ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Joint Arrangements
A joint arrangement is an arrangement where two or more parties have joint control. (PFRS 11)
A joint arrangement has the following characteristics:
The parties are bound by a contractual arrangement, and
The contractual arrangement gives two or more of those parties joint control of the arrangement.
Joint control exists when:
a. there exists a contractually agreed sharing of control
b. the agreement is that decisions about the relevant activities require the unanimous consent of the
parties sharing control (i.e. no party can make a unilateral decision about relevant activities).
Types of Joint Arrangements
A joint arrangement can be 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. Those parties are
called joint operators. Normally, there will not be a separate entity established to conduct joint operations.
(Setup is similar to Partnership, Joint Operators have unlimited liability)
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. These parties are called joint venturers. This will normally be
established in the form of a separate entity to conduct the joint venture activities. (Setup is similar to
Corporation, Joint Venturers have limited liability)
A joint venture usually involves the establishment of a corporation, partnership or other economic entity in
which each joint venturer has an ownership interest. The joint venturers have no rights over the individual
assets nor have obligations toward the individual liabilities of the joint venture. Instead, like shareholders of
a corporation, joint venturers have rights only over the Net Assets of the joint venture.
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Separate Vehicle
When assessing the rights and obligations from the joint arrangement, it is very important to look at how
the joint arrangement is structured, mainly whether the arrangement is structured through separate vehicle
or not.
A separate vehicle may be created in a joint arrangement. It is defined as a “separately identifiable financial
structure including separate legal entities (e.g. a company) or entities recognized by a statute (not
necessarily having legal personality), regardless of whether or not those entities have a legal personality”.
When a joint arrangement is NOT STRUCTURED through a separate vehicle, then the classification is
easy, it is a clear joint operation.
In such cases, the contractual arrangement establishes the parties’ rights to the assets, and obligations for
the liabilities, relating to the arrangement, and the parties’ rights to the corresponding revenues and
obligations for the corresponding expenses.
When the joint arrangement is not structured through a separate vehicle, then it can be either joint operation
or joint venture. If there is a separate vehicle and the parties have the rights to the assets and obligations
for the liabilities, the joint arrangement would be classified as a Joint Operation.
Accounting for Joint Operation
New treatment
Recognizes its own assets, liabilities, income and expenses plus its share in the joint operation’s
assets, liabilities, income and expenses.
Direct accounting of assets and liabilities applies.
Exercise 1
X Inc., Y Co and Z Inc. sign an agreement to collectively purchase an oil pipeline and to hire a company to
manage and operate the pipeline on their behalf. The costs involved in running the pipeline and the
revenue earned from the pipeline are shared by the three parties based on their ownership percentage.
All major operating and financing decisions related to the pipeline must be agreed to by the three
companies. The cost of purchasing the pipeline was P60,000,000. The pipeline has an estimated 20-year
useful life with no residual value. The management fee for operating the pipeline for 2004 was
P12,000,000. Revenue earned from the pipeline in 2004 was P19,800,000. X invested P18,000,000 for a
30% interest.
Required:
1. Prepare entries in the books of X Inc for 2004 to capture or recognize its share of the activities related
to the oil pipeline.
