CHAPTER 1

Joint arrangements
&
Public Enterprises
 IFRS 11
Joint Arrangements
 Introduction 3

• IFRS 11 Joint Arrangements

establishes principles for Fin. reporting
by parties to a joint arrangement.

• The standard must be applied by all

entities who are party to a joint
arrangement.
 IFRS 11 JOINT ARRANGEMENTS

• A joint arrangement is an arrangement in

which two or more parties have joint control

• Joint control is the contractually 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
 Formation 5

The contractual arrangement is usually in writing,

whatever its form, & it will deal with the following
issues surrounding the joint venture:

• Its activity, duration and reporting obligations

• The appointment of its B.O.Ds (or equivalent) &
the voting rights of the parties

• Capital contributions to it by the parties

• How its output, income, expenses or results are
shared b/n the parties
 Need for Joint Arrangement
6

• Reasons for Joint arrangements:

 opportunity to gain new capacity and expertise

 enter related businesses or new geographic

markets or gain new technological knowledge

 gives access to greater resources, including

specialized staff and technology
 shares risks

 can be flexible
Figure 1.1 : Assessing joint control
 Example : Assessing joint control

Three parties (A, B and 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.

Requirement:
Assess whether the arrangement gives all the parties
control of the arrangement collectively.
 Example: Assessing joint control

3 parties (D, E & F) establish an arrangement

whereby: D has 50% of the voting rights in the
arrangement; and E & F each have 25%.
The contractual arrangement b/n D, E & F
specifies that at least 75% of the voting rights
are required to make decisions about the
relevant activities of the arrangement.

Requirement
Assess whether the arrangement gives all the
parties control of the arrangement collectively.
 10
Example: Assessing joint control
Solution
Even though D can block any decision, it does not control the
arrangement because it needs the agreement of either E or F.
In this example, D, E and F collectively control the
arrangement.

However, there is more than one combination of parties that

can agree to reach 75% of the voting rights (i.e. either D and
E or D and F). In such a situation, to be a joint arrangement
the contractual arrangement between the parties would
need to specify which combination of the parties is required to
agree unanimously to decisions about the relevant activities
of the arrangement.
Example: Assessing joint control 11

Solution
G and H have joint control of the arrangement
only if the contractual arrangement specifies
that decisions about the relevant activities of the
arrangement require both G and H agreeing.
Joint operation or Joint venture

• A joint arrangement is classified as either a joint

operation or a joint venture

• 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

• A joint venture is a joint arrangement whereby the parties

that have joint control of the arrangement have rights to
the net assets of the arrangement
Classification 13

Not structured through a Structured through a

separate vehicle * separate vehicle *
Assessment
Assess the parties’ rights and of the parties’
obligations arising from the rights and
arrangement by considering: obligations
(a) the legal form of the separate
vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances
Parties have rights to the assets Parties have rights
and obligations for the liabilities to the net assets

Joint operation Joint venture

Accounting
reflects
Accounting for assets, liabilities, revenues Accounting for an
the parties’
and expenses in accordance with the investment using the rights and
contractual arrangements equity method obligations
 Separate vehicles 14

Legal form Do the parties have rights to the assets

and obligations for the liabilities? Yes

No
Contractual Do the parties have contractual rights to

Joint Operation
terms the assets, and obligations for the Yes
liabilities?
No
Other Is the arrangement designed so:
a) Its activities primarily aim to provide Yes
parties with an output, and
(b) It depends on the parties for settling
liabilities?
No
Joint Venture
 Example: Construction and real estate 15

• A separate vehicle is established, over which two parties have

joint control.
• The purpose of the Joint Arrangement is to construct and sell
residential units to the public
• Neither the legal form nor the contractual terms give the parties
rights to the assets or obligations for the liabilities of the
arrangement
• Contributed equity by the parties is sufficient to buy the land and
raise debt finance for the construction
• Sales proceeds will be used to repay external debt and
remaining profit is distributed to parties
• Parties provide guarantee to financier
Example:
Mining 16

• A and B jointly establish a corporation D over which

they have joint control to process the ore from the
mine C
• A & B have agreed to the following:
• A & B will purchase all the output produced by D in a
ratio of 60:40 (in proportion to ownership interest in D)
• D cannot sell the output to third parties
• Price of the output is set by A and B at a level to cover
production and admin costs (i.e. D breaks even)
 Accounting for a joint operation

• A joint operator shall recognise in relation to its interest in

a joint operation:
 its assets, including its share of any assets held jointly
 its liabilities, including its share of any liabilities
incurred jointly
 its revenue from the sale of its share of the output
arising from the joint operation
 its share of the revenue from the sale of the output by
the joint operation
 its expenses, including its share of any expenses
incurred jointly
Accounting for a joint venture

• A joint venturer should recognise its interest in a joint

venture as an investment and should account for that
investment using the equity method in accordance with
IAS 28 unless the entity is exempted from applying the
equity method
Equity method 19

• Recognize the investment initially at cost, then

adjusting for the post-acquisition change in the
investor’s share of net assets of the joint venture.
• Presentation:
• a one-line entry in the st. of comprehensive income
‘investor’s share of the joint venture’s profit or
loss’ and a separate line item for other comprehensive
income.
• a one-line item in the SoFP—Investment in joint
venture.
Example 1
equity method 20

