Sri Lanka Accounting Standard-LKAS 31

Interests in Joint Ventures

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
-716-
-717-
-718-
 LKAS 31
 

An investor in a joint venture is a party to a joint venture and does

not have joint control over that joint venture.

Joint control is 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).

A joint venture is a contractual arrangement whereby two or more

parties undertake an economic activity that is subject to joint
control.

Proportionate consolidation is a method of accounting whereby a

venturer’s share of each of the assets, liabilities, income and
expenses of a jointly controlled entity is combined line by line with
similar items in the venturer’s financial statements or reported as
separate line items in the venturer’s financial statements.

Separate financial statements are those presented by a parent, an

investor in an associate or a venturer in a jointly controlled entity,
in which the investments are accounted for on the basis of the direct
equity interest rather than on the basis of the reported results and
net assets of the investees.

Significant influence is the power to participate in the financial and

operating policy decisions of an economic activity but is not control
or joint control over those policies.

A venturer is a party to a joint venture and has joint control over

that joint venture.

4 Financial statements in which proportionate consolidation or the equity

method is applied are not separate financial statements, nor are the
financial statements of an entity that does not have a subsidiary,
associate or venturer’s interest in a jointly controlled entity.

5 Separate financial statements are those presented in addition to

consolidated financial statements, financial statements in which
investments are accounted for using the equity method and financial
statements in which venturers’ interests in joint ventures are
proportionately consolidated. Separate financial statements need not be
appended to, or accompany, those statements.

  -719-
LKAS 31

6 Entities that are exempted in accordance with paragraph 10 of LKAS 27

from consolidation, paragraph 13(c) of LKAS 28 Investments in
Associates from applying the equity method or paragraph 2 of this
Standard from applying proportionate consolidation or the equity
method may present separate financial statements as their only financial
statements.
 
Forms of joint venture
 
7 Joint ventures take many different forms and structures. This Standard
identifies three broad types—jointly controlled operations, jointly
controlled assets and jointly controlled entities—that are commonly
described as, and meet the definition of, joint ventures. The following
characteristics are common to all joint ventures:

(a) two or more venturers are bound by a contractual arrangement;

and

(b) the contractual arrangement establishes joint control.

Joint control

8 Joint control may be precluded when an investee is in legal

reorganisation or in bankruptcy, or operates under severe long-term
restrictions on its ability to transfer funds to the venturer. If joint
control is continuing, these events are not enough in themselves to
justify not accounting for joint ventures in accordance with this
Standard.

Contractual arrangement
9 The existence of a contractual arrangement distinguishes interests that
involve joint control from investments in associates in which the
investor has significant influence (see LKAS 28). Activities that have
no contractual arrangement to establish joint control are not joint
ventures for the purposes of this Standard.

10 The contractual arrangement may be evidenced in a number of ways,

for example by a contract between the venturers or minutes of
discussions between the venturers. In some cases, the arrangement is
incorporated in the articles or other by-laws of the joint venture.
Whatever its form, the contractual arrangement is usually in writing and
deals with such matters as:

  -720-
 LKAS 31
 

(a) the activity, duration and reporting obligations of the joint

venture;

(b) the appointment of the board of directors or equivalent governing

body of the joint venture and the voting rights of the venturers;

(c) capital contributions by the venturers; and

(d) the sharing by the venturers of the output, income, expenses or

results of the joint venture.

11 The contractual arrangement establishes joint control over the joint

venture. Such a requirement ensures that no single venturer is in a
position to control the activity unilaterally.

12 The contractual arrangement may identify one venturer as the operator

or manager of the joint venture. The operator does not control the joint
venture but acts within the financial and operating policies that have
been agreed by the venturers in accordance with the contractual
arrangement and delegated to the operator. If the operator has the power
to govern the financial and operating policies of the economic activity,
it controls the venture and the venture is a subsidiary of the operator and
not a joint venture.

Jointly controlled operations

13 The operation of some joint ventures involves the use of the assets and
other resources of the venturers rather than the establishment of a
corporation, partnership or other entity, or a financial structure that is
separate from the venturers themselves. Each venturer uses 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.

14 An example of a jointly controlled operation is when two or more

venturers combine their operations, resources and expertise to
manufacture, market and distribute jointly a particular product, such as
an aircraft. Different parts of the manufacturing process are carried out
by each of the venturers. Each venture bears its own costs and takes a

  -721-
LKAS 31

share of the revenue from the sale of the aircraft, such share being
determined in accordance with the contractual arrangement.

15 In respect of its interests in jointly controlled operations, a venturer

shall recognise in its financial statements:

(a) the assets that it controls and the liabilities that it incurs; and

(b) the expenses that it incurs and its share of the income that it
earns from the sale of goods or services by the joint venture.

16 Because the assets, liabilities, income and expenses are recognised in

the financial statements of the venturer, no adjustments or other
consolidation procedures are required in respect of these items when the
venturer presents consolidated financial statements.

