ACCOUNTING FOR JOINT ARRANGEMENTS

Joint Arrangement – an arrangement of which two or more parties have joint control
Joint Control –is the contractually agreed sharing of control over an economic activity, and exists only when
the strategic financial and operating decisions relating to the activity require the unanimous consent of the
parties sharing control (the venturers).

Types of Joint Arrangements:

1. Joint Operations - A joint arrangement whereby the parties that have joint control of the arrangement (i.e.
joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement
2. Joint Venture - A joint arrangement whereby the parties that that joint control of the arrangement (i.e. joint
venturers) have rights to the net assets of the arrangement

Party to a joint venture - an entity that participates in a joint arrangement, regardless of whether that entity has
joint control of the arrangement
Joint Venturer – a party to a joint venture and has joint control over that joint venture
Investor – a party that participates but does not have joint control to a joint venture

Note: In J.O., operators have general liability, in JV, venturers have limited liability.

Joint Arrangements
1. Joint operations
a. Co-ownership of assets
 Joint control or operation of an oil pipeline by oil, gas or mineral extraction companies
 Two companies jointly own a condominium and shares on the rents and expenses.

b. Sharing of tasks
 Two or more entities combine their operation, resources and expertise to manufacture a particular
commodity (i.e. aircraft, sports car, sea vessel).
 Two or more entities contributed resources to sell at a particular event.

Joint operations are either:

1. Non-revenue generating
a. Sharing in the use of an asset
b. Sharing in the output of an activity or property
2. Revenue generating - accounting depends on:
a. Without set of book
b. With a separate set of book

2. Joint Venture - (previously jointly controlled entities)

- Involves the establishment of a corporation, partnership or other entity (financial structure or an
investment vehicle) in which the venturers has interests. Being a separate financial structure, the jointly
controlled entity maintains its own records and prepares financial statements.
- Parties to the joint venture uses equity method
THEORY
1. Electricity companies A and B (involved in electricity sales but not distribution) jointly establish a power
generation entity (company C) to build and operate a CCGT power plant. Companies A and B each have a
50% ownership interest in the company C, which is structured as a corporation. The incorporation enables
the separation of company C from companies A and B and, as a consequence the assets and liabilities held
in company C are the assets and liabilities of company C. The contractual arrangement between the parties
does not specify that the parties have rights to the assets or obligations for the liabilities of Company C.

However, the parties also enter into an-off-take agreement requiring the following:
 Companies A and B agree to purchase all the power generated by Company C in a ratio of 50:50.
Company C cannot sell any of the output to third parties, unless this is approved by companies A
and B. Because the purpose of the arrangement is to provide companies A and B with power they
require, such sales to third parties are expected to be uncommon and not material.
 The price of the power sold to companies A and B is set forth in the off-take agreement at a level
that is designed to cover the costs of production and administrative expenses incurred by the
company. The arrangement is intended to operate at a break-even level.

Given the relevant data, what is the proper classification of this joint arrangement?
A. It is classified as joint venture because the arrangement is established through a separate vehicle, an
incorporated entity Company C.
B. It is classified as joint venture because the incorporation enables the separation of company C from
companies A and B and, as a consequence, the assets and liabilities held in company C are the assets and
liabilities of company C.
C. It is classified as joint operation because the off-take agreement reflects the exclusive dependence of
Company C upon companies A and B for generation of cash flows and the rights of Company A and B to all of
the economic benefits of the assets of company C.
D. It is classified as joint operation because IFRS 11 provides that in case of doubt, a joint arrangement
shall be classified as joint operation instead of joint venture.