2. Compute the share of X Inc. in the net income of the joint operation for 2004.
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
1)
Oil Pipeline 18,000,000 (60M x 30%)
Cash 18,000,000
Operating expense 3,600,000 (12M x 30%)
Cash 3,600,000
Depreciation Exp 900,000 (18M/20)
Accum. Dep.-Pipeline 900,000
Cash 5,940,000 (19.8M x 30%)
Revenue 5,940,000
2) Proportionate Share Total
(30%)
Revenue 5,940,000 19,800,000
Less:
Operating expense 3,600,000 12,000,000
Depreciation expense
(18M/20= 900,000) 900,000
(60M/20 = 3,000,000) 3,000,000
Net Income of Joint Operation 4,800,000
X 30% interest X 30%
Net Income of X 1,440,000 1,440,000
Exercise 2
Dave and Ed agreed to acquire and jointly operate an oil pipeline that each will use to transport its own
oil. The joint operators will share equally in the pipeline’s acquisition and operating costs. The acquisition
cost was P100,000,000 and the operating costs were P30,000.000. Dave and Ed had total sales of
P120,000,000 and P150,000,000, respectively. The individual financial statements of the entities will show
the following:
Dave Ed
Balance Sheet: Balance Sheet:
PPE (P100M x 50%) = P50 M PPE (P100M x 50%) = P50M
Income Statement: Income Statement:
Sales = P120M Sales = P150M
Expenses = P15M (P30M x 50%) Expenses = P15M (P30M x 50%)
Profit = P105M Profit =P135 M
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Traditional
Accounting for Joint Operations
1. Separate set of books are maintained for the joint operation
a. Accounting for the joint operation transactions is the same as partnership accounting.
b. Joint operators will record transactions affecting their interest through “Investment in Joint
Operations” account.
2. No separate set of books are maintained for the joint operation
a. Each joint operator will record transactions on behalf of the joint operation in his own records,
alongside with other business dealings.
b. Each joint operator records all the joint operation transactions in their own books whether he is
a party to the transactions or not, hence, each joint operator must inform on time the other joint
operator of the joint operation transactions made by him.
c. “Joint Operation” account is maintained to record all nominal accounts.
JOINT OPERATION
a. Merchandise contributions a. Mdse. returned to Joint Operators
b. Purchases b. Mdse. Withdrawals
c. Freight-in c. Purchase discounts
d. Sales discounts d. Purchase ret. & all.
e. Sales ret. & allow. e. Sales
f. Expenses f. Other revenues
d. Managing joint operator is normally designated to undertake the following:
To handle joint operation cash; although in most joint operation, cash is handled by the
joint operators making sales and purchases.
To maintain real accounts, the term joint operation is used as a prefix or placed before
the real accounts. (i.e. Joint operation cash, joint operation accounts receivable, joint
operation inventories, etc…)
To determine joint operation profit or loss upon termination of a completed joint operation
or at the end of an accounting period for uncompleted joint operation.
To distribute joint operation profit or loss based on joint operation’s profit and loss
agreement.
To make cash settlement to joint operators upon termination of a completed joint operation.
Joint Operation Profit or Loss
The following should be considered in computing profit or loss:
1. If the joint operation is completed, the balance of the Joint Operation account represents the
profit or loss. A credit balance represents profit and a debit balance represents loss.
2. If Joint Operation is uncompleted, meaning there are still unsold merchandise, the profit or loss
is the squeeze figure between the balance of the Joint Operation account before profit
distribution and the cost of the unsold merchandise ( the required debit balance of the Joint
Operation account after profit or loss distribution).
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Cash Settlement
This is the cash due or from the participant upon completion of the Joint Operation undertaking.
1. Cash settlement is represented by the joint operator’s account balance after recording
investments, withdrawals, and share in joint operation gain. A debit balance represents cash
to be paid in final settlement while a credit balance represents cash to be received. The
recording of cash settlement on the books of each joint operator requires that:
a. All accounts, except personal accounts, be brought to zero balance
b. Any unaccounted debit or credit is cash to be received or paid.
2. Computation of cash settlement (cash received or paid)
Investment XXX
Add: Share in joint operation gain XXX
Les: Withdrawals XXX
Cash settlement XXX
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(See Illustration on separate file, Ex 3 and Ex 4)
Accounting for Joint Venture
A joint venture shall recognize its interest in a joint venture as an investment and shall account for that
investment using the equity method.
The use of the equity method will result in recognizing only a single line item investment in a joint
venture in the statement of financial position, and a single line item for the proportionate share in
net income and changes in equity in the statement of comprehensive income.
In addition, the venturer needs to make adjustments through these same accounts for its share of
the following items:
1. Allocation and amortization of acquisition differentials.
2. Unrealized profits from intercompany transactions.
3.Contributions to the joint venture.
