Section 15 – Investments in Joint Ventures – sets out the accounting and disclosure requirements for joint ventures in consolidated financial statements, separate financial statements of a venturer that is a parent and individual financial statements of a venturer that is not a parent. [FRS 102.15.1].
The accounting requirements in Section 15 are based on the IASB's IFRS for SMEs, which in turn were derived from those in the then IAS on the topic, IAS 31 – Interests in Joint Ventures. It therefore does not reflect the requirements of IFRS 11 – Joint Arrangements – which is now the effective IFRS relevant to this topic. Although based on the IFRS for SMEs, Section 15 has also been amended, principally in relation to certain aspects of the accounting and disclosures for investments in a jointly controlled entity in the individual financial statements of a venturer that is not a parent.
A ‘joint venture’ is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. The exact form of the strategic investment can vary and Section 15 addresses that variation by classifying joint ventures into three categories: jointly controlled assets, jointly controlled operations and jointly controlled entities.
Joint ventures are commonplace in many industry sectors, often as a means of pooling resources or expertise, risk sharing or new product development. The term is sometimes used loosely to describe any commercial partnership type arrangement but it is important to emphasise that only those where contractually-based joint control exists will fall within the scope of Section 15.
There are differences between the accounting and disclosure requirements in Section 15 compared with IFRS 11. The key differences are discussed below and summarised at 5 below.
As noted above, Section 15 classifies joint ventures as either jointly controlled operations, jointly controlled assets or jointly controlled entities.
IFRS 11 addresses joint arrangements and only makes the distinction between joint operations and joint ventures. This distinction is based on the rights and obligations under the arrangement, rather than focussing on the legal form of the entity. [IFRS 11.14]. Where the parties with joint control have an interest in the net assets of the arrangement then the arrangement will be a joint venture, [IFRS 11.16], which is the equivalent of a jointly controlled entity under Section 15. Otherwise, where the parties with joint control have rights to underlying assets and obligations for liabilities the arrangement will be a joint operation. [IFRS 11.15]. Determining the appropriate classification under IFRS 11 involves an assessment of a venturer's rights and obligations under the arrangement, based on the detailed guidance within the standard.
Generally, arrangements that are jointly controlled operations or jointly controlled assets under Section 15 would be joint operations under IFRS 11. Although many arrangements that are jointly controlled entities under Section 15 would be classified as joint ventures under IFRS 11 some would have to be classified as joint operations due to the requirement to assess rights and obligations rather than focussing on the legal form of the entity.
Section 15 permits entities that are not parents to account for their investment in jointly controlled entities using either cost less impairment, at fair value with changes in fair value recognised through other comprehensive income (unless reversing a revaluation decrease of the same investment previously recognised in profit or loss, in which case the revaluation increase is recognised in profit or loss, or where a revaluation decrease exceeds increases previously recognised in respect of the same investment, in which case the excess is recognised in profit or loss) or at fair value with changes in fair value recognised through profit or loss (see 3.6.2 below). [FRS 102.15.9]. The same accounting policy choice is available for a venturer accounting for their investment in jointly controlled entities that is preparing separate financial statements in accordance with Section 9 – Consolidated and Separate Financial Statements. [FRS 102.9.26].
Under IFRS, an entity that is not a parent must prepare individual financial statements in which its investments in jointly controlled entities are accounted for under the equity accounting method unless it meets the criteria for exemption. [IAS 28.16-17]. An entity preparing separate financial statements under IFRS has an accounting policy choice of measuring investments in jointly controlled entities at cost, in accordance with IFRS 9 – Financial Instruments, or using the equity method of accounting. [IAS 27.10].
Under Section 15, a venturer that is a parent and has investments in jointly controlled entities that are held as part of an investment portfolio is required to measure those investments at fair value through profit or loss with changes in fair value recognised in profit or loss in the consolidated financial statements (see 3.6.3.B below). [FRS 102.15.9B]. However, under IFRS, the measurement of investments in joint ventures at fair value through profit or loss is an option that is only available for an entity which is a venture capital organisation or a mutual fund, unit trust and similar entities including investment-linked insurance funds or one which holds its investments indirectly through such an entity. [IAS 28.18].
Section 15 (via Section 14 – Investments in Associates) requires the use of Section 19 – Business Combinations and Goodwill – to determine the implicit goodwill on the acquisition of a jointly controlled entity. The implicit goodwill is then amortised over its useful life. [FRS 102.14.8(c), 19.23]. Under IFRS, implicit goodwill is not amortised.
Section 15 (via Section 14) requires that where loss of joint control is as a result of a partial disposal, a gain or loss is recognised based on the disposal proceeds and the carrying amount relating to the proportion disposed of. The carrying value of the equity interest retained at the date joint control is lost becomes the cost of the retained investment and there is no measurement of the retained interest at fair value.