EXAM DRILL PROBLEMS: JOINT OPERATIONS

1. D, E and F formed a joint operation to sell personalized shirts during the campaign period. Their
transactions during the two-month period are summarized below. The books of F, being the manager, is
used by the joint operation:
June 12 Investment of merchandise by P 119,000
D
14 Investment of cash by E 45,000
17 Investment of cash by F 30,000
19 Investment of merchandise by 98,000
E
20 Freight-in 9,000
20 Cash sales 285,000
21 Cash sales 78,000
29 Withdrawal of merchandise by 18,000
E
July 5 Purchases 49,000
10 Withdrawal of cash by D 16,000
21 Selling expenses 7,000
31 Unsold merchandise charged to 10,000
D
 The contractual arrangements include distribution of gains and losses as follows: D, 25%; E, 35%; and F,
40%. The venture is completed and terminated on July 31, 2008. In the final settlement, how much would
each venture receive?
D E F
a. P93,000 P125,000 P30,000
b. P120,250 P163,150 P73,600
c. P130,250 P163,150 P43,600
d. P120,250 P163,150 P43,600

2. On October 1, 2008, X, Y and Z formed a joint operation for the sale of merchandise. X was designated as
the managing venture. Profits and losses are to be divided as follows: X, 60%; Y, 15% and Z 25%. On
December 15, 2008, the venture was terminated, the participants agreed to recognize profit or loss on the
venture to date. The cost of inventory on hand is determined to be P47,000. The joint operations account has
a debit balance of P68,000 before adjustment for venture inventory and profit, no separate set of books is
maintained for the joint operation and the participants record in their individual books all venture
transactions.

Before profit or loss distribution, assuming Y has a credit capital balance of P9,450, in the final settlement,
what is the amount due to (from) Y?
a. P12,600 due to c. P6,300 due to
b. P6,300 due from d. P12,600 due from

3. Before profit or loss distribution, assuming Z has a debit capital balance of P11,875, in the final settlement,
what is the amount due to (from) Z?
a. P6,625 due from c. P6,625 due to
b. P17,125 due to d. P17,125 due from

On September 30, 2011 Roxas, Silverio and Tan agreed on a joint operations to sell their common stock shares
of the Golden Copper Mines. Gains and losses are to be shared in proportion to the contributed shares. Roxas
contributes 6,000 shares, which had cost him P42 a share; Silverio gave 10,000 which had cost P58 each and
Tan 4,000 shares which had cost P62 per share. The par value off the shares was P50 and when the arrangement
began market value was P40 per share.

On October 20 he sold 4,500 shares for a P44 a share and P3,000 expenses incurred. On November 1, Golden
Copper distributed a stock dividend of 20%. Tan sold 5,000 shares, ex-stock dividend, on November 5 for P25 a
share. On November 15, Golden Copper paid a cash dividend of P1 per share. On November 22, he sold 6,000
shares for P28. On December 20, the remainders of the shares were sold for P35 a share. Tan’s expenses were
P4,700.

4. The 20,000 shares contributed to the arrangement should be valued at:

a. P800,000 c. P1,080,000
b. P1,000,000 d. P1,200,000

5. Assuming the arrangement is ended on December 31, the share of Roxas in the loss of the arrangement
would be:
a. P10,130 c. P13,130
b. P11,130 d. P12,130

6. If a distribution of proceeds is made on December 31, the share of Silverio would amount to:
a. P374,650 c. P381,450
b. P378,500 d. P385,300
7. Tan’s loss on the disposition on his investment in Golden Copper is:
a. P95,420 c. P105,420
b. P95,140 d. P120,140

EXAM DRILL PROBLEMS: JOINTLY CONTROLLED ENTITIES

2. The Hanwell Company acquired a 30% equity interest in The Northfield Company, a joint venture, for
P400,000 on 1 January 20X6. In the year to 31 December 20X6 Northfield earned profits of P80,000 and
paid no dividend. In the year to 31 December 20X7 Northfield incurred losses of P32,000 and paid a
dividend of P10,000. In Hanwell's consolidated statement of financial position at 31 December 20X7, what
should be the carrying amount of its interest in Northfield??
a. P438,000 c. P414,400
b. P411,400 d. P400,000

3. On January 1, 2013, two real estate companies (the parties - Packet Company and Sacket Company) set up a
separate vehicle (Harrison Company) for the purpose of acquiring and operating a shopping centre. The
contractual arrangement between the parties establishes joint control of the activities that are conducted in
Harrison Company. The main feature of Harrison’s legal form is that the entity, not the parties, has rights to
the assets, and obligations for the liabilities, relating to the arrangement. These activities include the rental
of the retail units, managing the car park, maintaining the centre and its equipment, such as lifts, and
building the reputation and customer base for the centre as a whole.

