joint Venture

Financial asset
Account for assets, liabilities, Equity accounting accounting
revenues and expenses (IFRS 11) (IAS 28) (IAS 39/IFRS 9)

IFRS 12 IFRS 7
5
©2013 Grant Thornton International Ltd. All rights reserved. 4
 Degree of influence over ‘investees’
& the relevant IFRS investment standards
Degree of influence IFRS accounting

Unilateral Control Account for investment according to IFRS

10( Consolidated Financial Statements)

Joint operation: Account for assets and liabilities

using IFRS 11 Joint Arrangements.
Joint control (joint
arrangements) Joint venture: Account for investment using the
equity method in accordance with IAS 28

Significant influence Account for investment using the equity method

in accordance with IAS 28

Less than significant Account for investment using the fair value
model in accordance with IFRS 9
 Investment Standards
Description IFRS-9 IFRS-10 IFRS-11 IAS-28
Name of the Financial Instrument Consolidated Joint Investment in
standard Financial Statement Arrangement associate & Joint
venture
Accounting •Account for Investment •Equity method + •Equity method + •Equity method
Method at fair value consolidation proportional of accounting for
•Report gain /loss from • Investment is consolidation investment
change in fair value in initially recorded at • Investment is •No
P/L or OCI cost and initially recorded Consolidation,
•Dividend by investee is subsequently at cost and only separate F.S
reported as income adjusted for profit subsequently
•No Consolidation, only /loss of subsidiary adjusted for
separate F.S and dividend of profit /loss of
subsidiary subsidiary and
•Two reports are dividend of
produced( separate subsidiary
and Consolidated •Two reports are
Financial Statement) produced( separa
te and
proportionally
Consolidated
Financial
 Investment in Joint Arrangement
Basic Concepts and Terminologies
 Joint arrangement: is an investment arrangement of which
two or more investor companies have joint control over a
investee company.
 Joint control : Exists only when decisions about the relevant
activities (major decisions) of investee require the unanimous
consent of two or more investor s sharing control.
 Unanimous consent: means that any party within the
arrangement can prevent other party from making unilateral
decisions without its consent.

8
 Decisions that need Unanimous consent

Major capital
expenditures
Who
appoints
the Board Acquiring/ Disposing
and key Appointing Board subsidiaries
members
managem
ent
personnel
? Relevant
Activities
Who can
change the
Selling/ buying strategic
determining funding
goods and
services
direction of
the entity?

Dividend and
remuneration decisions

Relevant activities are those activities that significantly affect the investee's return.
 Example: Testing Existence of Joint control

 The existence of joint control:

 May be explicitly stated in the contract, bylaws or article of
association
 Implied in bylaws or the article of association and needs our

judgment to determine weather there exist or not.

10
 Example 1:
Three Firms : Belayab Motors , Lifan Motors and Marathon Motors
have established A Tire mfg Factory with a capital of $ 500
million . Belayab has 55%, Lifan has 15% and Marathon has 30%
ownership rights in the new factory.
 The contractual agreement reached between the owners
indicate that unanimous consent of all the parties is required to
make decisions about the new factories relevant activities .
 Required:

 Identify Investor company having single control, joint control, significant influence
or no significant influence over investee
 which standard should be used by the three firms to account its investment?
Accounting Method
 Example 1:1
Three Firms : Belayab Motors , Lifan Motors and Marathon Motors
have established A Tire mfg Factory with a capital of $ 500
million . Belayab has 55%, Lifan has 15% and Marathon has 30%
ownership rights in the new factory.
 The tire factory’s bylaws demands majority vote(at least 50+1%)

to make decisions about the new factories relevant activities .