If the loss of joint control is for reasons other than a partial disposal, for example a change in circumstances such as the joint venture issuing shares to third parties, no gain or loss is recognised and the carrying value of the equity-accounted investment as at the date at which joint control is lost becomes the cost of the retained investment. [FRS 102.14.8(i)].
Under IFRS, where loss of joint control is as a result of a partial disposal, a gain or loss is recognised based on any difference between the disposal proceeds together with the fair value of any retained interest and the carrying amount of the total interest in the joint venture.
If the loss of joint control is for reasons other than a partial disposal, a gain or loss is recognised based on the fair value of the retained interest and the carrying amount of the interest in the joint venture at that date. [IAS 28.22].
Section 9 sets out the requirements in respect of transactions where a venturer may exchange a business, or other non-monetary asset, for an interest in another entity, and that other entity becomes a jointly controlled entity of the venturer. To the extent that the fair value of the consideration received by the venturer exceeds the carrying value of the part of the business, or other non-monetary assets exchanged and no longer owned by the venturer, and any related goodwill together with any cash given up, the venturer should recognise a gain. Any unrealised gain arising on the exchange is recognised in other comprehensive income. To the extent that the fair value of the consideration received is less than the carrying value of what has been exchanged, together with any related goodwill and cash given up, a loss is recognised (see 3.9 below).
IFRS, does not distinguish between realised and unrealised gains for equivalent transactions and requires that gain or loss, realised or unrealised, to be recognised in profit or loss. [IFRS 10 Appendix B.98].
Section 15 applies to investments in:
A venturer that is a parent accounts for interests in jointly controlled entities in its separate financial statements in accordance with paragraphs 9.26 and 9.26A of FRS 102, as appropriate (see Chapter 8 at 4.2). [FRS 102.15.1].
Terms defined within Section 15 are explained in this chapter. Those and other relevant terms used within Section 15 but defined elsewhere within FRS 102 have the meanings specified in the Glossary as shown in the following table: [FRS 102 Appendix I]
Term | Definition |
Consolidated financial statements | The financial statements of a parent and its subsidiaries presented as those of a single economic entity. |
Control (of an entity) | The power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. |
Held as part of an investment portfolio | An interest is held as part of an investment portfolio if its value to the investor is through fair value as part of a directly or indirectly held basket of investments rather than as a media through which the investor carries out business. A basket of investments is indirectly held if an investment fund holds a single investment in a second investment fund which, in turn, holds a basket of investments. In some circumstances, it may be appropriate for a single investment to be considered an investment portfolio, for example when an investment fund is first being established and is expected to acquire additional investments. |
Individual financial statements |
The accounts that are required to be prepared by an entity in accordance with the Act or relevant legislation, for example:
Separate financial statements are included in the meaning of this term. |
Joint control | The contractually agreed sharing of control over an economic activity. It exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). |
Jointly controlled entity | A joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. |
Joint venture | A contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities. |
Parent | An entity that has one or more subsidiaries. |
Separate financial statements | Those presented by a parent in which the investments in subsidiaries, associates or jointly controlled entities are accounted for either at cost or fair value rather than on the basis of the reported results and net assets of the investees. Separate financial statements are included within the meaning of individual financial statements. |
Subsidiary | An entity, including an unincorporated entity such as a partnership, which is controlled by another entity (known as the parent). |
Venturer | A party to a joint venture that has joint control over that joint venture. |
Section 15 defines a joint venture as ‘a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control’. [FRS 102.15.3].
An economic activity is not defined in FRS 102 but is intended to be broadly based given that joint ventures can take many forms (see 3.3.5 below).
Joint control is defined as ‘the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers)’. [FRS 102.15.2].
Although FRS 102 does not define what strategic, financial and operating decisions would cover, these are generally understood to include areas such as budgeting, capital expenditure, treasury management, dividend policy, production, marketing, sales and human resources.
FRS 102 defines control (of an entity) as ‘the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities’. [FRS 102 Appendix I]. The concept of control is discussed further in Chapter 8.
A venturer is defined as ‘a party to a joint venture that has joint control over that joint venture’. [FRS 102 Appendix I].
Section 15 offers no further guidance on the following: parties to a joint venture that are not venturers and the nature of the contractual arrangements or joint control (in particular the concept of unanimous consent) which are key to an understanding of a joint venture. These aspects are discussed in the following sections making reference to additional guidance in IFRS 11 when relevant. As Section 10 – Accounting Policies, Estimates and Errors, requires management to use its judgement in developing and applying an accounting policy when a transaction is not specifically addressed by the standard, management may consider the requirements and guidance in IFRS dealing with similar and related issues. [FRS 102.10.5-6].
In addition to ‘venturers’, there may well be other investors in the joint venture. In the absence of a definition of an ‘investor’ in FRS 102, it is clear from the definition of a ‘venturer’ that an investor in a joint venture must be ‘a party to a joint venture that does not have joint control over the joint venture’. This is illustrated by Example 13.1.
