CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS OF GROUP ENTITIES 14.

117

UNIT 5:
IND AS 111: JOINT ARRANGEMENTS

5.1 OBJECTIVE OF IND AS 111

Joint arrangement is an arrangement of which two or more parties have joint control. Joint
arrangements are established for a variety of purposes (e.g. as a way for parties to share costs
and risks, or as a way to provide the parties with access to new technology or new markets) and
can be established using different structures and legal forms.
The objective of Ind AS 111 is to establish principles for financial reporting by entities that have an
interest in a joint arrangement.
This Ind AS defines various terms related to joint arrangements. It requires an entity that is a party
to a joint arrangement to determine the type of joint arrangement in which it is involved i.e.
whether it is a joint operation or a joint venture by assessing its rights and obligations. Based on
the type of the arrangement, the accounting treatment for that arrangement will be decided.

5.2 SCOPE OF IND AS 111

Ind AS 111 shall be applied by all entities that are a party to a joint arrangement.

5.3 ASSESSMENT OF JOINT ARRANGEMENT

As mentioned above, a joint arrangement is an arrangement of which two or more parties have
joint control.
A joint arrangement has the following characteristics:

The contractual arrangement gives two

The parties are bound by a contractual
arrangement AND or more of those parties joint control of
the arrangement

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5.3.1 Contractual arrangement

One of the essential elements of a joint arrangement is that there has to be a contractual
arrangement between the parties to the arrangement. A contractual arrangement is usually in
writing, however, it can be evidenced in several other ways as well.
A joint arrangement can be structured through a separate vehicle. In most of such case, the
contractual arrangement is incorporated in the articles, charter or by-laws of the separate vehicle.
Example 1

A Ltd. and B Ltd. incorporated a new entity AB Ltd. The articles of association of AB Ltd. defines
the terms of contractual arrangements between A Ltd. and B Ltd.

The contractual arrangement describes the terms of arrangement between the two or more parties
that are involved in the activity that is subject of the arrangement. The contractual arrangement
generally deals with such matters as:

Purpose, activity and duration of the joint arrangement

How the members of the board of directors, or equivalent governing body, of the joint
arrangement, are appointed.

Decision-making process such as matters requiring decisions from the parties,

voting rights of parties and the required level of support for those matters.

Capital or other contributions required of the parties

How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the
joint arrangement

5.3.2 Joint control

Joint control is the contractually agreed sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the unanimous consent of the parties
sharing control.
Hence, in a joint arrangement, all the parties to an arrangement must act collectively in order to
take decisions about the relevant activities of the arrangement and there is no single party who
can control the arrangement individually. In a joint arrangement, any party sharing the control can
prevent the other party / parties from controlling the arrangement.

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In order to assess the joint control, an entity that is a party to an arrangement should first assess
that whether the contractual arrangement gives all the parties or a group of the parties control
over the arrangement. Control assessment will be done based on the guidance given in
Ind AS 110 (which is discussed in Unit 3). Accordingly, all the principles of control assessment,
some of which are summarised below, would be relevant while doing the assessment of joint
control by the parties:
 Power over the relevant activities of the investee
o Power with and without voting rights
o Potential voting rights
o Rights to appoint Key Managerial Personnel
o De-facto control
o Purpose and design of the investee
o Contractual arrangements
o Special relationship with investor and investee
 Exposure to returns
 Ability to use the power to affect the returns of the investee
Hence, if all the parties or a group of parties to a contractual arrangement (considered
collectively) have power, exposure to returns and ability to use that power to affect the returns of
the arrangement then the parties have control over the arrangement collectively.
The flowchart below can be used as a visual aid to remember the aforementioned concepts in
brief:
Is there a contractual arrangement?
No
Yes
Are all or group of parties to the arrangement required to act
No together to direct the relevant activities?
Yes

Are decisions about relevant activities required to be taken with

unanimous consent?
No
Yes
Joint control exists

Please remember: In a joint arrangement, no single party controls the arrangement on its own.
That is because, by definition, a party with joint control can prevent other parties from controlling
the arrangement.

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Following are some of the illustrations for doing assessment of joint control.
(One should keep in mind that the illustrations on control assessment discussed in Unit 3 would
also be equally relevant for doing assessment of joint control).
Illustration 1: Joint control
ABC Ltd. and DEF Ltd. have entered into a contractual arrangement to manufacture a product and
sell that in retail market. As per the terms of the arrangement, decisions about the relevant
activities require consent of both the parties. The parties share the returns of the arrangement
equally amongst them. Whether the arrangement can be treated as joint arrangement?
Solution:
The arrangement is a joint arrangement since both the parties are bound by the contractual
arrangement and the decisions about relevant activities require unanimous consent of both the
parties.
*****
Sometimes the decision-making process that is agreed upon by the parties in their contractual
arrangement implicitly leads to joint control. This is explained in below illustrations:
Illustration 2: Implicit joint control
PQR Ltd. and XYZ Ltd. established an arrangement in which each has 50% of the voting rights
and the contractual arrangement between them specifies that at least 51% of the voting rights are
required to make decisions about the relevant activities. Whether the arrangement can be treated
as joint arrangement?
Solution:
In this case, the parties have implicitly agreed that they have joint control of the arrangement
because decisions about the relevant activities cannot be made without both parties agreeing.
*****
Illustration 3: Implicit joint control
A Ltd., B Ltd. and C Ltd. established an arrangement whereby A Ltd. has 50% of the voting rights
in the arrangement, B Ltd. has 30% and C has 20%. The contractual arrangement between A Ltd.,
B Ltd. and C Ltd. specifies that at least 75% of the voting rights are required to make decisions
about the relevant activities of the arrangement. Whether the arrangement can be treated as joint
arrangement?
Solution:
In this case, even though A can block any decision, it does not control the arrangement because it
needs the agreement of B. The terms of their contractual arrangement requiring at least 75% of
the voting rights to make decisions about the relevant activities imply that A Ltd. and B Ltd. have

