Joint Arrangement

PFRS 11 Joint Arrangements

PAS 28 Investments in Associates and Joint
Ventures

Learning Objectives
Define a joint arrangement and state
its characteristics
Identify whether joint arrangement
constitutes a joint operation or a joint
venture.
Account for Joint Operations.
Describe the accounting for joint
ventures.

Objective and Scope

PFRS 11 Joint Arrangements
describes the principles for financial
reporting by parties to joint
arrangement. This standard shall be
applied by all parties to a joint
arrangement.

Whats a joint arrangement?

It is an arrangement of which two or
more parties have joint control.

Joint Arrangement
The parties are bound by a
contractual agreement.
The contractual agreement gives two
or more of those parties joint
control of the arrangement.

Types of Joint
Arrangements
Joint Operation
Joint Venture

Contractual Arrangement
The existence of contractual
agreement for sharing of joint control
over an investee distinguishes
interests in joint arrangements from
other investments such as
investment in fair value, investment
in associate and investment in
subsidiary .

Joint Control
The contractually agreed sharing of control
of an arrangement, which exists only when
decisions about the relevant activities
requires the unanimous consent of the
parties sharing control.
No joint operator or venturer obtains
leverage over the other joint operator in
terms of voting rights in making financial
and operating decisions.

Nature of
Relationshi
p With
Investee

Type of
Investment

Interest in
Voting
rights of
investee

Applicable
Reporting
Standard

Accounting
treatment
for
investment

Regular
Investor

Investment
in FVPL or
FVOCI

Less than
20%

PFRS 9

Fair Value

Significant
Influence

Investment
in Associate

20% to 50%

PAS 28

Equity
Method

Control

Investment
in Subsidiary

51% to
100%

PFRS 3 and
PFRS 10

Consolidatio
n*

Joint
Control

Joint
Operation

Contractuall
y Agreed

PFRS 11 and
other
relevant
PFRSs

Recognize
own assets,
liabilities,
revenues
and
expenses in
joint
operation.

PFRS 11 and
PAS 28

Equity
Method

Joint Venture

Case Analysis
#1
A, B, C establish an arrangement
whereby A has 50% of the voting rights
in the arrangement, B has 30% and C
has 20%. The contractual arrangement
between A, B and C specifies that at
least 75% of the voting rights are
required to make decisions about the
relevant activities of the arrangement.

#2
A, B, and C establish an arrangement
whereby A has 50% of the voting rights
in the arrangement, B has 25% and C
has 25%. The contractual arrangement
between A, B and C specifies that at
least 75% of the voting rights are
required to make decisions about the
relevant activities of the arrangement.

#3
Assume an arrangement in which A
and B each have 35% of the voting
rights in the arrangement with the
remaining 30% being widely
dispersed. Decisions about the
relevant activities require approval
by the majority of the voting rights.

Types of Joint
Arrangement
PFRS requires an entity to determine the
type of joint arrangement in which it is
involved. The following are the types of
joint arrangement under PFRS 11:
a. Joint Operation is a joint
arrangement whereby the parties that
have joint control of the arrangement
have rights to the assets and obligations
for the liabilities, relating to the
arrangement. Those parties are called
joint operators.

B. Joint Venture
It is a joint arrangement whereby the
parties that have joint control of the
arrangement have rights to the net
assets of the arrangement. Those
parties are called joint ventures.

An entity applies judgment when

determining the type of joint
arrangement in which it is involved.
Such judgment shall be made as follows:
a.Determine the type of joint arrangement by
considering the entitys rights and
obligations arising from the arrangement.
a.Assess rights and obligations by considering
the following:
a. Structure and legal form of arrangement
b. Terms of contractual agreement and
c. other facts and circumstances

Assessment of Rights and

Obligations
Structure and Legal form of the
arrangement
a.A joint arrangement that is not
structured through a separate vehicle is a
joint operation.
b.A joint arrangement in which assets and
liabilities relating to the arrangement are
held in a separate vehicle can be either a
joint venture or a joint operation.

Whats a separate
vehicle?
A separately identifiable financial
structure including separate legal
entities recognized by statute,
regardless of whether those entities
have legal personality.