The interest of an ‘investor’ in a jointly controlled entity should be treated as either:
Contractual arrangements can be evidenced in several ways. An enforceable contractual arrangement is often, but not always, in writing (although we expect unwritten agreements to be rare in practice). Statutory mechanisms can create enforceable arrangements, either on their own or in conjunction with contracts between the parties. A contractual arrangement may be incorporated into the articles or other formation documents of the entity.
The contractual arrangement sets out the terms upon which the parties agree to share control over the activity that is the subject of the arrangement. IFRS 11 provides some relevant guidance on the aspects generally specified in the contractual arrangement for a joint arrangement which could equally be applied to a joint venture under FRS 102:
In order to establish whether joint control of an arrangement exists, it is necessary to establish whether the contractual arrangement gives all the parties to that arrangement (or a group of the parties) control of the arrangement in the collective sense. That means the parties (or a group thereof) must need to act together to direct the strategic, financial and operating policies of the arrangement. It follows that there must be at least two parties for there to be joint control.
Section 15 includes the specific requirement for ‘unanimous consent’ in the definition of joint control. Unanimous consent essentially means that any party to the arrangement can prevent any of the other parties, or group of the other parties, from making decisions of a strategic, financial or operating nature without its consent. This ensures that no single party can control the arrangement. This means, for example, that none of the parties to the contractual arrangement should have a casting vote that enables it to resolve a deadlock, as that would constitute a form of unilateral control. [FRS 102.15.2].
Care is required in situations where a contractual arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture if it acts within the financial and operating policies agreed by the venturers in accordance with the contractual arrangement and delegated to the operator. If, however, the operator does have the power to govern (i.e. not merely to execute) the financial and operating policies of the economic activity, the operator controls the venture and the venture is a subsidiary of the operator and not a joint venture.
An entity may own share warrants, share call options, debt or equity instruments that are convertible into ordinary shares, or other similar instruments that have the potential, if exercised or converted, to give the entity voting power or reduce another party's voting power over the financial and operating policies of another entity (potential voting rights).
Potential voting rights are not directly addressed in Section 15. Nevertheless, the existence of potential voting rights may be relevant to an assessment of joint control, as explained in Section 9, since control can be achieved by having options or convertible instruments that are currently exercisable. [FRS 102.9.6]. However, the contractual arrangement giving rise to joint control will tend to override relative ownership interests (voting and potential voting rights). This is an issue that will need to be addressed in the light of individual facts and circumstances.
Section 15 explains that joint ventures can take one of three forms, all sharing the common characteristics of an underlying contractual arrangement and joint control. The three forms are:
Jointly controlled operations arise when a joint venture is established that does not involve the formation of a separate corporation, partnership or other entity or financial structure that exists separately from the venturers. Instead the joint venture uses assets and other resources of the venturers. In such a case each venturer will use its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer's employees alongside the venturer's similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers. [FRS 102.15.4].
An example of a jointly controlled operation might be where two or more venturers combine their operations, resources and expertise in order to jointly manufacture, market and distribute a particular product. Each venturer undertakes a different part of the manufacturing process and bears its own costs. Revenue from the sale of the product is then shared on the basis of the contractual arrangement. There is no separate entity conducting the business of manufacturing and selling the product. It is merely an extension of the venturers' existing businesses.
In respect of its interests in jointly controlled operations, a venturer recognises in its financial statements:
As the assets, liabilities, income and expenses will already be reflected in the individual financial statements of the venturer (including the separate financial statements of a venturer that is a parent) then no adjustments or other consolidation procedures are required in respect of these items if the venturer presents consolidated financial statements.
When venturers are funding the operations of a jointly controlled operation they may need to account for a receivable or payable from other venturers, as illustrated in Example 13.2 below.
Jointly controlled assets arise in circumstances where one or more assets are contributed to or acquired for the purpose of the joint venture and those assets are jointly controlled and often jointly owned. [FRS 102.15.6].
The assets are used to obtain benefits for the venturers, who may each take a share of the output from the assets and bear an agreed share of the expenses incurred. Such ventures do not involve the establishment of an entity or financial structure separate from the venturers themselves, so that each venturer has control over its share of future economic benefits through its share in the jointly controlled assets.
Joint ventures of this type are particularly common in extractive industries. For example, a number of oil companies may jointly control and operate an oil pipeline. Each venturer uses the pipeline to transport its own product in return for which it bears an agreed proportion of the operating expenses of the pipeline. Another example of a jointly controlled asset could be that two entities jointly control a commercial property, each taking a share of the rents received and bearing a share of the expenses.
In respect of its interest in a jointly controlled asset, a venturer recognises in its financial statements:
As with jointly controlled operations, the assets, liabilities, income and expenses will already be reflected in the individual financial statements of the venturer (including the separate financial statements of a venturer that is a parent), therefore no adjustments or other consolidation procedures are required in respect of these items if the venturer presents consolidated financial statements. Separate accounting records may be limited to a record of the expenses incurred in common, and ultimately borne by the venturers according to their agreed shares. Similarly, financial statements may not be prepared for the joint venture itself, although the venturers may prepare management accounts in order to assess the performance of the joint venture.
