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Chapter
23/
Interests in Joint Ventures (lAS 31)
217
If the ven turer ceases to have joint contro l over a jointly controlled enti ty, then the use of prop or–
tionate consolida tio n sho uld be discontinued.
7. PROPORTIONATE CONSOLIDATION
7.1 Under the proportionate co nso lida tion me thod of acco unting, the balance shee t of the ven–
turer incl udes its share of the net asse ts of the joint venture and the income sta teme nt includes its
share of the income and ex penses of the joint venture.
7.2
Different reporting form ats may be used to present proporti onate con solidati on of financial
statements.
• The venturer may combine eac h of its share of the asse ts and liabi lities, income and expenses
of the jointly co ntro lled entity with similar items in its financial statements; or
• The vent urer may incl ude separate line items for the same items.
8. EQUITY METHOD
Th e equity method is described in Chapter 2 1 dea ling with lAS 28,
Investments in Associates.
If
the venturer ceases to have co ntrol at any time or ceases to have signific ant influence in a jointly
contro lled entity, then the equity method should be discontinued.
Case Study 1
Facts
Three entities decide to form a joi nt venture. The entities have these holdings in the joi nt venture: Aztec
holds 25% of the equity shares, Matex owns 35% of the equity shares, and Azure owns 40% of the eq–
uity shares. The agreement among the companies is such that decisions can be made only with a 60%
majority. Each company has equal representation on the management board.
Required
Discuss the way in which the entities' holdings in the joi nt venture should be accounted for.
Solu tion
The structure of the joint venture means that each venturer has the opportunity to control the joint ven–
ture and, therefore, exercise control Only two of the joint venturers must be in agreement to achieve a
60% majority They should use either equity accounting or proportionate consolidation. Additionally
each entity has equal representation on the management board.
9. EXCEPTION TO THE USE OF THE EQUITY METHOD AND PROPORTIONATE
CONSOLIDATION
9.1 If the j ointly co ntro lled entity becomes classified as held for sale under IFRS 5, it has to be
accounted for usi ng that Standard. Simil arly if the jointly controlled entity becomes a subsidiary or
an associate, then the respecti ve sta ndards shou ld be used.
9.2
In the separate financial statements of the ventu rer, any interest in a j ointl y co ntro lled entity
should be accounted for either at cos t or und er lAS 39.
9.3 If an asset is co ntributed or so ld to the j ointl y controlled entity and the asset is still retained
by the joint venture, then the venturer sho uld recognize only that portion of the ga in that is
attributable to the other venturers (ass uming that the risks and reward s of ownership have passed ).
9.4 However, the venturer should recogni ze the full amo unt of any loss incurred when th is sale
provide s evidence of a reduction in the net rea lizable value of current assets or an imp airment loss.
9.5 Wh en the venturer purchases asse ts from a j ointl y contro lled entity , it sho uld not recogni ze its
share of the gai n until it resells the asset to a third party.
10. FINANCIAL STATEMENTS OF AN INVESTOR
Where the interest in the joint ven ture is cl assified as that of an investor in a joint venture (i.e., the
inves tor does not have j oint co ntro l), then it should be repo rted as interest in the joint venture in
accordance with either lAS 28, or lAS 39.