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3.4 The contractual arrangement usually should be in writi ng and dea l with the nature of the
activities, the appointment of the board of directors, the capita l contributions by the venturers, and
the sha ring of profits and losses of the joint ventures. The key thing is that no sing le venturer
should be in a position to control the activit ies.
4.
JOINTLY CONTROLLED OPERATIONS
4.1 In jointly controlled operations, a separate entity is not established. Each venturer uses its
own asse ts, incurs its own expenses and liabilit ies, and raises its own financing. The agreement
between the venturers normally would set out the details of how the revenue and expenses were
going to be shared.
4.2 An example of this type of agreement may be where two entities agree to develop and
manufacture a high-speed train where, for example, the engine may be deve loped by one venturer
and the carriages by another. Each venturer would pay the cos ts and take a share of the revenue
from the sale of the trains according to the agreement. Here each venturer will show in its financia l
stateme nts the assets that it controls, the liabilities that it incurs, together with the expenses that it
incurs and its share of the income from the sale of goods or services .
4.3 Because the joint venturer is simply recording its own asse ts and liabilities and expenses that
have been incurred and its share of the joint ventu re income, there are no adjustments or other con–
solidation procedures used in respect of these items.
5.
JOINTLY CONTROLLED ASSETS
5.1 With jointly controlled assets, the venturers jointly cont rol and often jointly own assets that
are given to the joint venture. Each venturer may take a share of the assets' output, and each
venturer will bear a share of the expenses that are incurred.
5.2 Norma lly this will not involve the establishment of a company or partnership or any other
business entity. Each venturer controls its econo mic benefits through its share of the asset.
5.3 An example of this type of venture is in the oil industry, where a number of oil companies
jointly own a pipeline. The pipeline will be used to transport the oil, and each venturer agrees to
bear part of the expenses of operating the pipeline. The financial statements of each venturer will
show its share of the joint assets, any liabilities it has incurred directly, and its share of any joi nt
liabilit ies together with any income from the sale or usage of its share of the output of the joint
venture. Addit ionally any share of the expenses incurred by the joint venturer or expenses incurred
directly will be shown in the financial statements.
5.4 The accounting treatment of jointly controlled assets is based on the substance of the transac–
tion and its economic reality and quite often the legal form of the joi nt venture.
It
is unlikely that
separate financia l statements will be prepared for the joint venture, although a record may be kept
of any expenses incurred.
6.
JOINTLY CONTROLLED ENTITIES
6.1 A join tly controlled entity normally involves the setting up of a company or partnership or
other entity in which each of the jo int venturers has an interest. The key thing about this type of
entity is that there is a contractual arrangement that establishes the jo int control over it.
6.2 Each venturer normally would contribute assets and other resources to the jointly controlled
entity. These assets and resources would be included in the accounting records of the venture r and
recogni zed as an investment in the jo intly controlled entity. An example is where an entity enters
into an agreement with a fore ign government to set up a manufacturing business. The separate en–
tity wi ll be joi ntly controlled by the jo int venturer and the government of the foreign country.
6.3 A joi ntly controlled entity will maintain its own accounting records and will prepare its own
financ ial statements.
6.4 lAS
31
allows two accounting treatments for an investmen t in the joi ntly controlled entity:
(1)
Proportionate consolidation
(2) The equity method of accounting