17 Separate accounting records may not be required for the joint venture
itself and financial statements may not be prepared for the joint venture.
However, the venturers may prepare management accounts so that they
may assess the performance of the joint venture.

Jointly controlled assets

18 Some joint ventures involve the joint control, and often the joint
ownership, by the venturers of one or more assets contributed to, or
acquired for the purpose of, the joint venture and dedicated to the
purposes of the joint venture. The assets are used to obtain benefits for
the venturers. Each venturer may take a share of the output from the
assets and each bears an agreed share of the expenses incurred.

19 These joint ventures do not involve the establishment of a corporation,

partnership or other entity, or a financial structure that is separate from
the venturers themselves. Each venturer has control over its share of
future economic benefits through its share of the jointly controlled
asset.

20 Many activities in the oil, gas and mineral extraction industries involve
jointly controlled assets. For example, a number of oil production
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 expenses of operating the
pipeline. Another example of a jointly controlled asset is when two
entities jointly control a property, each taking a share of the rents
received and bearing a share of the expenses.

  -722-
 LKAS 31
 

21 In respect of its interest in jointly controlled assets, a venturer shall

recognise in its financial statements:

(a) its share of the jointly controlled assets, classified according to

the nature of the assets;

(b) any liabilities that it has incurred;

(c) its share of any liabilities incurred jointly with the other
venturers in relation to the joint venture;

(d) any income from the sale or use of its share of the output of
the joint venture, together with its share of any expenses
incurred by the joint venture; and

(e) any expenses that it has incurred in respect of its interest in

the joint venture.

22 In respect of its interest in jointly controlled assets, each venturer

includes in its accounting records and recognises in its financial
statements:

(a) its share of the jointly controlled assets, classified according to

the nature of the assets rather than as an investment. For example,
a share of a jointly controlled oil pipeline is classified as property,
plant and equipment.

(b) any liabilities that it has incurred, for example those incurred in
financing its share of the assets.

(c) its share of any liabilities incurred jointly with other venturers in
relation to the joint venture.

(d) any income from the sale or use of its share of the output of the
joint venture, together with its share of any expenses incurred by
the joint venture.

(e) any expenses that it has incurred in respect of its interest in the
joint venture, for example those related to financing the
venturer’s interest in the assets and selling its share of the output.

Because the assets, liabilities, income and expenses are recognised in

the financial statements of the venturer, no adjustments or other

  -723-
LKAS 31

consolidation procedures are required in respect of these items when the

venturer presents consolidated financial statements.

23 The treatment of jointly controlled assets reflects the substance and

economic reality and, usually, the legal form of the joint venture.
Separate accounting records for the joint venture itself may be limited
to those expenses incurred in common by the venturers and ultimately
borne by the venturers according to their agreed shares. Financial
statements may not be prepared for the joint venture, although the
venturers may prepare management accounts so that they may assess
the performance of the joint venture.

Jointly controlled entities

24 A jointly controlled entity is 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.

25 A jointly controlled entity controls the assets of the joint venture, incurs
liabilities and expenses and earns income. It 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 profits of the jointly
controlled entity, although some jointly controlled entities also involve
a sharing of the output of the joint venture.

26 A common example of a jointly controlled entity is when two entities

combine their activities in a particular line of business by transferring
the relevant assets and liabilities into a jointly controlled entity. Another
example is when an entity commences a business in a foreign country in
conjunction with the government or other agency in that country, by
establishing a separate entity that is jointly controlled by the entity and
the government or agency.

27 Many jointly controlled entities are similar in substance to those joint

ventures referred to as jointly controlled operations or jointly controlled
assets. For example, the venturers may transfer a jointly controlled
asset, such as an oil pipeline, into a jointly controlled entity, for tax or
other reasons. Similarly, the venturers may contribute into a jointly
controlled entity assets that will be operated jointly. Some jointly
controlled operations also involve the establishment of a jointly
controlled entity to deal with particular aspects of the activity, for
example, the design, marketing, distribution or after-sales service of

  -724-
-725-
LKAS 31

proportionate consolidation are similar to the procedures for the

consolidation of investments in subsidiaries, which are set out in LKAS
27.

34 Different reporting formats may be used to give effect to proportionate

consolidation. The venturer may combine its share of each of the assets,
liabilities, income and expenses of the jointly controlled entity with the
similar items, line by line, in its financial statements. For example, it
may combine its share of the jointly controlled entity’s inventory with
its inventory and its share of the jointly controlled entity’s property,
plant and equipment with its property, plant and equipment.
Alternatively, the venturer may include separate line items for its share
of the assets, liabilities, income and expenses of the jointly controlled
entity in its financial statements. For example, it may show its share of a
current asset of the jointly controlled entity separately as part of its
current assets; it may show its share of the property, plant and
equipment of the jointly controlled entity separately as part of its
property, plant and equipment. Both these reporting formats result in the
reporting of identical amounts of profit or loss and of each major
classification of assets, liabilities, income and expenses; both formats
are acceptable for the purposes of this Standard.