 Required:

 Identify Investor company having single control, joint control,

significant influence or no significant influence over investee

 which standard should be used by the three firms to account its

investment? Accounting Method

 Example 2:

 Assume the previous data that the new factory is established between
Belayab and Lifan only. Each has 50% ownership interest
 The article of association between the two owners indicate that at

least 51% of the voting rights are required to make decisions about the
entity’s relevant activities.
Required:
 Identify Investor company having single control, joint control, significant

influence or no significant influence

 which standard should be used by the two firms to account its
investment? Accounting Method

13
 Example 2:1

 Assume the new factory is established between Belayab and Lifan

only. Belayab has 85% ownership interest and Lifan owns the
remaining
 The article of association indicates that at least 75% of the votes are

required to make decisions about the entity’s relevant activities.

Required:
 Identify Investor company having single control, joint control, significant

influence or no significant influence

 which standard should be used by the two firms to account its
investment? Accounting Method

14
 Example 3:

 Three enterprises (Belayab , Lifan and Marathon Motors ) have

established the factory with ownership interest of
 Belayab 50% , Lifan 30% and Marathon 20% . Their article of
association indicate that at least 75% of the voting rights are
required to make decisions about the entity’s relevant activities.
 Required:
 Identify Investor company having single control, joint control,
significant influence or no significant influence
 which standard should be used by the three firms to account its
investment? Accounting Method

15
 Example 3: 1

 Three enterprises (Belayab , Lifan and Marathon Motors ) have

established the factory with ownership interest of
 Belayab 50% , Lifan 30% and Marathon 20% . Their article of
association indicate that at least 81% of the voting rights are
required to make decisions about the entity’s relevant activities.
 Required:
 Identify Investor company having single control, joint control,
significant influence or no significant influence
 which standard should be used by the three firms to account its
investment? Accounting Method

16
 Example 4
 What if
 Belayab 50% , Lifan 25% and Marathon 25% , . Their article of
association indicate that at least 75% of the voting rights are required
to make decisions about the entity’s relevant activities.
 Required:
 Assess the existence of single control, joint control, significant influence
or no significant influence
 which standard should be used by the three firms to account its
investment? Accounting Method

17
 Types of Joint Arrangement
 Joint arrangement s are Investees over which 2/more investors have
joint control
 IFRS11 identifies two types of joint arrangements :
1. Joint operations
2. Joint ventures.
 The key distinction between the two forms is the owners’ rights and
obligations under the joint arrangement .
 Joint Operation: is a joint arrangement whereby the parties in the
joint control have rights to the assets, and obligations for the liabilities
of the arrangement.
 Joint Venture: is a joint arrangement whereby the parties in the joint
control of the arrangement have rights to the net assets of the
arrangement. 18
Types of Joint Arrangement cont..

19
 Determination of separate entity as joint operation or
joint venture

 Example 1: Berta and Satcon construction have jointly formed a new

company ( KK Construction) to undertake contraction projects that
demands beyond their individual capacity. KK was formed with each
partner investing ETB 100 million . Both have 50% ownership interest
in KK and the major decisions of KK requires a 50+1% vote.
 KK company has General partnership in legal form .
 Required:
a. Determine weather the new entity is joint operation or joint venture?
b. Which standards are used by Berta and Satcon to account their
investment in KK Construction?

20
 Example 2: Berta and Satcon construction have jointly formed a new
company ( KK Construction) to undertake contraction projects that
demands beyond their individual capacity. KK was formed with each
partner investing ETB 100 million . Both have 50% ownership interest
in KK and the major decisions of KK requires a 50+1% vote.
 KK company is a PLC in legal form .
a. Determine weather the new entity is joint operation or joint venture?
b. Which standards are used by the two to account their investment in
KK Company?

