SFAS No.

39 Accounting for Joint Venture

CONTENTS

Paragraph

INTRODUCTION 01 - 08

Objective 04
Scope 05 - 07
Definitions 08

RECOGNITION AND MEASUREMENT 09 - 34

The construction of the Joint Venture Assets 09 - 14

The Operations of the Joint Venture Assets 15 - 31
Disclosures 32 - 34

STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39

JOINT VENTURE ACCOUNTING 35 - 49

Recognition and Measurement 35 - 44

Disclosures 45 - 47
Transition 48
Effective Date 49

SFAS No. 39

Page 1
SFAS No. 39 Accounting for Joint Venture

ACCOUNTING FOR JOINT VENTURE

INTRODUCTION

0.1. A definitive characteristic of the business world is the expectation of investment in

profitable, low risk enterprises. These investment hopes often exceed the capacity
if a single business entity to provide funds. An entrepreneur with opportunities for
investments, but does not possess sufficient funds or assets will attempt to find a
partner in order to capitalize those opportunities by forming a Joint Venture (JV).

A Joint Venture is based in general terms on Civil Law and specifically on Contract
Law. As a result, all rights, liabilities, ownership, asset ownership arrangement,
shared income-expense-output arrangements should be disclosed in the Notes of
the Financial Statements.

A Joint Venture involving an Indonesian accounting entity and a foreign party

which is based upon an agreement between those parties, and observes the laws of
each country as well as international laws, has the same disclosure consequences.

0.2. Other entrepreneurs may possess of have access to sufficient funds, but are lacking
other resources, or perhaps not prepared to take the risk alone. These can
motivate the entrepreneurs into creating a JV. All JV are essentially the same, that
is, an entrepreneur attempt to obtain sufficient funds and or assets to undertake the
planned investment, an/or to obtain a synergy from a strategic alliance, and/or to
share the risks of investment with other entrepreneurs. An entrepreneur possessing
access to funds and having sufficient other resources and does not want to share
the risks with other entrepreneurs perhaps will not be interested in co-operative
arrangements and might feel it is better to borrow oney from a bank or seek funds
in the capital markets. This, then, the major difference between a JV and other
forms of funding. Essentially, in a JV, there are limitation for the entrepreneurs in
capitalizing upon funds from existing financial institutions, or there are problems
in obtaining resources or certain concessions, and/or there is an expectation that
the investment risk be shared.

Page 2
SFAS No. 39 Accounting for Joint Venture

0.3. There are several froms of JV. But they can be divided into two groups:

• JV as a separate legal entity from the legal entities of the JV participants, and
• JV with no formation of a separate legal entity.

While the first JV can be in the form of a legal body or association, a JV without
a legal entity can be in the form of Joint Operation Control (JOC) and Joint Asset
Control) (JAC). The latter could also be a JV where only one of the JV
participants opssesses significant control of JV assets and operations. In JOC or
JAC types ofJV, each JV participants has significant control of JV operations or
assets, and as a result this type of co-operation is called joint control. JVs in this
Statement are limited to those were only one party possesses significant
(meaningful) control of JV assets and operations.

The operational structure of the JVs vary significantly and evolved in response to
the need of the participants. Two popular JV forms are Build, Operate and
Transfer (BOT) and Build, Transfer and Operate (BTO). These two types can
be combined with Shared Product contract (SPC) or Shared Income contract
(SIC) in a certain ways.

Objective

0.4. The objective of this standard is to address the accounting of the JV activities, that
is,) those related to:

a. recognition and measurement of accounts arising from the JV activities such as

assets, liabilities, income and expenses, and
b. the presentation and disclosures of the JV activity accounts.

Scope

0.5. This Statement addresses JV activities categorized as a JV which is not a separate

legal entity, where only one party has a significant control over the assets and
operations. A JV which is established as a separate entity and other matters should
be treated in accordance with other Statement of Financial Accounting Standards
and generally accepted accounting principles. Conversely, JVs which are not
established as separate legal entities, including JACs and JOCs shall be treated in
accordance with SFAS No. 12 Financial Reporting on Interests in Jointly
Controlled Operations and Assets.

0.6. This standard addresses JV activities, both from the perspective off those holding
assets or certain operational licenses, as well as from the perspective of investors.

