Joint Arrangements by Antonio J.

Dayag

Correlation of PFRSs 9, 10, 11, 12,

PAS 28

Principles of Investments in Joint

Arrangement

Joint Arrangement ~ is an arrangement of which

two or more parties have joint control (PFRS 11,
part 4)
Arrangement is described as an ACTIVITY or an
OPERATION or a specific grouping of asset and
liabilities, which may or may not form a legal
entity.
Characteristics: (PFRS 11, part 5)
A. Parties are bound by contractual agreement
B2- Contractual agreements can be evidenced in
several ways. An enforceable contractual
arrangement is often, but, not always in
writing. It may be a contracted or documented
discussion between the parties.
B3- When joint arrangements are structured thru a
separate vehicle, the contractual agreement or
some aspects of contractual arrangement, in
some causes is incorporated in the articles,
charters or by-laws of the separate vehicle.
B4- Contractual arrangement sets out the terms
upon which the parties participate in the
activity that is the subject of the arrangement.
B. Contractual Arrangement gives two or more
parties joint control of the arrangement.
Joint Control~ is the contractual 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, part 7)
First key aspect of joint control assess whether the
contractual arrangement gives all the parties or a
group of parties control the arrangement collectively.
(PFRS 11, part 8)

Contractual Terms

Second key aspect of joint control is that it exists

only when decisions about the relevant activities
require unanimous consent of parties that control the
arrangement collectively. (PFRS 11, part 9)
Where a joint arrangement exists there is no single
party that has control. (PFRS 11, part 10)
Party with joint control of an arrangement can
present any other parties or a group of parties from
controlling the arrangement. (PFRS 11, part 10)
There can be a joint arrangement even though not all
parties have joint control of the arrangement.
(PFRS 11, part 11)
Judgment is needed to assets whether the parties, or
a group of parties, have joint control of the
arrangement, assessment shall be made by
considering all facts and circumstances. (PFRS 11,
part 12)
If facts and circumstances change, an entity shall
reassess whether I has joint control of the
arrangement.
B5- Asset control
B6- Determine if joint control
B8- When the minimum required proportion of the
voting rights can be achieved by more than one
combination of the parties agreeing together,
that arrangement is not a joint arrangement
unless stipulated by contractual arrangements
B9- Protective rights only and not relevant activitiesnot a party with joint control
B10- Arbitration of disputes does not prevent the
arrangement from being jointly controlled/joint
arrangement
B11- If arrangement outside PFRS 11, an entity
accounts for its interest in accordance with
relevant PFRS such as PFRS 10, 28 or PFRS 9.

Voting Rights

*Joint Control ~ the parties collectively control the

arrangement because they are the only combination of
parties that can control and the parties must unanimously
agree. In case 3, there is also a joint control because a
single combination is sufficient to achieve the minimum
proportion or voting rights. (25%>20%)
**No Joint Control ~ multiple combination of parties
could collectively control the arrangement, the
contractual agreement does not specify which parties
must agree, there is no unanimous consent. The
arrangement is treated as an ASSOCIATE. (Case 2,
both 25%, case 4, ONLY 70% and there are other
parties)

PAS 31 vs. PFRS11

Accounting for Joint Operation

Where the joint operation is undertaken in a separate

vehicle, separate accounting records do not need to be
kept for the joint operation.

Example: joint operation does not sell the

output produced, but rather distributes it to the
operators. No profit/loss account rose.
Where the Operator contributes a non- current
asset to the joint operation, the value of the
contribution is effectively the fair value of that noncurrent asset.
In contributing an asset, the operator is as if selling a
proportion of that asset to the other joint operators
and retaining a proportion for itself.
If CA < FV, operator makes a profit.

Profit = FV- CA, of the proportion of the asset sold.

If joint arrangement is a partnership in nature,
separate accounting records do not need to be kept,
each joint operator records all the joint operation
transactions in their own books, whether he is a party
to the transactions or not, joint operators must inform
on time the other operators the transactions made by
him.
An account Investment in operation must be
maintained. The following transactions affect the
account:

Cash Settlement: computation of cash settlement upon

termination,

Interest in Joint Operation

P xxx

profit

Add: Share in joint operation gain or

xxx
Total:

P xxx

Less: Withdrawals

xxx

Cash Settlement

P xxx

Accounting for Joint Venture

A party that participates, but does not have joint
control, a joint venture shall account for its interest in
the arrangement in accordance with PAS 39/PFRS 9
financial instruments, unless it has Significant
Influence (PAS 28).
Joint venture agreement specifies each co-ventures
capital contribution, representation of the board of
directors, and involvement, plus other relevant matters.
A distinguishing characteristic of a joint venture is that
no investor can make strategic decisions unilaterally.
Joint control is not the same with profit sharing.
Investment should be recorded at the fair value of the
non-monetary assets transferred to the joint venture
Only the gain represented by interests of the other
nonrelated ventures should be recognized on the date of
the contribution and if only the transaction has
commercial substance as per PAS 16.
Principles on business combinations accounting that do
not conflict with te guidance in this PFRS include but
are not limited to:
1. Measuring identifiable assets and liabilities at fair
value, other than items for which exceptions are
given in PFRS 3 and other PFRSs.
2. Recognizing acquisition-related costs as expenses in
the periods in which the costs are incurred and the