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 Accounting for investment in Joint Operation(IFRS-11)
If the Investment is made in a joint operation :


 The joint operator(investor) recognizes line-by-line the following in

relation to its interest in a joint operation(investee) :
 Its assets, including its share in the assets of joint operation

 Its liabilities, including its share in the liabilities of joint operation

 Its revenue , including its share in the revenue of the joint operation

 Its expenses, including its share in the expenses of the joint

operation

22
 Investment in Joint Operation Cont…

The method is also called Proportionate consolidation method

or line by line accounting.
 Investor companies are supposed to prepare two reports:
1. Their own separate financial statement
2. Proportionally consolidated financial statement

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 Accounting for investment in Joint Venture
 If the investment is joint venture(IAS28):
 the Joint venturers(investors ) account only for their
interest in the joint venture(investee) based on equity
method of accounting/ Single line accounting
 Equity method : is a method of accounting for investment
whereby the investor initially recognizes its investment at cost
and subsequently adjusts for :
 Its share in profit or loss of the investee/joint venture,
 Its share in dividend made by investee/joint venture.
 The financial statement prepared by investor company is only
separate financial statement.
24
 Example :
 Addis Tire factory is a company formed between Belayab and
Marathon motors on Jan 1, 2006 by investing ETB. 320,000 each
for a 50% interest in the factory . After operating for a year,
Addis has summarized the following financial statements. Their
bylaw requires at least 51% vote on decision of relevant activities
Addis / P&L Statement
For the Year Ended December 31, 2006
Revenue 1,600,000
Less: Costs and expense ( 1,200,000)
Net Income 400,000
Net Income Division :
Belayab 200,000
Marathon 200,000

25
 Addis /Statement change in equity
For the Year Ended December 31, 2006

Belay Ab Marathon Combined

Investment on January 1 Br320000 Br320000 Br640000

Add: Net Income 200,000 200,000 400,000

Joint venturers’(operator’s) capital, Dec31, Br520,000 Br520,000 Br1,040,000

 Addis /Balance Sheet
December 31, 2006

Assets
Current Assets Br1,280,000
PPE 1,920,000
Total Assets Br3,200,000
Liabilities & Venturers’ Capital
Current Liabilities Br640,000
Long-Term Liabilities 1,520,000
Total Liabilities Br 2,160,000
Venturers’(operators) Capital:
Belayab Br.520,000
Marathon 520,000 1,040,000
 Required:

a. Record the initial investment made by

Belayab on January 1
b. Record the share of Belayab in Addis profit
c. Prepare the Financial report for
investor(belayab) if,
i. Addis tire is a partnership company
ii. Addis tire is a plc company
 Case1: Addis Tire is
Partnership
 Therefore, IFRS-11- Proportionate consolidation method is used
 Two financial reports are prepared: separate and proportionally

consolidated.
To record initial investment:
January 1,2006. Investment in Addis Tire. 320,000
Cash 320,000
 To record earnings in a joint operation

Dec, 31,2006 Investment in Addis Tire. 200,000

Investment income 200,000

 These two entries are posted and give us the next

separate financial statement of Belayab
 1st Report: Belayab separate Financial statements.
Belayab /P &L Statement
For the Year Ended December 31, 2006
Revenue 4,000,000
Investment income 200,000
Less: Costs ( 2,200,000)
Net Income 2,000,000
Belay Ab S. Financial Position 12/31/2006
Assets
Current Assets Br1,200,000
Investment in Addis 520,000
PPE 2,080,000
Total Assets Br3,800,000
Liabilities & owners equity
Current Liabilities Br500,000
Long-Term Liabilities 1,800,000
Total Liabilities 2,300,000
Dec31,2006,Capital: 1,500,000
Total Liabilities & owners equity Br 3,800,000
30
 2nd Report: Belayab proportionally consolidated reports

 Belayab ( joint operator) account line-by-line its share of assets,

liabilities, expenses, and revenues of joint operation(addis tire) as per its
ownership rate. However, the investment and investment income
account in a separate financial statements are eliminated to avoid double
counting.
Dec, 31,2006 Current assets 640,000
Other assets 960,000
Investment income 200,000
Costs and expenses 600,000
Current liabilities 320,000
Long-term Debt 760,000
Revenue 800,000
Investment in Addis. 520,000
2nd Report: Belayab proportionally consolidated
reports Cont…

 Therefore, once separate FS are prepared for internal

reporting purpose , proportionally consolidated reports
are prepared for external reporting purpose as shown in
the next slide.