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joint control of the arrangement because decisions about the relevant activities of the arrangement
cannot be made without both A Ltd. and B Ltd. agreeing.
*****
Apart from the above mentioned situations of implicit joint control, there can be other
circumstances where the contractual arrangement requires a minimum proportion of the voting
rights to make decisions about the relevant activities. When that minimum required proportion of
the voting rights can be achieved by more than one combination of the parties agreeing together,
that arrangement is not a joint arrangement unless the contractual arrangement specifies which
parties (or combination of parties) are required to agree unanimously to decisions about the
relevant activities of the arrangement. This is explained in below illustrations:
Illustration 4: Explicit joint control
An arrangement has three parties: X Ltd. has 50% of the voting rights in the arrangement and
Y Ltd. and Z Ltd. each have 25%. The contractual arrangement between them specifies that at
least 75% of the voting rights are required to make decisions about the relevant activities of the
arrangement. Whether the arrangement can be treated as joint arrangement?
Solution:
In this case, even though X Ltd. can block any decision, it does not control the arrangement
because it needs the agreement of either Y Ltd. or Z Ltd. In this question, X Ltd., Y Ltd. and Z Ltd.
collectively control the arrangement. However, there is more than one combination of parties that
can agree to reach 75% of the voting rights (i.e. either X Ltd. and Y Ltd. or X Ltd. and Z Ltd.). In
such a situation, to be a joint arrangement the contractual arrangement between the parties would
need to specify which combination of the parties is required to agree unanimously to decisions
about the relevant activities of the arrangement.
*****
Illustration 5: Explicit joint control
An arrangement has A Ltd. and B Ltd. each having 35% of the voting rights in the arrangement
with the remaining 30% being widely dispersed. Decisions about the relevant activities require
approval by a majority of the voting rights. Whether the arrangement can be treated as joint
arrangement?
Solution:
A Ltd. and B Ltd. have joint control of the arrangement only if the contractual arrangement
specifies that decisions about the relevant activities of the arrangement require both A Ltd. and
B Ltd. agreeing.
*****
The above illustrations also highlight that it is not necessary that all the parties in an arrangement
should have joint control to form a joint arrangement. Some party or parties may be participating in the
joint arrangement but may not be having joint control of that joint arrangement. That is the reason the
word “or” has been used between the words “all” and “group of parties” in the flowchart given earlier.

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Following are some further illustrations on assessment of whether a joint arrangement exists or
not:
Illustration 6: Joint control through board representation
Electronics Ltd. is established by two investors R Ltd. and S Ltd. The investors are holding 60%
and 40% of the voting power of the investee respectively.
As per the articles of association of Electronics Ltd., both the investors have right to appoint
2 directors each on the board of Electronics Ltd. The directors appointed by each investor will act
in accordance with the directions of the investor who has appointed such director. Further, articles
of association provides that the decision about relevant activities of the entity will be taken by
board of directors through simple majority.
Determine whether Electronics Ltd. is controlled by a single investor or is jointly controlled by both
the investors.
Solution:
The decisions about relevant activities are required to be taken by majority of board of directors.
Hence, out of the 4 directors, at least 3 directors need to agree to pass any decision. Accordingly,
the directors appointed by any one investor cannot take the decisions independently without the
consent of at least one director appointed by other investor. Hence, Electronics Ltd. is jointly
controlled by both the investors. R Ltd. holding majority of the voting rights is not relevant in this
case since the voting rights do not given power over the relevant activities of the investee.
*****
Illustration 7: Chairman with casting vote
MN Software Ltd. is established by two investors M Ltd. and N Ltd. Both the investors are holding
50% of the voting power each of the investee.
As per the articles of association of MN Software Ltd., both the investors have right to appoint
2 directors each on the board of the company. The directors appointed by each investor will act in
accordance with the directions of the investor who has appointed such director. The decision about
relevant activities of the entity will be taken by board of directors through simple majority. Articles
of association also provides that M Ltd. has right to appoint the chairman of the board who will
have right of a casting vote in case of a deadlock situation.
Determine whether MN Software Ltd. is jointly controlled by both the investors.
Solution:
The decisions about relevant activities are required to be taken by majority of board of directors.
Hence, out of the 4 directors, at least 3 directors need to agree to pass any decision. Accordingly,
the directors appointed by any one investor cannot take the decisions independently without the
consent of at least one director appointed by other investor. However, the chairman of the board has
right for a casting vote in case of a deadlock in the board. Hence, M Ltd. has the ability to take