services are received, with the exception that the For other entities the exemption from the equity
costs to issue debt or equity securities are recognized
method applies only if the entity is a parent that is
in accordance with PAS 32 and IFRS 9
exempted from preparing consolidated financial
3. Recognizing deferred tax assets and deferred tax
statements or if the following conditions are met:
liabilities that arise from the initial recognition of
1. The entity is a wholly-owned subsidiary or partialassets or liabilities, except for deferred tax
owned subsidiary of another entity and its other
liabilities that arise from the initial recognition of
owners are informed about and do not object to not
goodwill.
applying he equity method
4. Recognizing the excess of the consideration
2. Entitys debt or equity instruments are not traded in
transferred over the net of acquisition date amounts
a public market
3. Entity did not file or not in the process of filing its
of the identifiable assets acquired and the liabilities
FS with the SEC or any regulatory organization for
assumed, if any, as goodwill
5. Testing for impairment a cash-generating unit to
the purpose of issuing any instrument in the public
which goodwill has been allocated at least annually,
market.
4. The ultimate or any intermediate parent produces
and whenever there is an indication that the unit
CFS available for public use that complies with
may be impaired, as required by PAS 36
The consolidated statement of financial position is
PFRSs.
Downstream Transactions, when a joint venture
prepared by:
1. Including the interest in the joint venture at a
purchases assets from a joint venture, the joint venture
cost plus share of post-acquisition in total
should not recognize its share of the profit made by the
comprehensive income
joint venture on the transactions in question until it sells
2. Including group share of the post-acquisition
the asset to an independent third party until profit is
total comprehensive income in the
realized
consolidated equity
Upstream Transactions, Joint venture may sell or
The consolidated income statement and other
contribute assets so making a profit or loss. Any such
comprehensive income will include:
gain or loss should however, only be recognized to the
1. The consolidated share in the joint ventures
extent that it reflects the substance of the transaction
net or loss
Only the gain attributable to the interest of the other
2. The consolidated share in the joint ventures
joint venture should be recognized in the financial
other comprehensive income
statements.
Use of equity method should be discontinued from Full amount of any loss should be recognized when the
the date on which the venture ceases to have joint
transaction shows evidence that the net realizable
control over, or have significant influence, on a joint
value of current assets is less than the cost or there is
venture.
an impairment loss.
PFRS 12 addresses all disclosure requirements in
Other principle of eliminating unrealized profits or
respect of interests in other entities and it is
losses in proportion to the investors ownership
applicable to an entity that has an interest in any
interest in the joint venture also applies to other
combination of the following: subsidiaries, joint
intercompany transactions, such as transfer or sale of
arrangements,
associates
and
unconsolidated
PPE.
structured entities.
Adjustments to eliminate the investors proportionate
PFRS 11 prescribes that a joint venture shall
share of unrealized profit or loss on any intercompany
recognize its interest in a joint venture as an
transaction need to be made to the balances of the
investment and shall account for that investment
particular accounts in which the effects of unrealized
using equity method in accordance with PAS 28,
P/L are recorded
Investment in Associates and Joint Ventures, unless
Joint Venture Losses
exempted from applying the equity method as
When the equity method being used by the Joint
specified in that standard.
Ventures share of losses of the joint venture equals or
The Equity Method of Accounting
exceeds its interest in joint venture, it should
In the separate financial statements of an investor,
discontinue including its share of further losses.
investment in joint ventures and associate are accounted
Investment is recorded at zero value.
at cost or at fair value. Under either measurement basis, After the interest is reduced to zero, additional losses
the investor recognizes dividend income when right to
should only be recognized where the joint venture has
receive dividend has been established.
incurred obligations, or made payments on behalf of the
Exemptions from the Equity Method:
joint venturer.
In general, joint ventures should be accounted for Goodwill and Impairment Testing
using the equity method
Any Impairment loss id recognized in accordance
1. For certain entities, they may elect to measure their
with PAS 36 Impairment of assets for joint venture as
investments in associates and joint venture at fair
a dingle asset.
value through profit or loss in accordance with PAS
There is no separate testing for impairment of
39/PFRS 9.
goodwill, as it form forms part of the CA of an
2. When availed, such entities need not apply the
investment in Joint venture and is not separately
equity method for the Standard but they must
recognized
disclose their involvements in accordance with
Any reversal of that impairment loss is recognized in
PFRS 12.
accordance with PAS 36 to the extent of the

recoverable amount of investment that subsequently

increased.
Goodwill does not arise when the joint venture is first
established. Goodwill may arise of an investor
purchases its interest in a joint venture from other
investors and it pays a premium over its share in the
net assets.

Investme
nt
Subsidiar
y

Associate

Summary of the Accounting Treatment required at each

Criteri Investors Separate FS
Consolidated FS

Joint
Venture

Contro
l

(51%
or
more)
Signifi
cant
Influen
ce

(20%50%)
Joint
Contro
l

Other
Investme
nt

Required
Treatment in
CFS

Any Impairment loss attributable to the goodwill of

joint venture shall be recognized as impairment loss
of investment in associate or joint venture in profit or
loss, and the corresponding amount should be
credited to the carrying amount of the investment in
joint venture.

(20%50%)
Asset
held
for
accreti
on of
wealth

PAS 27: Investments

carried at:
1. Cost
2. PFRS 9/PAS39
3. Using Equity Method

PAS 27: Investments

carried at:
1. Cost
2. PFRS 9/PAS39
3. Using Equity Method

PAS 27: Investments

carried at:
1. Cost
2. PFRS 9/PAS39
3. Using Equity Method

PFRS 10: Investment is

eliminated and net assets of
subsidiary are consolidated
with those of the parent

PAS
28/PFRS
10:
Investment is accounted for
using the equity method

PAS 28/PFRS 10/PFRS 11:

Investment is accounted for
using the equity method

PFRS 9

PFRS 9

Full
Consolidation

Equity
Accounting

Equity
Accounting

As for single
company
accounts

Levels of reporting for Consolidated Financial Statements (CFS) Purpos