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 Working paper for combined financial report
Belayab share in Addis
company (50%) Elimination Total
P & L statement
Sales 4,000,000 800,000 4,800,000
Investment income 200,000 (200,000) 0
Costs and expense (2,200,000) (600,000) (2,800,000)
Net income 2,000,000 200,000 (200,000) 2,000,000
S. Financial Position
Current assets 1,280,000 640,000 1,920,000
Investment in Addis 520,000 (520,000) 0
PPE 2,000,000 960,000 2,960,000
Total assets 3,800,000 1,600,000 4,880,000
Current liability 500,000 320,000 820,000
Long term liablity 1,800,000 760,000 2,560,000
Dec31,06,capital 1,500,000 520,000 (520,000) 1,500,000
Total lia & capital 3,800,000 1,600,000 4,880,00033
 Case1: Addis Tire is a Plc (JV) (IAS-
28)

 Only separate financial statement is prepared for external reporting

 Investment is accounted using equity method.

Entries
 To record investment made in Addis Tire

January 1,2006. Investment in Addis 320,000

Cash 320,000
 To record earnings from investment

Dec, 31,2006 Investment in Addis 200,000

Investment income 200,000

Belayab interest in the joint venture is presented using single
account called Investment in Addis Tire, no line by lines
consolidation .
 Belayab , Financial Statements
Income statement
Sales 4,000,000
Investment income 200,000
Costs and expenses (2,200,000)
Net income 2,000,000
Balance sheet
Current assets 1,280,000
Investment in Addis 520,000
Other assets 2,000,000
Total assets 3,800,000
Current liability 500,000
Long term liability 1,800,000
Dec31,06,capital 1,500,000
Total lia & capital 3,800,000 35
 Comparison(Belayab )
Addis is JO Addis is JV
Sales 4,800,000 Sales 4,000,000
Investment income 0 Investment income 200,000
Costs and expense (2,800,000) Costs and expense (2,200,000)
Net income 2,000,000 Net income 2,000,000

Balance sheet Balance sheet

Current assets 1,920,000 Current assets 1,280,000
Investment in Addis 0 Investment in Addis 520,000
2,000,000
Other assets 2,960,000 Other assets
Total assets 4,880,000 Total assets 3,800,000
Current liability 820,000 Current liability 500,000
Long term liability 2,560,000 Long term liablity 1,800,000
Dec31,06,capital 1,500,000 Dec31,06,capital 1,500,000
Total lia & capital 4,880,000 Total lia & capital 3,800,000
36
 Parties in a joint arrangement but
doesn’t have joint control

 A party that participates in, but does not have joint control
over a joint venture is required to account for its interest in
the arrangement in accordance:

With IFRS 9 financial instruments if it has no significant
influence, or

In accordance with IAS 28( equity method) if it has
significant influence over the joint venture.

37
 1

Discussion
 Compare commercial code JV /JO with IFRS definition

and classification.

38
 Investments in Associates(IAS 28)

 Associate: is an entity over which an investor has significant influence

and that is not a subsidiary or a joint venture.
 Significant influence: is the power to participate in the operating and
financial policy decisions of investee; but is not control or joint control
over those policies.
 IAS 28 states that significant influence is presumed to exist if an entity
holds 20% -50% of an entity’s voting power, unless it can be clearly
demonstrated this is not the case.