Section 15 defines a jointly controlled entity as ‘a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest’. The entity would operate in the same way as other entities except that the venturers would have joint control over the entity and its economic activities by virtue of the existence of a contractual arrangement between them. [FRS 102.15.8].
A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns income. It manages the joint venture and may enter into contracts in its own name and raise finance for the purposes of the joint venture activity. Each venturer is entitled to a share of the results of the jointly controlled entity based on the requirements in the joint venture agreement.
There are a number of different considerations for the accounting for interests in jointly controlled entities depending on whether the venturer is a parent or not, and if a parent, the financial statements being prepared. These are discussed in the sections that follow.
Where a venturer is an entity that is not a parent and hence only prepares individual financial statements, in those financial statements it has a choice of how to account for all of its interests in jointly controlled entities. It can apply either:
In terms of the option to carry interests in jointly controlled entities at fair value through profit or loss or fair value through other comprehensive income, fair value in that context should be determined by reference to the guidance in Appendix 2 to Section 2 – Concepts and Pervasive Principles, (see Chapter 4 at 3.13). [FRS 102.15.9(d)].
There is no option in Section 15 to use the equity method of accounting in individual financial statements (this option exists under IFRS) even though permitted by the Regulations (see 4.2 below). However, the individual financial statements of a venturer that is not a parent must disclose summarised financial information about its investments in jointly controlled entities, along with the effect of including those investments as if they had been accounted for using the equity method. Investing entities that are exempt from preparing consolidated financial statements, or would be exempt if they had subsidiaries, are exempt from this requirement. [FRS 102.15.21A].
A venturer that is not a parent, and that chooses to adopt the cost model, should measure its investments in jointly controlled entities at cost less any accumulated impairment losses. Section 27 – Impairment of Assets – will apply to the recognition and measurement of impairment losses. [FRS 102.15.10].
Section 15 does not define ‘cost’ of investment. However, Section 2 defines ‘historical cost’ as the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the asset at the time of its acquisition. [FRS 102.2.34(a)]. The Regulations state that the purchase price of an asset is determined by adding to the actual price paid any expenses incidental to its acquisition and then subtracting any incidental reductions in the cost of the acquisition. [1 Sch.27(1)]. Consistent with this, Section 17 – Property, Plant and Equipment – states that cost is normally either the purchase price paid (including directly attributable costs) or the fair value of non-monetary assets exchanged. [FRS 102.17.10, 14]. The purchase price would generally represent the fair value of the consideration given to purchase the investment consistent with the guidance in respect of exchanges of businesses or other non-monetary assets (see Chapter 8 at 3.8) and the requirements in respect of measuring the cost of a business combination (see Chapter 17 at 3.6).
A venturer will recognise distributions received from its investments in jointly controlled entities as income irrespective of whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition. [FRS 102.15.11].
A venturer that is not a parent, and that chooses to adopt the policy of accounting for its jointly controlled entity at fair value through other comprehensive income or fair value through profit or loss, should initially recognise its investment at the transaction price. [FRS 102.15.14]. ‘Transaction price’ is not defined, but it is presumably the same as its cost (see 3.6.2.A above).
At each subsequent reporting date, the venturer should measure its investments in jointly controlled entities at fair value using the fair value guidance in the Appendix to Section 2 of FRS 102. [FRS 102.15.15].
Where the fair value through other comprehensive income model is used, increases in the carrying amount of the investment as a result of a revaluation to fair value are recognised in other comprehensive income and accumulated in equity i.e. revaluation reserve. If a revaluation increase reverses a revaluation decrease of the same investment that was previously recognised as an expense, it must be recognised in profit or loss. [FRS 102.17.15E]. Decreases as a result of revaluation are recognised in OCI to the extent of any previously recognised revaluation increase accumulated in revaluation reserve in respect of the same investment. If a revaluation decrease exceeds the revaluation gains accumulated in revaluation reserve in respect of that investment, the excess is recognised in profit or loss. [FRS 102.17.15F]. This means that it is not permissible to carry a negative revaluation reserve in respect of each investment in jointly controlled entities at fair value (see Chapter 15 at 3.6.3).
Where the fair value through profit or loss model is used, increases and decreases in the carrying amount of the investment as a result of a revaluation to fair value are recognised in profit or loss.
A venturer will recognise distributions received from its investments in jointly controlled entities as income irrespective of whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition. [FRS 102.15.15A].
A venturer that is a parent accounts for interests in jointly controlled entities in its separate financial statements in accordance with the requirements of Section 9 (see also Chapter 8 at 4.2). [FRS 102.15.1].