As a result, Packet Company paid P1.6 million for 50,000 shares of Harrison’s voting common stock, which
represents a 40% investment. No allocation to goodwill or other specific account was made. The joint
control over Harrison is achieved by this acquisition and so Packet applies the equity method. Harrison
distributed a dividend of P2 per share during the year and reported net income of P560,000.

What is the balance in the Investment in Harrison account found in Packet’s financial records as of
December 31, 2013?
a. P1,724,000 c. P1,844,000
b. P1,784,000 d. P1,884,000

4. On January 1, 2013, Wilkins, Inc. and Xylo, Inc. (the parties) agreed to combine their businesses by
establishing a separate vehicle (Bremm, Inc.). Wilkins believes that the arrangement could enable it to
achieve its strategic plans to increase its size, offering an opportunity to exploit its full potential for organic
growth through an enlarged offering of products and services. Xylo expects the arrangement to reinforce its
business opportunities by marketing more products.

As a result, Wilkins, Inc. acquired 20% of the outstanding common stock of Bremm, Inc. for P700,000. This
investment gave Wilkins the joint control over Bremm. Bremm’s assets on that date were recorded at
P3,900,000 with liabilities of P900,000. Any excess of cost over book value of the investment was attributed
to patent having a remaining useful life at 10 years.

In 2013, Bremm reported net income of P170,000. In 2014, Bremm reported net income of P210,000.
Dividends of P70,000 were paid in each of these two years. What is the equity method balance of Wilkin’s
investment in Bremm, Inc. at December 31, 2014?
a. P728,000 c. P756,000
b. P748,000 d. P776,000

5. Boo Company purchases 40% of Basket Company on January 1 for P500,000 that carry voting rights at a
general meeting of shareholders of Basket Company. Boo Company and Blake Company immediately
agreed to share control (wherein unanimous consent is needed to all the parties involved) over Basket
Company. Basket reports assets on that date of P1,400,000 with liabilities of P500,000. One building with a
 seven-year life is undervalued on Basket’s books by P140,000. Also Basket’s book value for its trademark
(10-year life) is undervalued by P210,000. During the year, Basket reports net income of P90,000, while
paying dividends of P30,000. What is the Investment in Basket Company balance (equity method) in Boo’s
financial records as of December 31?
a. P504,000 c. P513,900
b. P507,600 d. P516,000

6. Using the same information in the preceding problem, the income from Investment in Basket Company in
Boo’s financial records as of December 31?
a. P36,000 c. P12,000
b. P19,600 d. P 7,600

7. Goldman Company reports net income of P140,000 each year and pays an annual cash dividend of P50,000.
The company holds net assets of P1,200,000 on January 1, 2013. On that date, Wallace Company purchases
40 percent of the outstanding stock for P600,000, which gives it the ability to have joint control with
Zimmerman Company over Goldman. At the purchase date, the excess of Wallace’s cost over its
proportionate share of Goldman’s book value was assigned to goodwill. On December 31, 2015, what is the
investment in Goldman Company balance (equity method) in Wallace’s financial records?
a. P600,000 c. P690,000
b. P660,000 d. P708,000

8. On January 1, 2011 entities A and B each acquired 30 per cent of the ordinary shares that carry voting rights
at a general meeting of shareholders of entity Z for P300,000. Entities A and B immediately agreed to share
control over entity Z. for the year-ended December 31, 2011 entity Z recognized a profit of P400,000.
On December 30, 2011 entity Z declared and paid a dividend of P150,000 for the year 2011. At December
31, 2011 the fair value of each venturers’ investment in entity Z is P425,000. However, there is no published
price quotation for entity Z.

Using cost model, entities A and B must each recognize dividend income for the year 2011 amounted to:
a. Nil or zero. c. P 75,000
b. P45,000 d. P120,000

NOTE: Full PFRS vs. PFRS for SMEs

SMEs shall account for investment in joint venture using either: equity method, cost model or fair value model.
Full PFRS requires equity method or proportional consolidation as an option.

PFRS for SME requires amortization of the implicit goodwill throughout its expected useful life, while full
PFRS prohibits goodwill amortization.