IFRS/IAS Summary

IAS-31 - Financial Reporting of Interests in Joint Ventures (Revised Dec 2003)

Objective of IAS 31

The objective of IAS 31 is to prescribe the accounting treatment required for interests in joint ventures, irrespective of the structures or forms under which the joint venture activities take place. For the purposes of the Standard, joint ventures are classified as jointly controlled operations, jointly controlled assets and jointly controlled entities.

Key Definitions [IAS 31.2]

Joint venture: A contractual arrangement by which two or more parties (venturers) undertake an economic activity that is subject to joint control. A joint venture can take the form of: [IAS 31.3]

jointly controlled operation;
jointly controlled assets; and
jointly controlled entity.

Control: The power to govern the financial and operating policies of an activity so as to obtain benefits from it.

Joint control: The contractually agreed sharing of control over an an economic activity such that no individual contracting party has control.

Jointly Controlled Operations

Jointly controlled operations involves the use of assets and other resources of the venturers rather than the establishment of a separate entity. Each venturer uses its own assets, incurs its own expenses and liabilities and raises its own finance. The revenue from the sale of the joint product and any expenses incurred in common are usually shared among the venturers The Standard requires that the venturer should recognise in its financial statements the assets that it controls, the liabilities that it incurs, the expenses that it incurs, and its share of the income from the sale of goods or services by the joint venture. [IAS 31.10]

Jointly Controlled Assets

Jointly controlled assets involve the joint control, and often the joint ownership, of assets dedicated to the joint venture. Each venturer may take a share of the output from the assets and each bears a share of the expenses incurred. The Standard requires that the venturer should recognise in its financial statements its share of the joint assets, any liabilities that it has incurred directly and its share of any liabilities incurred jointly with the other venturers, income from the sale or use of its share of the output of the joint venture, its share of expenses incurred by the joint venture and expenses incurred directly in respect of its interest in the joint venture. [IAS 31.16]

Jointly Controlled Entities

A jointly controlled entity is an entity in which two or more venturers has an interest, with a contractual arrangement which establishes joint control over the entity. IAS 31 allows two treatments of accounting for an investment in jointly controlled entities:

Under the benchmark treatment, in its consolidated financial statements, a venturer should report its interest in a jointly controlled entity using proportionate consolidation. [IAS 31.25]
The allowed alternative treatment specifies that, in its consolidated financial statements, a venturer should report its interest in a jointly controlled entity using the equity method of accounting. [IAS 31.32]

If an interest in a jointly controlled entity is acquired and held exclusively with a view to its subsequent disposal in the near future, or the entity operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturer, it should be accounted for as an investment under IAS 39, Financial Instruments: Recognition and Measurement. [IAS 31.35]

If a venturer contributes or sells an asset to a jointly controlled entity, while the assets are retained by the joint venture, provided that the venturer has transferred the risks and rewards of ownership, it should recognise only the proportion of the gain attributable to the other venturers. The venturer should recognise the full amount of any loss incurred when it is indicative of a permanent decline in value. [IAS 31.39]

The requirements for recognition of gains and losses apply equally to non-monetary contributions unless the gain or loss cannot be measured, or the other venturers contribute similar assets. Unrealised gains or losses should be eliminated against the underlying assets (proportionate consolidation) or against the investment (equity method). [SIC 13]

When a venturer purchases assets from a jointly controlled entity, it should not recognise its share of the gain until it resells the asset to an independent party. Losses should be recognised if they are indicative of a permanent decline in value. [IAS 31.40]

Separate Financial Statements of a Venturer

IAS 31 (r2000) does not indicate a preference for any particular treatment of a jointly controlled entity in the separate financial statements of a venturer. [IAS 31.38]

Financial Statements of an Investor

An investor in a joint venture who does not have joint control should report its interest in a joint venture in its consolidated financial statements either: [IAS 31.42]

in accordance with IAS 28 (r2000) Accounting for Investments in Associates, where the investor has significant influence in the joint venture; or
in accordance with IAS 39 (r2000) Financial Instruments: Recognition and Measurement.

Disclosure

A venturer should disclose:

information about contingent liabilities it has incurred in connection with the joint venture. [IAS 31.45]
capital commitments with respect to the joint venture [IAS 31.46]
a listing and description of interests in significant joint ventures [IAS 31.47]

Note: Please note that these summaries are only for reference purposes and are not a substitute for the entire IFRS/IAS. Kindly read the whole text of IFRS/IAS before consulting these summaries.

Summaries are courtesy of Deloitte.

IFRS/IAS Summary

IAS-31 - Financial Reporting of Interests in Joint Ventures (Revised Dec 2003)

More Summaries

Accountancy Poll