The parent is required to apply a policy of accounting for its investments in jointly controlled entities either :
The discussion at 3.6.2.A and 3.6.2.B above with respect to the cost model and the fair value model will be relevant for a parent applying either of these models.
The same choices apply to a parent that is exempt in accordance with Section 9 paragraph 9.3 from the requirement to present consolidated financial statements and therefore presents separate financial statements as its only financial statements. [FRS 102.9.26A].
Section 9 states that a parent must apply the same accounting policy for all investments in a single class (for example investments in subsidiaries that are held as part of an investment portfolio, those that are not so held, associates or jointly controlled entities) but it can elect different policies for different classes. [FRS 102.9.26].
Although Section 15 does not state so explicitly, it appears that, although associates and jointly controlled entities do not need to be measured the same way, all investments in a single class must be measured the same way. There is an explicit requirement in Section 9 for an entity that is a parent to apply the same accounting policy for all investments in a single class, the implications of which are discussed in Chapter 8 at 4.2. In our view, this implies that jointly controlled entities held as part of an investment portfolio are separate classes of investments. Section 15 requires investments in jointly controlled entities that are held as part of an investment portfolio to be measured at fair value through profit or loss in the parent's consolidated financial statements, rather than under the equity method (see 3.6.3.B below). [FRS 102.15.9A-B].
In its consolidated financial statements, a venturer that is a parent accounts for all of its investments in jointly controlled entities using the equity method, except where its investments in jointly controlled entities are held as part of an investment portfolio. In this case such investments in jointly controlled entities are required to be measured at fair value in its consolidated financial statements with the changes in fair value recognised in profit or loss. [FRS 102.15.9A-B].
Investments in jointly controlled entities are held as part of an investment portfolio if their value to the venturer is through fair value changes in a directly or indirectly held basket of investments rather than as a means through which the venturer carries out business. A basket of investments is held indirectly if a venturer holds a single investment in a second investment fund which, in turn, holds a basket of investments. In some circumstances, it may be appropriate for a single investment to be considered an investment portfolio, for example when an investment fund is first being established and is expected to acquire additional investments (see Chapter 8 at 3.4.2.A). [FRS 102 Appendix I].
The equity method is explained in Section 14. It is described as a method of accounting whereby the investment is initially recognised at transaction price (including transaction costs) and is subsequently adjusted to reflect the investor's share of:
The investor's share of the investee's profit or loss is recognised in the investor's profit or loss. [FRS 102.5.5, 6 Sch 20(3)]. The investor's share of the investee's other comprehensive income is recognised in the investor's statement of comprehensive income. [FRS 102.5.5A, 6 Sch 20(3)].
The requirements of the equity method described above should be applied to jointly controlled entities, substituting ‘joint control’ for ‘significant influence’ and ‘jointly controlled entity’ for ‘associate’. [FRS 102.15.13].
The equity method is discussed in detail in Chapter 12. The key aspects of the equity method as applicable to an investment in a jointly controlled entity are therefore as follows: [FRS 102.14.8]
It is common for venturers to transact with the joint venture, in particular on the formation of the venture. Typical transactions include:
When a venturer contributes or sells assets to a joint venture, Section 15 requires that the recognition of any portion of a gain or loss from the transaction should reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer should only recognise that portion of the gain or loss that is attributable to the interests of the other venturers in its consolidated financial statements. However, the venturer should recognise the full amount of any loss when the contribution or sale provides evidence of an impairment loss. [FRS 102.15.16].
These requirements are illustrated in the following examples:
£m | £m | |
Dr. Cash (1) | 3 | |
Dr. Investment in joint venture C(2) | 4 | |
Cr. Property (3) | 6 | |
Cr. Gain on sale (4) | 1 |
In Example 13.3 above, the elimination of A's share of the profit has been made against the asset that was the subject of the transaction and now held by A. This is based on our suggested approach for the elimination of unrealised profits and losses resulting from downstream transactions (investor to jointly controlled entity) under Section 14, discussed in Chapter 12 at 3.3.2.F. It is also consistent with the treatment where a venture exchanges a non-monetary asset for an interest in another entity that becomes a jointly controlled entity of a venture (see 3.9 below).
£m | £m | |
Dr. Cash (1) | 3 | |
Dr. Investment in joint venture C (2) | 5 | |
Dr. Loss on sale (3) | 2 | |
Cr. Property (4) | 10 |
When a venturer purchases an asset from a joint venture, the venturer should not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party or otherwise realises its carrying amount. For example on an item of property, plant and equipment, this will occur as the asset is depreciated or written down for impairment; therefore the appropriate proportion of the previously unrecognised profit can be recognised as the asset's carrying value is reduced. A venturer should recognise its share of the losses resulting from these transactions in the same way as profits except that losses shall be recognised immediately when they represent an impairment loss. [FRS 102.15.17].