0.7. With the issuance of this Statement, the term “co-operative” of “joint” in
paragraph 14 of the SFAS No. 35 (1994) should be applied solely for the
development of telecommunication facilities under a SPC arrangement.

Page 3
SFAS No. 39 Accounting for Joint Venture

Definitions

0.8. The following terms used in this standard are defined as follows:

Joint Venture is a contract between two or more parties, where each party agrees
to work together using assets and or licenses possessed , and to jointly bear the
risks of that venture.

Asset holder is the party holding assets or certain operational licenses used as
Joint Venture objects or facilities. For example a person owning land, on which an
office block will be constructed under a JV contract, or PT Jasa Marga which
owns the operational license for toll roads.

Investor is the party which provides funds, either in total or in part, to enable the
efficient utilization of assets or concessions in a JV. This limitation differs from
SFAS No. 12 becausean investor in this Statement can either possess control of JV
assets and operations or not, depending on the type of the JV as stipulated in the
contract.

JV assets are fixed assets which are developed or used to carry out the JV
activities.

JV operator is a party operating the JV assets. JV managers could be the asset

holders, the investors or other designated parties.

Concession period is a length of time in where investors and asset holders are still
bound to a shared product or chared income contract or other forms of payment
stipulated in the JV contract.

RECOGNITION AND MEASUREMENT

The development of the JV assets

0.9. A Joint Venture usually commences with the asset holders meeting potential
investors. The asset holders possess assets (for example, land), or certain
operational licenses (for example, telecommunication services or toll road
operational license), which are then handed over for development or use under a
JV contract. An investor is a party which possesses funds to develop JV assets.

10. JV Assets, like buildings and toll roads, usually require large amounts of funds to
be constructed. These funds are usually provided by investor, although in several
cases asset holders may also contribute in part.

11. Assets handed over by asset holders for use under a JV contract should be
recorded by the asset holders as JV assets at acquisition cost.

Page 4
SFAS No. 39 Accounting for Joint Venture

12. If an operational license with no acquisition cost is handed over for use in a JV, the
asset holder should only disclose the existence of the handover.

13. Funds invested by asset holders in a JV are recorded as participation in the JV. On
the other hand, investors record funds received, representing JV participation,
from asset holders as liabilities.

14. All costs expended by the investors to develop JV assets must be capitalized in JV
assets undergoing development. These accounts will be reclassified to JV assets
once development is completed and the assets are ready for use.

Operations of the Joint Venture assets

15. From the perspective of those given the authority to operate of manage JV assets,
there are two methods often followed by JV participants. First, JV assets are
managed by investors who fund the development until the end of the concession
period. At the end of this period, investiors will transfer the JV assets and their
management to asset holders. This method is usually called the Build, Operate and
Transfer (BOT) method.

16. The second method is one where the investors fund the development of JV assets
until they are ready for operation. Once operation is ready to commence the assets
are transferred to asset holders for management. This method is usually called the
Build, Transfer, and Operate System (BTO).

17. The first accounting issue to arise in joint activities as described under paragraphs
15 and 16 above is that of JV asset recognition. Under the first method, investors
will directly manage the JV assets once development is completed. At this stage
and until the end of the concession period, investors generally have significant
control over the management of the JV assets. In line with asset recognition
requirements, if investors are certain that there are economic benefits from the
aforementioned assets and the acquisition cost can be reliably calculated, they must
record there as JV assets.

18. Under the BTO system, investors will transfer the JV assets (the development of
which they are funding) to asset holders once the assets are ready for use. At this
stage, asset holders usually have significant control over the management of the JV
assets. Asset holders should recognize JV assets at the time investors transfer the
management of the JV assets to them.

19. The acquisition cost for JV assets developed by means of investor funds is valued
at the cost of their development. In the case of these assets being transferred to
asset holders, there is a possibility that the latter may not know the precise value of
their development costs. In this case, asset holders can use the development costs
agreed to in the JV contract, or fair value at the time the JV assets are transferred.

Page 5
SFAS No. 39 Accounting for Joint Venture

20. JV assets developed by means of investor funds should be recorded by the party
managing those assets, where the managing party is one of the investors or asset
holders.