• On 1/1/20X1 A enters in to a contractual arrangement

with B Co. AND buys 30% of AB JV for 300,000.
AB’s profit = 80,000 for the year ended 31/12/20X1.
On 31/12/20X1 B declared a dividend of 100,000.
As of 31/12/20X1 the Recoverable Amount of A’s
investment in AB = 290,000 (ie FV 293,000 less costs
to sell 3,000).
 EXAMPLE 2:
• A Co. and B Co. each invested Br. 320,000 for a 50% interest in
AB joint venture on January 1, 2002.
The condensed financial statements for the joint venture, AB
Company, for 2002 were as follows:
AB Company (a joint venture)
Income Statement
For the Year Ended December 31, 2002
Revenue Br.1,600,000
Less: Costs and expenses (1,200,000)
Net income Br. 400,000
– Division of net income:
– Company A Br. 200,000
– Company B 200,000
– Total Br. 400,000
 Example …
AB Company (a joint venture)
Statement of Venturers’ Capital
For the Year Ended December 31, 2002
A Co. B Co. Combined

Investments, Jan. 1, 2002 Br. 320,000 Br. 320,000 Br. 640,000

Add: Net Income 200,000 200,000 400,000
Venturers’ capital, Dec. 31 520,000 520,000 1,040,000
 AB Company (a joint venture)
Balance Sheet
December 31, 2002
Assets
Current assets Br. 1,280,000
Other assets 1,920,000
Total assets Br. 3,200,000
Liabilities & Venturers’ Capital
Current Liabilities Br. 640,000
Long-term Liabilities 1,520,000
Venturers’ capital:
A Company Br. 520,000
B Company 520,000 1,040,000
Total Liabilities & Venturers’ Capital Br. 3,200,000
 A) EQUITY METHOD
Recognition of investments in a joint venture
Jan. 1 Investment in AB Company 320,000
Cash 320,000

Recognition of proportionate share in earnings of a JV

Dec. 31 Investment in AB Company 200,000

Investment Income 200,000
 Disclosures 25

• The IFRS requires an entity to disclose information that

enables users of FS to evaluate:
• the nature of, and risks associated with, its interests in
other entities; and
• the effects of those interests on its financial position,
financial performance and cash flows.
 Joint arrangements and associates
26
Nature, extent and financial effects of interests in
joint arrangements and associates,
• List and nature of interests
• Quantitative financial information
• Unrecognised share of losses of JVs and
associates
• Fair value (if published quoted prices available)
• Nature and extent of any significant restrictions
on transferring funds
Nature of, and changes in, the risks
associated with the involvement
• Commitments and contingent liabilities
26
Judgements and estimates 27

• An entity must disclose information about significant

judgements and assumptions it has made in
determining…
• joint control (see IFRS 11) of an arrangement
• type of joint arrangement when the arrangement has
been structured through a separate vehicle
 28

PUBLIC Enterprises
 1.2 PUBLIC Enterprises
Defn: are autonomous or semi-autonomous bodies
owned by the gov’t & engaged in providing services
and or products.

Background:
• The growth of public enterprises has been partly by
nationalization and partly through creation of new
ones.

• Some industries are also reserved for the public

sector as a matter of national policy. EX: Airways,
defense industries, railways, tele, energy, Shipping
….
• Why Public enterprises?
– Limitation of the free price mechanism
– Basic industries need huge investment
– Government’s duty to help in economic dev’t
– Creation of economic surpluses and their utilization
– Final choice of projects are made in the interest of the
economy as a whole
– If social benefits exceed social costs in the case
of any service, then its production should be taken
up
– Limitation on demand of merit goods on account of
price if left in private hands
– The overall economic policy of a country may dictate
the use of public enterprises in some sectors
 Formation Provision:
• Every enterprise shall be established by regulation
and the establishment regulation shall contain:
– The name of the enterprise
– A st. the enterprise shall be governed by the proc.
– The purpose for which the enterprise is established
– The authorized capital
– The amt of initial cap. paid up both in cash & in kind
– Not less than 25% of Auth. Cap.
– A st. that the ent. shall not be liable beyond its T-assets
= Limited Liability St.
– The head office of the enterprise
– A st. that may authorize the enterprise to open branches
– The name of the supervising authority
– The duration for which the enterprise is established
 ORGANIZATION
• Each enterprise shall have:

– A supervising authority
– Designated by the Council of Ministers
– Ex: FDRE Public Financial Enterprises
Agency

– A management board (3-12 In number)

– Management

– Necessary staff
 Accounting for Public Enterprises
• Public enterprises are state owned, state controlled
business enterprises.
• They are characterized by public purpose, public
o/ship & control.
• Their accounting aspect is the same as business
accounting with minor differences in the owners’
equity section as there are no shares and
shareholders in PEs.
 Capital Section of PEs
The following are the capital items in PEs
• State capital… original value of NAs of PE formed

• Legal Reserve… 5% of net earning of each year

– until the fund equals 20% of the capital
– Obj: Covering Losses & Unforeseen expenses

• Other reserve funds… for contingency purposes/OCEs

– Ex: Forex Translation diff of CBE
• State dividend… similar to dividend in businesses

• Appraisal Surplus… excess obtained from appraisal of

 Basic Events with Accounting
Issue

• Formation

Assets……………………..xxxx
State Capital……………………..xxxx

• Operation
Income Summary…..xxx
Legal Reserve…….……. xxxx
Other Reserves…….……xxxx
State Dividend Payable.. xxxx

• Privatization

• Liquidation
 DISSOLUTION AND WINDING-UP
Grounds for Dissolution.
• An enterprise may be dissolved for any one of the
following reasons:
1.The expiry of the life of the enterprise as fixed in its est. reg.;
2) Completion of the venture for which the enterprise was
established;

3) Failure of the purpose or impossibility of performance;

4) Loss of 75% of the P-U-C of the enterprise;

5) By decision of the Council of Ministers

6) Decision of the court declaring the enterprise bankrupt.