These requirements are illustrated in the following examples:
£m | £m | |
Dr. Property (1) | 10 | |
Dr. Investment in joint venture C (2) | 7 | |
Cr. Cash (3) | 17 |
In Example 13.5 above, the elimination of A's share of the profit made by C has been made against the asset that was the subject of the transaction and now held by A. This is based on our suggested approach for the elimination of unrealised profits and losses resulting from upstream transactions (jointly controlled entity to investor) under Section 14, discussed in Chapter 12 at 3.3.2.F.
£m | £m | |
Dr. Property (1) | 7.0 | |
Dr. Investment in joint venture C (2) | 4.5 | |
Dr. Share of loss of C (3) | 0.5 | |
Cr. Cash (4) | 12.0 |
It may be that transactions occur between a venturer and a joint venture in assets, such as inventories, which are destined for onward sale in the normal course of business by the buying party. The accounting adjustments required are the same as for similar transactions between an investor and its associate – see Examples 12.6 and 12.7 in Chapter 12 at 3.3.2.F.
Section 15's requirement to eliminate partially unrealised profits or losses on transactions with joint ventures is expressed in terms of transactions involving the transfer of assets. This raises the question of whether this requirement is generally intended to apply to items such as interest paid on loans between joint ventures and the reporting entity.
In our view, the requirement for partial elimination of profits or losses does not apply to items such as interest paid on loans and borrowings between the reporting entity and its joint ventures, since such loans do not involve the transfer of assets giving rise to gains or losses. Moreover, the loans are not normally regarded as part of the venturer's share of the net assets of the joint venture, but as separate transactions, except in the case of loss-making joint ventures, where interests in long-term loans may be accounted for as if they were part of the reporting entity's equity investment in determining the carrying value of the joint venture against which losses may be offset.
However, if the joint venture has capitalised the borrowing costs then the investor would need to eliminate a relevant share of the profit, in the same way it would eliminate a share of the capitalised management or advisory fees charged to a joint venture.
A venturer may exchange a business, or other non-monetary asset, for an interest in another entity, and that other entity becomes a jointly controlled entity of the venturer. The accounting issues that arise from these transactions are whether they should be accounted for at fair value or at previous book values and how the gain on the transaction should be reported.
The requirements in respect of such transactions are set out in Section 9 (see also Chapter 8 at 3.8) and the principles behind the requirements are derived from previous UK GAAP. The principles are that the only exception to the use of fair values should be in rare circumstances where the transaction is artificial and has no substance and that any unrealised gains should not be reported in profit or loss.
Accordingly, the following accounting treatment applies in the consolidated financial statements of the reporting entity:
The consideration given for the interest acquired in the jointly controlled entity will include that part of the business, or other non-monetary assets, exchanged and no longer owned by the reporting entity. The consideration may also include cash or monetary assets to achieve equalisation of values. Where it is difficult to value the consideration given, the best estimate of its value may be given by valuing what is acquired;
The most common situation for these transactions in practice is the contribution of a business for equity in a joint venture (or associate), and such a transaction forms the basis of illustrating the above accounting requirements in Example 13.7 below.
A | B | |||
(in £m) | Book value | Fair value | Book value | Fair value |
Separable net assets | 50 | 80 | 70 | 120 |
Goodwill | 10 | 20 | 15 | 30 |
Total | 60 | 100 | 85 | 150 |
How should A account for the set-up of the jointly controlled entity?
The required entries in A would be:
£m | £m | |
Dr. Share of net assets of JV Co (1) | 68 | |
Dr. Goodwill (2) | 16 | |
Cr. Net assets contributed to JV Co (3) | 60 | |
Cr. Other comprehensive income (gain on disposal) (4) | 24 |
The gain on the transaction in Example 13.7 is unrealised because qualifying consideration has not been received. Therefore, the gain is accounted for in other comprehensive income as only realised profits can be recognised in profit or loss. [FRS 102.9.31(c)]. Where part or all of the gain is realised then that portion can be taken to profit or loss. This is illustrated in Example 13.8 below:
£m | £m | |
Dr. Share of net assets of JV Co (1) | 61.2 | |
Dr. Cash | 10.0 | |
Dr. Goodwill (2) | 14.4 | |
Cr. Net assets contributed to JV Co (3) | 60.0 | |
Cr. Profit and loss (gain on disposal) | 10.0 | |
Cr. Other comprehensive income (gain on disposal (4) | 15.6 |
Section 9 does not explain how a realised gain can be distinguished from an unrealised gain. In Example 13.7 above, we have used a ‘top slicing’ approach whereby as much of the total gain as is backed by cash is treated as realised (i.e. £10m). ‘Top slicing’ is the recommended approach to determining realised profits for exchanges of assets in paragraph 3.18 of the ICAEW/ICAS TECH 02/17BL – Guidance on Realised and Distributable Profits under the Companies Act 2006. Paragraph 3.18A of the guidance states that when the consideration received comprise a combination of assets and liabilities, the profit will be realised only to the extent of any net balance (i.e. cash less liabilities) of qualifying consideration received.