21. Investors or asset holders with the right to manage JV assets may assign the
management of the asset to another party. Assigning this management function,
however, does not change the rights to control the JV asset and operation.

22. JV assets should be recorded at acquisition cost, or cost of development as

described in the JV contract, or fair value, whichever is most objective or
verifiable.

23. Asset holders should record JV assets upon the transfer of the assets. Using an
asset approach and cost principle for measurement of the asset, JV assets should
be recorded at acquisition cost or fair value at the time of transfer. In a JV,
however, this transfer transaction is not an asset acquisition transaction such as
purchase or lessing. Fur a BOT JV, asset holders may not have to pay for the JV
assets transferred at the end of the concession period, or pay below the fair value.
Therefore, the recognition of JV assets under the BOT Method is by crediting the
JV income accounts (where there is certainty regarding the economic benefits from
these assets), or deferred income (where there is uncertainty regarding their
economic benefits).

24. Under the BTO method, asset holders must make payments to investors as a result
of managing the JV assets which have been financed by the investors. Payment
methods are always stipulated in the contracts, for example, in shared profit or
shared income arrangements, or modifications of these arrangements. The
difference between these arrangements and installment payment transactions, or
installment sales from the standpoint of investors, or leasing, is that there is a risk
that the payment will not be the same as the amount expected. It is this difference
in JV payments from payments under installment purchase/sales transactions or
leasing that in fact differentiates JV activities and installment selling activities or
leasing. This difference in payments should be recognized and presented as
additional JV income or expense.

25. Investors record the transfer of JV assets to asset holders at the end of the
concession period by reversing all accounts which have arisen in connection with
the JV. Asset holders, on the other hand, record this transfer as an asset by
crediting JV income if there is certainty of economic benefits from the assets, or by
crediting deferred income if there is uncertainty relating to the economic benefits.

26. If investors hand over JV assets to asset holders for use when the JV assets are
complete, the transfer should be recorded as a right to share JV income or
production. Receipt of cash or the rights to periodic income/production from
shared income, shared production or other arrangements arising from the JV is
recognized as JV income.

Page 6
SFAS No. 39 Accounting for Joint Venture

27. for transactions described under paragraph 26, asset holders record the transfers in
the JV asset accounts by crediting JV long-term liability accounts. Periodic
payments to investors under the JV contract are recorded as settlement of liabilities
together with interest and JV expense or income.

28. The calculation of interest for transactions described under paragraph 26 and 27 is
computed by multiplying the normal level of interest by the remaining liability from
or obligation to investors. The difference between the interest expense (or interest
income to investors) and the portion of the JV liability (or JV obligation to
investors) from the amount paid (or received by investors) is recorded as JV
income or expense.

29. JV assets are depreciated by the party which records the assets on their balance
sheet, that is, the party managing the JV. There is a high probability that the
economic life of the assets may exceed the concession period accepted by
investors. If the investors are also the JV managers, the maximum depreciation
period allowed for JV assets will be until the end of the concession period. If the
JV managers are assets holders, the depreciation period will be the economic life
of the related assets, and will not be limited to the concession period.

30. JV assets should be systematically depreciated by the JV manager over the

economic life. For investors, the depreciation period should not be longer than the
JV concession period.

31. Rights to shared income or product are amortized by the investor.

Disclosures

32. In connection with JV contracts, the following disclosures should be made: :

a. the parties involved in the JV contract,
b. rights and obligations of each JV participant in relation to the JV contract, and
c. stipulations regarding changes to the Jv contract, if any.

33. In connection with fixed asset disclosures, the following disclosures should be
made for JV assets: :
a. classification of assets comprising JV assets,
b. determination of the acquisition costs of the JV assets, and
c. determination of the depreciation or amortization of the JV assets

34. In connection with shared income/product JV contracts, the following disclosures

should be made:
a. calculation or determination of rights to shared JV income/product,
b. determination of amortization of rights to shared JV income/product, and
c. calculation of (additional) JV expense or income arising from shared JV
income/product payments.

Page 7
SFAS No. 39 Accounting for Joint Venture

STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39

JOINT VENTURE ACCOUNTING

Statement of Financial Accounting Standard No. 39 consists of paragraphs 35-47.