The Equity Method of Accounting
1. Investment is initially recorded at cost and the carrying amount is increased or decreased to
recognize the investor’s share of the profits or losses of the joint venture or associate after the
date of acquisition.
2. The investor takes its share of post-acquisition profit or losses irrespective of whether dividends
are distributed.
3. Dividends received from a joint venture or an associate merely reduce the carrying amount of the
investment.
4. The carrying amount of the investment must also be adjusted for the changes in the investor’s
share of the components of other comprehensive income of the joint venture or associate after
the acquisition date.
5. In the consolidated financial statements of the investor, the carrying amount of the investment in
the joint venture or associate is not eliminated but shown as a separate item as investment in
joint venture or associate.
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Presentation in Statement of Financial Position
Investments accounted for under equity method are presented as noncurrent assets except when they
are held for sale under PFRS 5.
Joint Venture (Equity Method)
Exercise 5
Charlie Company entered into a joint arrangement classified as joint venture on January 1, 2021. Charlie
acquired its 30% interest in Delta Inc for P500,000. During the year, Delta Inc. reported P1,000,000 profit
and P200,000 other comprehensive income. Delta Inc declared dividends of P600,000. Compute for the
carrying amount of Charlie Company’s investment on December 31, 2021.
Exercise 6
Two real estate companies set up a separate vehicle for the purpose of acquiring and operating
condominium units. One of the companies, SS Company paid P2,016,000 for a 30% interest in AA
Corporation’s (separate vehicle) outstanding voting stock on January 1, 2004. Such acquisition gave SS
Corporation to joint control with another company over AA Corporation. The book values and fair values
of AA’s assets and liabilities on January 1 , along with amortization data are as follows:
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
AA Co. AA Co.
Book Value Fair Value
Cash P 480,000 P 480,000
Accounts receivable, net 840,000 840,000
Inventories (sold in 2004) 1,200,000 1,440,000
Other current assets 240,000 240,000
Land 1,080,000 2,040,000
Buildings – net (10 years remaining life) 1,800,000 2,400,000
Equipment – net (7 years remaining life) 1,440,000 600,000
Total assets P7,080,000 P8,040,000
Accounts payable P 960,000 P 960,000
Other current liabilities 240,000 240,000
Bonds payable (due, January 1, 2009) 1,200,000 1,320,000
Common stock, P10 par 3,600,000
Retained earnings 1,080,000
Total liabilities and Stockholders’ Equity P7,080000
AA Corporation reported net income of P1,440,000 for 2004 and paid dividends of P720,000.
Required:
1. Prepare the schedule of determination of allocation of excess.
2. Prepare entries in the books of the joint venturer in 2004 in relation to its investment in joint venture,
assuming that the joint venture does not prepare consolidated financial statements using equity
method.
3. In relation to No 2, determine:
a. Investment in Joint Venture-SS Company and
b. Investment income (equity in net earnings) for 2004.
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Answer
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
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ACCP303 – Accounting for Special Transactions
Joint Arrangements
C. N. Dait
Comparison of Joint Operation and Joint Venture
Joint Operation Joint Venture
Rights and obligations conferred Rights to Assets Rights to Net Assets (Equity)
to the parties. Obligation to Liabilities
Parties Joint operators Joint venturers
Separate vehicle Either not structured through a Structured through a separate
separate vehicle vehicle
OR (Assets are held in a separate
Structured through a separate vehicle)
vehicle
(Assets are held in a separate
vehicle)
Set-up Similar to Partnership Similar to corporation
Joint operators have unlimited Joint venturers have limited
liability like a partner in liability like a stockholder in
partnership. corporation.
Accounting Recognize own assets, liabilities, Equity method.
revenues and expenses plus
share in the assets, liabilities,
revenues and expenses of the
joint operation.
Transactions between a venturer and a joint venture
Gains and losses from upstream and downstream transactions between an investor and joint venture are
recognized in the investor’s FS only to the extent of unrelated investors’ interest in the joint venture.
END
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