Case Analysis
A, B, and C, each engaged in the
extraction of oil, agreed to acquire and
jointly operate an oil pipeline. Each party
will use the pipeline to transport its own
product and in return for which bears an
agreed proportion of the expenses of
operating the pipeline. A, B and C agreed
to share equally on the cost of acquiring
the pipeline and the costs of operating it.

#2
A and B agreed to combine their
operations, resources, and expertise to
manufacture, market and distribute
jointly a particular product. Different
parts of the manufacturing process are
carried out by each of the parties.
Each party bears its own costs and
takes a share of the revenue from the
sale of the product equally.

#3
A and B entered into a joint agreement to form
Alphabets Corporation which shall manufacture
materials required by A and B for their own
individual manufacturing process. The arrangement
ensures that the parties operate the facility that
produces the quantity and quality specifications of
the parties.
Each party shall have a 50% ownership interest in
the Alphabets Corporation. Alphabets Corporation
shall have its own assets, incurs obligation , and
generates and incurs its own income and expenses.

Using the previous case but with the following

additional situations.
It was further agreed that:
a. A and B shall purchase all the output produced by
Alphabets Corporation in a ratio of 50:50. Alphabets
Corporation cannot sell any of its output to third
parties, unless it is approved by A and B.
b. The price of the output sold to the parties is set by
both parties at a level that is designed to cover the
costs of production and administrative expenses
incurred by Alphabets Corporation.

c. If the parties changed the terms of

the contractual arrangement so
Alphabets Corporation was able to
sell outputs to third parties, how
will the arrangement be classified?

Joint Operations

A and B agreed to combine their operations, resources and

expertise to manufacture, market and distribute jointly a
particular product. Different parts of the manufacturing
process are carried out by each joint operators. Each joint
operator bears its own costs and takes a share of the
revenue from the sale of the product equally. The joint
operation was completed and thus terminated, during the
year. The following transactions occurred during the year.
* A incurred total costs of P100, assumed obligation
amounting to P20 and made sales amounting to P200.
* B incurred total costs of P80 and made sales amounting to
P150.
How will these transactions be accounted for?

A, B, and C, each engaged in the extraction of oil,

agreed to acquire and jointly operate an oil pipeline.
Each party will use the pipeline to transport its own
product in return for which it bears an agreed
proportion of the expenses of operating a pipeline.
A, B and C agreed to share equally on the cost of
acquiring the pipeline and the expenses of
operating it. Total acquisition cost of the pipeline is
P150M and the total expenses relating to the
operation of the pipeline during the period is P30M.
How will these be accounted for?

Accounting for Joint

Operation Transactions
It depends whether:
a.No separate accounting records
are maintained.
b.Separate records are
maintained.

No Separate Records are

maintained

Merchandise Contributions
xx

Merchandise Withdrawals
xx

Purchases and Freight In

xx

Purchase Returns , discounts

and Allowances
xx

Sales, Returns, Discounts

and
allowances
xx

Sales and Other Items

of income
xx

Expenses
xx

Unsold merchandise, if any

xx

Illustration
A, B and C agreed to form a joint operation. Profit or loss of the
joint operation shall be divided equally. The following were the
transactions during the year.
a. Inventory costing P100 was sent by A to B.
b. Freight paid by A on the inventories sent to B amounted to P5.
c. Cash of P200 was sent by C to B to be used to purchase
additional inventory.
d. B purchased additional inventory amounting to P250, P50 of
which were made on account of B.
e. Cash Sales made by amounted to P800
f. Operating expenses amounting to P55 were paid by B using his
own cash.
g. Unsold inventory at year end amounted to P30.

The following are the transactions of A, B and C during the year:

a. A contributed cash of P100 and merchandise costing P200.
b. B contributed merchandise costing P400. Freight-in paid by B is P20.
c. C made purchases amounting to P100 using the cash contributed by
A.
d. C paid expenses of P200 using its own cash.
e. C made total sales of P800. All the merchandise was sold except onehalf of those contributed by B.
f. C is appointed as the manager of the joint operation. As
compensation, C is entitled to a P30 salary plus bonus of 25% on
profit after salary and bonus.
g. Interest of 10% per annum is allowed to A and Bs capital
contributions.
h. C is charged for the cost of any unsold inventory. Profit or loss after
necessary adjustments shall be divided equally.