No gain or loss is recognised in those rare cases where the artificiality or lack of substance of the transaction is such that a gain or loss on the exchange could not be justified. When a gain or loss on the exchange is not taken into account because the transaction is artificial or has no substance, the circumstances should be explained. [FRS 102.9.32]. There is no elaboration as to the circumstances where this might be applicable.
Venturers may not always be entitled to a fixed proportion of the profit of a jointly controlled entity. Venturers that each have a 50% interest in a joint venture may, for example, agree that;
It may not be appropriate in those cases for the venturers to account for 50% of the profit of the joint venture. Instead, they would need to take into account the substance of the profit sharing arrangements that apply in each reporting period, in determining their share of the profits and net assets of the joint venture. A venturer's profit share may therefore differ from its share in the net assets of the joint venture. This situation is not unlike the situation that arises in the case of an investment in an associate that has different classes of equity (see Chapter 12 at 3.3.2.C).
Section 15 requires the following disclosures in individual and consolidated financial statements:
For jointly controlled entities accounted for in accordance with the equity method, a venturer should disclose separately its share of the profit or loss of such investments and its share of any discontinued operations of such jointly controlled entities. [FRS 102.15.20].
For jointly controlled entities accounted for at fair value through other comprehensive income, a venturer should make the disclosures required by paragraphs 11.43 and 11.44 (this is notwithstanding the fact that paragraph 11.44 refers to fair value through profit or loss, but the intention is clearly to make these disclosures for fair value through other comprehensive income): [FRS 102.15.21]
For investments in associates accounted for at fair value through profit or loss, the above disclosures will also apply (see Chapter 6 at 10.3.1.C).
The individual financial statements of a venturer that is not a parent should disclose summarised financial information about its investments in the jointly controlled entities, along with the effect of including those investments as if they had been accounted for using the equity method. Summarised financial information is not defined in FRS 102, but using the GAAP hierarchy to refer to IFRS 12 – Disclosure of Interests in Other Entities, it would seem appropriate to include: current assets, non-current assets, current liabilities, non-current liabilities, revenue, profit or loss from continuing operations, post-tax profit or loss from discontinued operations, other comprehensive income, total comprehensive income. This list is not exhaustive and other items may need to be considered if deemed material. [IFRS 12 Appendix B.12]. Investing entities that are exempt from preparing consolidated financial statements, or would be exempt if they had subsidiaries, are exempt from this requirement. [FRS 102.15.21A].
The Companies Act does not define a ‘joint venture’, but paragraph 18 of Schedule 6 of the Regulations refers to a ‘joint venture’ as an undertaking that is managed ‘jointly with one or more undertakings not included in the consolidation’ in its description of non-corporate joint ventures that are permitted to be dealt with in consolidated financial statements by way of proportional consolidation. [6 Sch 18]. The disclosure requirements for ‘joint ventures’ are framed in the context of such joint ventures that are proportionally consolidated, [4 Sch 18], and hence under FRS 102, these requirements will not be relevant.
However, jointly controlled entities that are equity accounted will be captured by the accounting and disclosure requirements in paragraph 19 of Schedule 6 of the Regulations which refer to ‘associated undertakings’.
An ‘associated undertaking’ is defined in the Regulations as an undertaking in which an undertaking included in the consolidation has a participating interest and over whose operating and financial policy it exercises a significant influence, and which is not:
A ‘participating interest’ is defined as an interest held by an undertaking in the shares of another undertaking which it holds on a long-term basis for the purpose of securing a contribution to its activities by the exercise of control or influence arising from or related to that interest. The interest in shares includes interests which are convertible into shares or options to acquire shares, regardless of whether or not they are currently exercisable. Additionally, interests held on behalf of an undertaking are to be treated as held by it. [10 Sch 11(1), 11(3)-(4)].
Hence an equity interest in a jointly controlled entity, given the nature of the joint control, will meet the definition of an associated undertaking for the purposes of the Regulations.
Schedule 1 to the Regulations permits the equity method of accounting to be applied in respect of participating interests in the individual entity accounts of a venturer. [1 Sch 29A]. However, since FRS 102 already included a number of options for accounting for such investments, this option was not introduced to FRS 102. Consequently, this option cannot be applied by a venturer in preparing their individual entity accounts in accordance with FRS 102 (see 3.6.2 above). [FRS 102.BC.A.28].
The Regulations require that equity accounted investments in jointly controlled entities are presented as fixed asset investments in the balance sheet. [6 Sch 20]. When ‘adapted formats’ (see Chapter 6 at 5.1) are used, investments in jointly controlled entities must be shown as a separate balance sheet item and distinguished between current and non-current items. [FRS 102.4.2A].
Goodwill relating to a jointly controlled entity is included in the carrying amount of the investment. [FRS 102.15.13].