This statement should be read in the context of paragraphs 1-34.

RECOGNITION AND MEASUREMENT

Development of Joint Venture Assets

35. Assets transferred by asset holders for use under a JV contract should be recorded
by asset holders as JV assets at acquisition cost.

36. Funds invested by asset holders in a JV are recorded as participation in the JV. On
the other hand, investors record these funds received, representing JV
participation, from asset holders as liabilities

Operation of Joint Venture Assets

37. JV assets developed by means of investor funds should be recorded by the party
managing the assets, where the managing party is one of the investors or asset
holders.

38. JV assets should be recorded at acquisition cost, or cost of development as

described in the JV contract, or fair value, whichever is most objective or
verifiable.

39. Investors record the transfer of JV assets to asset holders at the end of the
concession period by reversing all accounts which have arisen in connection with
the JV. Asset holders, on the other hand, record this transfer as an asset by
crediting deferred income if there is uncertainty relating to the economic benefits.

40. IF investors hand over JV assets to asset holders for use when the JV assets are
complete, the transfer should be recorded as a right to share JV income or
production. Receipt of cash or rights to periodic income/production from shared
income, shared production or other arrangements arising from the JV is recognized
as JV income.

41. Fir transactions described under paragraph 40, asset holders record the transfers in
the JV asset accounts by crediting long term liability accounts. Periodic payments
to investors under the JV contract are recorded as settlement of liabilities together
with interest and JV expense or income.

42. The calculation of interest for transactions described under paragraphs 40 and 41
is computed by multiplying the normal level of interest by the remaining liability
from or obligation to investors. The difference between interest expense ( or
interest income to investors) and the portion of the JV liability (or JV obligation to

Page 8
SFAS No. 39 Accounting for Joint Venture

investors) from the amount paid (or received by investors) is recorded as JV

income or expense.

43. JV asset should be systematically depreciated by the JV manager over the

economic life. For investors, the depreciation period should not be longer than the
JV concession period.

44. Rights to shared income or product are amortized by the investor.

Disclosures

45. In connection with JV contracts, the following disclosures should be made:

a. parties involved in the JV.
b. rights and obligations of each JV participant in relation with JV contract, and
c. stipulations regarding changes to the JV contract, if any.

46. In connection with fixed asset disclosures, the following disclosures should be
made for JV assets:
a. classification of assets comprising JV assets
b. determination of the acquisition costs of JV assets, and
c. determination of the depreciation or amortization of JV assets.

47. In connection with shared income/product JV contracts, the following disclosures

should be made: :
a. Calculation or determination of rights to shared JV income/product,
b. Determination of amortization of rights to shared JV income/product, and
c. Calculation of (additional) JV expense or income arising from shared
income/product payments.

Transition

48. If the application of this Statement results in changes in accounting policies, then
the changes should be reported prospectively.

Effective Date

49. This Statement is effective for financial statements covering periods beginning on
or after January 1, 1998. Earlier application is encouraged

Page 9
SFAS No. 39 Accounting for Joint Venture

JOINT OPERATION AGREEMENT Attachment 1

commencement

Incorporation of JV Yes general SFAS

(with legal entity) and
specific industry

No.

Yes
Do some parties SFAS 12
have control ?

A B C

THE ASSET OWNER Attachment 2

Page 10
SFAS No. 39 Accounting for Joint Venture

Transfer of No Jointly controlled

asset ? operation SFAS 12

Yes

JV asset

the fund is
being held?

participation
in JV

BOT? Yes Ultimate assets

of BOT 25

No

BTO :
JV asset and long
term liabilities 25

payment of long term

liabilities 27

INVESTOR Attachment 3

Page 11
SFAS No. 39 Accounting for Joint Venture

Final transfer of Assets BOT

to JV Manager 25/39

BTO :
26, 48
emergence of Rights
Sacrifice of Assets

Receipt of Benefit
From Asset Holders
27, 28, 41, 42

MANAGEMENT Attachment 4

Page 12
SFAS No. 39 Accounting for Joint Venture

Is asset received BOT method:

from the investor? No investors are the
managers

Asset recorded
by manager
20/37

acquisition cost
22/38

Page 13