35 Whichever format is used to give effect to proportionate consolidation,

it is inappropriate to offset any assets or liabilities by the deduction of
other liabilities or assets or any income or expenses by the deduction of
other expenses or income, unless a legal right of set-off exists and the
offsetting represents the expectation as to the realisation of the asset or
the settlement of the liability.

36 A venturer shall discontinue the use of proportionate consolidation

from the date on which it ceases to have joint control over a jointly
controlled entity.

37 A venturer discontinues the use of proportionate consolidation from the

date on which it ceases to share in the control of a jointly controlled
entity. This may happen, for example, when the venturer disposes of its
interest or when such external restrictions are placed on the jointly
controlled entity that the venture no longer has joint control.

Equity method
38 As an alternative to proportionate consolidation described in
paragraph 30, a venturer shall recognise its interest in a jointly
controlled entity using the equity method.

  -726-
 LKAS 31
 

39 A venturer recognises its interest in a jointly controlled entity using the

equity method irrespective of whether it also has investments in
subsidiaries or whether it describes its financial statements as
consolidated financial statements.

40 Some venturers recognise their interests in jointly controlled entities

using the equity method, as described in LKAS 28. The use of the
equity method is supported by those who argue that it is inappropriate to
combine controlled items with jointly controlled items and by those
who believe that venturers have significant influence, rather than joint
control, in a jointly controlled entity.   This Standard does not
recommend the use of the equity method because proportionate
consolidation better reflects the substance and economic reality of a
venturer’s interest in a jointly controlled entity, that is to say, control
over the venturer’s share of the future economic benefits. Nevertheless,
this Standard permits the use of the equity method, as an alternative
treatment, when recognising interests in jointly controlled entities.

41 A venturer shall discontinue the use of the equity method from the
date on which it ceases to have joint control over, or have
significant influence in, a jointly controlled entity.

Exceptions to proportionate consolidation and equity method

42 Interests in jointly controlled entities that are classified as held for

sale in accordance with SLFRS 5 shall be accounted for in
accordance with that SLFRS.

43 When an interest in a jointly controlled entity previously classified as

held for sale no longer meets the criteria to be so classified, it shall be
accounted for using proportionate consolidation or the equity method as
from the date of its classification as held for sale. Financial statements
for the periods since classification as held for sale shall be amended
accordingly.

44 [Deleted]

45 When an investor ceases to have joint control over an entity, it shall

account for any remaining investment in accordance with LKAS 39
from that date, provided that the former jointly controlled entity
does not become a subsidiary or associate. From the date when a
jointly controlled entity becomes a subsidiary of an investor, the
investor shall account for its interest in accordance with LKAS 27
and

  -727-
-728-
-729-
LKAS 31

has significant influence in the joint venture, in accordance with

LKAS 28.

Operators of joint ventures

52 Operators or managers of a joint venture shall account for any fees
in accordance with LKAS 18 Revenue.

53 One or more venturers may act as the operator or manager of a joint

venture. Operators are usually paid a management fee for such duties.
The fees are accounted for by the joint venture as an expense.

Disclosure
54 A venturer shall disclose the aggregate amount of the following
contingent liabilities, unless the probability of loss is remote,
separately from the amount of other contingent liabilities:

(a) any contingent liabilities that the venturer has incurred in

relation to its interests in joint ventures and its share in each
of the contingent liabilities that have been incurred jointly
with other venturers;

(b) its share of the contingent liabilities of the joint ventures

themselves for which it is contingently liable; and

(c) those contingent liabilities that arise because the venturer is

contingently liable for the liabilities of the other venturers of a
joint venture.

55 A venturer shall disclose the aggregate amount of the following

commitments in respect of its interests in joint ventures separately
from other commitments:

(a) any capital commitments of the venturer in relation to its

interests in joint ventures and its share in the capital
commitments that have been incurred jointly with other
venturers; and

(b) its share of the capital commitments of the joint ventures

themselves.

  -730-
 LKAS 31
 

56 A venturer shall disclose a listing and description of interests in

significant joint ventures and the proportion of ownership interest
held in jointly controlled entities. A venturer that recognises its
interests in jointly controlled entities using the line-by-line
reporting format for proportionate consolidation or the equity
method shall disclose the aggregate amounts of each of current
assets, long-term assets, current liabilities, long-term liabilities,
income and expenses related to its interests in joint ventures
.
57 A venturer shall disclose the method it uses to recognise its interests
in jointly controlled entities.

Effective date and transition

58 An entity shall apply this Standard for annual periods beginning on or
after 1 January 2013. Earlier application is encouraged. If an entity
applies this Standard for a period beginning before 1 January 2013, it
shall disclose that fact.

58 [ Deleted ]

58B [ Deleted ]

58C [ Deleted ]

58D [ Deleted ]

  -731-