There is no guidance in FRS 102 as to how long term interests (such as long term loans for which no payment is intended in the foreseeable future) in jointly controlled entities should be presented and therefore an entity must make an accounting policy choice as to how such interests are presented. Entities frequently make loans to jointly controlled entities, the terms of which are repayable on demand, but there is no intention of repayment in the foreseeable future. In these circumstances, for entities applying Schedule 1 to the Regulations, management will need to exercise judgement in determining whether such a loan is a debtor or a fixed asset investment in nature (see Chapter 6 at 5.3.4). For entities applying the adapted formats, such loans will need to be classified as appropriate between current or non-current assets (see Chapter 6 at 5.1.1).
In the profit and loss account, for entities applying the formats of Schedule 1 to the Regulations, income from interests in joint controlled entities should be shown as one line item in the profit and loss account. [6 Sch 20]. For entities applying the adapted formats, the share of the profit or loss of associates and jointly controlled entities accounted for using the equity method must be included as a single line item in the profit and loss account. [FRS 102.5.5B]. The format of the profit and loss account and balance sheet under FRS 102 are discussed further in Chapter 6.
The Regulations also require that the following information must be given where an undertaking included in the consolidation has an interest in an ‘associated undertaking’ (which, as discussed at 4.1 above, will also be relevant for equity accounted jointly controlled entities):
In individual financial statements the Regulations require additional disclosures in respect of significant holdings in undertakings, other than subsidiary entities. A holding is deemed significant if:
In practice, this definition will capture most investments in jointly controlled entities. The resulting disclosures in individual accounts are:
Additional disclosure would also be required in respect of each jointly controlled entity detailed above of:
The additional disclosures just mentioned are not required when the jointly controlled entity is not required to publish its balance sheet anywhere in the world and the holding is less than 50% of the nominal value of the shares (or the information is not material). [4 Sch 6].
A parent is not required to provide the additional disclosures of paragraph 6 of Schedule 4 in the Regulations in its individual financial statements if it is exempt under sections 400 or 401 of the Act from the requirement to prepare group accounts and the company discloses, in the notes to its accounts, the aggregate investment in the relevant jointly controlled entities determined by way of the equity method of valuation. [4 Sch 13].
A parent that prepares consolidated financial statements and discloses the information described at 4.3.1 above in respect of its jointly controlled entities is not required to give the above disclosures in its individual financial statements. [4 Sch 4].
The key differences between FRS 102 and IFRS in accounting for joint ventures are set out below.
FRS 102 | IFRS | |
Classification |
Classifies joint ventures as either jointly controlled operations, jointly controlled assets or jointly controlled entities with different accounting considerations for each. Classification as jointly controlled entity requires existence of a separate legal entity. |
Defines joint arrangements and classifies them between joint operations and joint ventures. Classification as a joint venture depends on assessment of the venturer's rights and obligations over the arrangement. |
Accounting for jointly controlled operations | A venturer recognises in its financial statements:
|
A joint operator recognises:
The accounting and measurement for each of these items is in accordance with the applicable IFRS. |
Accounting for jointly controlled assets | A venturer recognises in its financial statements:
|
Although IFRS does not have a concept of jointly controlled assets, such assets would normally qualify as joint operations as defined by IFRS 11. The accounting for joint operations is, in substance, the same as the accounting for jointly controlled assets under FRS 102. |
Individual and separate entity financial statements | An entity that is not a parent or is a parent that prepares separate financial statements, has the option to account for its investments in jointly controlled entities using either the cost model, fair value through other comprehensive income or at fair value through profit or loss. | An entity that is not a parent must prepare financial statements whereby its investments in jointly controlled entities are accounted for under the equity accounting method unless it meets criteria for exemption. An entity that is a parent but prepares separate financial statements has the option to account for its investment in jointly controlled entities at cost, in accordance with IFRS 9 or the equity method of accounting. |
Investment portfolios / funds | Investments in jointly controlled entities held as part of an investment portfolio should be measured at fair value through profit or loss in the consolidated financial statements of a venturer that is a parent. | Venture capital organisations and similar entities can choose to measure investments in joint ventures at fair value through profit or loss. |
Accounting for jointly controlled entities | Apart from those held as above, jointly controlled entities are equity accounted in the consolidated financial statements of a venturer. | Apart from those held as above or are to be classified as held for sale under IFRS 5, joint ventures are equity accounted in the consolidated financial statements of a venturer. |
Implicit goodwill and fair value adjustments on acquisition of an equity-accounted jointly controlled entity | Follows the requirements of Section 19 of FRS 102. Goodwill should be amortised over its finite useful life, but if, in exceptional cases, an entity is unable to makes a reliable estimate of the useful life of goodwill, the life shall not exceed 10 years. | Follows the IFRS requirements regarding business combinations. Implicit goodwill is not amortised. |
Loss of joint control of an equity-accounted jointly controlled entity that does not become a subsidiary or an associate |
|
|
Exchange of business or other non-monetary assets for an interest in a joint venture in consolidated financial statement. |
|
|