39
 Example
 Belay Ab Motors has acquired 25,000 of the 100,000 ,Br 1 ordinary
shares of Lifan Motors for Br 60,000 on 1 January 20X8. In the year
to 31 December 20X8, Lifan earns profits after tax of Br 24,000,
from which it pays a dividend of Br 6,000.the necessary journal
entries recorded in the book of investor Belayab Motors under
equity method will be as follows:
January1, 20X8. Investment in associates 60,000
cash 60,000
December 31,20X8 Investment in associates 6,000
Investment Income 6,000
Cash 1,500
Investment in associates 1,500
 The asset 'Investment in associates' is then stated at Br 64,500,
being cost plus the group share of post-acquisition retained profits.
40
 Equity Method cont… loss
 loss: An associate may incur a substantial losses and the
investor’s share of the loss may equals or exceeds its
investment in the associate.
 If so, the investor immediately stops recognizing its share of any
further losses.
 If the associate subsequently reports profits, then the investor
resumes its recognition of the associate’s profits, but only after
its share of the profits equals the share of losses that it
previously did not recognize.

41
 Equity Method cont…

 Loss of significant influence or joint control: An investor

discontinues equity accounting from the date that it ceases to
have significant influence over an associate and accounts for the
investment in accordance with IFRS9(financial instrument)
prospectively.

42
 Presentation and Disclosure

Presentation
 Investments in associates and joint ventures are classified as
non-current assets.
 The investor's share of investee's profit /loss is recognized in its
profit /loss and
 it’s share in investee's other comprehensive income is included
in the investor's other comprehensive income

43
 Investment Accounting-Summery
Description IFRS-9 IFRS-10 IFRS-11 IAS-28
Name of the Financial Instrument Consolidated Joint Investment in
standard Financial Statement Arrangement associate & Joint
venture
Accounting •Account for Investment •Equity method + •Equity method + •Equity method
Method at fair value consolidation proportional of accounting for
•Report gain /loss from • Investment is consolidation investment
change in fair value in initially recorded at • Investment is •No
P/L or OCI cost and initially recorded Consolidation,
•Dividend by investee is subsequently at cost and only separate F.S
reported as income adjusted for profit subsequently
•No Consolidation, only /loss of subsidiary adjusted for
separate F.S and dividend of profit /loss of
subsidiary subsidiary and
•Two reports are dividend of
produced( separate subsidiary
and Consolidated •Two reports are
Financial Statement) produced( separa
te and
proportionally
Consolidated
Financial
Statement)
  THE END

This material is the property of Department of Accounting and Finance, CoBE, AAU.
Permission must be obtained from the Department prior to reproduction
 Public Enterprises In Ethiopian Context.

 Public Enterprise: a wholly state owned public enterprise established

pursuant to Proc. No. 25/1992 to carry on for gain manufacturing,
distribution, service rendering or other economic and related activities.
 Total Assets: all immovable and movable property, receivables, cash and
bank balances of the enterprise including intangible assets, deferred
charges .
 Net Total assets: total assets less current liabilities, long-term debts,
deferred income and other liabilities.
 Capital: the original value of the net total assets assigned to the enterprise
by the state at the time of its establishment or any time thereafter.
 The paid up capital shall not be less than 25 % of the authorized capital at
the time of establishment.
 Public Enterprises Cont…

 The authorized capital of the enterprise shall be fully paid up within 5

years from the date of its establishment.
 Net Profit: any excess of all revenue and other receipts over costs and
operating expenses properly attributable to the operations of the
financial year including depreciation, interest and taxes.
 State Dividend: remaining balance after deduction of the transfers to
the legal reserve fund and other reserve fund from the net profits.
 Legal reserve: 5% of net income of the financial year.
 Accounting for PE

 Follows the generally accepted accounting principles

 Financial year is determined by the supervising authority
 Accounts should be closed at least once a year – within three months
following the end of the financial year.
 Legal reserve 5% of net profits until such reserve equals 20% of the
capital of the enterprise.
 The legal reserve is used to cover losses and unforeseeable expenses
and liabilities
 Other reserve funds may be established with the approval of the
supervisory authority
 Formation of PE

 Example: The government formed XYZ Enterprise with Authorized

Capital of Br 50,000,000 in accordance with the requirements of Proc.
No. 25/1992 with investment of cash & equipment at fair value of
Br.700,000 & Br 15,000,000, respectively. The journal entry would be:

Cash 15,000,000
Equipment (fair value) 700,000
State Capital 15,700,000
 Operation of PE

 Example: Given the following information for XYZ Enterprise for the year ended December 31, 2006
after operating for a year.
XYZ Enterprise/Trial Balance
Dec. 31, 2006 (Br ‘000)
Cash Br 10,050
Accounts Receivable 2,600
Property plant and Equipment 2,200
Accumulated Depreciation Br 50
Accounts Payable 150
Notes Payable 200
State Capital 15,700
Sales 5,000
Operating Expenses 2,950
Purchases 3,300 _______
Total 21,100 21,100

Ending inventory is Br 1,600,000.

The board of directors decided to establish other reserves of Br 100,000 from the net income of the
year
Required: Assuming Profit tax rate is 35%, Prepare :
1. The income statement for XYZ for the year ended dec. 31, 2006;
2. Journal entries for transfer of net income to legal reserve and other
reserves, and to recognize the state dividend payable;
3. The balance sheet at dec. 31, 2006.
 XYZ Enterprise/ Income Statement
For the Year ended Dec. 31, 2006(‘000 birr)
Sales Br 5,000
Cost of Goods Sold ( 1,700)
Gross profit 3,300
Operating Expenses 2,950
Income before tax 350
Income tax expense (35%) (122.5)
Net Income 227.5
Journal entries:
Income tax expense 122,500
Income tax Payable 122,500
( to accrue profit tax expense)

Income summary 227,500

Legal Reserve (5% x 227,500) 11,400
Retained Earnings 100,000
State Dividend Payable 116,100

( to close profit of the period to respective accounts)

 XYZ Enterprise
Balance Sheet
Dec. 31, 2006
Assets
Cash 10,050
Accounts Receivable 2,600
Inventory 1,600
Property, Plant and equipment 2,200
Less: Accumulated Depreciation (50) 2150
Total assets 16,400
Liabilities and Capital
Accounts Payable 150
Income tax payable 122.5
Notes Payable 200
State Dividend Payable 116.1
State Capital 15,700
Legal Reserve 11.4
Other Reserves 100
 PRIVATIZATION OF PE ( PROC. NO. 146/1998)

 Privatization" means the transfer, through sale of an enterprise or its

unit or asset or government share holdings in a share company to
private ownership .
 Balance Sheet
Dec. 31, 2006 (Br ‘000)
Assets
Cost Market value
Cash 10,050 10,050
Accounts Receivable 2,600 2000
Inventory 1,600 2000
Property, Plant and equipment (net) 2150 3000
Total assets 16,400 17,050
Liabilities and Capital
Accounts Payable 150
Income tax payable 122.5
Notes Payable 200
State Dividend Payable 116.1
State Capital 15,700
Legal Reserve 11.4
Other Reserves 100
Total Liabilities and Capital 16400
An individual investor has paid Br 20,000,000 to acquire
Required: Journalize the transaction.(Privatization)
Case 1: Continuing with the books of XYZ
Inventory 400
Property, Plant and equipment (net) 850
Goodwill (20,000-16,461.40) 3538.6
State Capital 15,700
Legal Reserve 11.4
Retained Earnings 100
Accounts Receivable 600
X, Capital 20,000

Case 2: New books

Cash 10,050
Accounts Receivable 2000
Inventory 2000
Property, Plant and equipment (net) 3000
Goodwill 3538.6
Accounts Payable 150
Income tax payable 122.5
Notes Payable 200
State Dividend Payable 116.1
DISSOLUTION AND WINDING UP

 The process involves:

 Sale of assets

 Payment of creditors (if the assets of the enterprise are not sufficient

to pay the debts, and if the authorized capital is not fully paid up, the
liquidator can ask for full payment of the authorized capital)
 Payment of remaining assets to the government