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decisions related to relevant activities through 2 votes by directors and 1 casting vote by chairman of
the board. Therefore, M Ltd. individually has power over MN Software Ltd. and there is no joint
control.
*****
Illustration 8: Equal voting rights but no joint control
ABC Ltd. is established by two investors AB Ltd. and BC Ltd. Each investor is holding 50% of the
voting power of the investee.
As per the articles of association of ABC Ltd., AB Ltd. and BC Ltd. have right to appoint 3 directors
and 2 directors respectively on the board of ABC Ltd. The directors appointed by each investor will
act in accordance with the directions of the investor who has appointed such director. Further,
articles of association provides that the decision about relevant activities of the entity will be taken
by board of directors through simple majority.
Determine whether ABC Ltd. is jointly controlled by both the investors.
Solution:
The decisions about relevant activities are required to be taken by majority of board of directors.
Hence, out of the 5 directors, at least 3 directors need to agree to pass any decision. Accordingly,
the directors appointed by AB Ltd. can take the decisions independently without the consent of any
of the directors appointed by BC Ltd. Hence, ABC Ltd. is not jointly controlled by both the
investors. Equal voting rights held by both the investors is not relevant in this case since the voting
rights do not given power over the relevant activities of the investee.
*****
Illustration 9: Joint control over specific asset
X Ltd. and Y Ltd. entered into a contractual arrangement to buy a piece of land to construct
residential units on the said land and sell to customers.
As per the arrangement, the land will be further divided into three equal parts. Out of the three
parts, both the parties will be responsible to construct residential units on one part each by taking
decision about relevant activities independently and they will entitled for the returns generated
from their own part of land. The third part of the land will be jointing managed by both the parties
requiring unanimous consent of both the parties for all the decision making.
Determine whether the arrangement is a joint arrangement or not.
Solution:
The two parts of the land which are required to be managed by both the parties independently on
their own would not fall within the definition of a joint arrangement. However, the third part of the
land which is required to be managed by both the parties with unanimous decision making would
meet the definition of a joint arrangement.
*****

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Illustration 10: Multiple relevant activities directed by different investors

Entity R and entity S established a new entity RS Ltd. to construct a national highway and operate
the same for a period of 30 years as per the contract given by government authorities.
As per the articles of association of RS Ltd, the construction of the highway will be done by entity
R and all the decisions related to construction will be taken by entity R independently. After the
construction is over, entity S will operate the highway for the period of 30 years and all the
decisions related to operating of highway will be taken by entity S independently. However,
decisions related to funding and capital structure of RS Ltd. will be taken by both the parties with
unanimous consent.
Determine whether RS Ltd. is a joint arrangement between entity R and entity S?
Solution:
In this case, the investors should evaluate which of the decisions about relevant activities can
most significantly affect the returns of RS Ltd. If the decisions related to construction of highway or
operating the highway can affect the returns of the RS Ltd. most significantly then the investor
directing those decision has power over RS Ltd. and there is no joint arrangement. However, if the
decisions related to funding and capital structure can affect the returns of the RS Ltd. most
significantly then RS Ltd. is a joint arrangement between entity R and entity S.
*****
Illustration 11: Informal agreement for sharing of control
An entity has four investors A, B, C and D holding 10%, 20%, 30% and 40% voting power
respectively. The articles of association requires decisions about relevant activities to be taken by
majority voting rights. However, investor A, B and C have informally agreed to vote together. This
informal agreement has been effective in recent meetings of the investors to take decisions about
relevant activities. Whether A, B and C have joint control over the entity?
Solution:
In this case, three investors have informally agreed to make unanimous decisions. These three
investors together also have majority voting rights in the entity. Hence, investor A, B and C have
joint control over the entity. The agreement between investor A, B and C need not be formally
documented as long as there is evidence of its existence in recent meetings of the investors.
*****
It should be noted that if the requirement for unanimous consent relates only to decisions that give
a party protective rights and not to decisions about the relevant activities of an arrangement, that
party is not a party with joint control of the arrangement. This is explained in below illustration:

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Illustration 12: Party with protective rights

D Ltd., E Ltd. and F Ltd. have established a new entity DEF Ltd. As per the arrangement,
unanimous consent of all three parties is required only with respect to decisions related to change
of name of the entity, amendment to constitutional documents of the entity to enter into a new
business, change in the registered office of the entity, etc. Decisions about other relevant activities
require consent of only D Ltd. and E Ltd. Whether F Ltd. is a party with joint control of the
arrangement?
Solution:
Consent of F Ltd. is required only with respect to the fundamental changes in DEF Ltd. Hence
these are protective rights. The decisions about relevant activities are taken by D Ltd. and E Ltd.
Hence, F Ltd. is not a party with joint control of the arrangement.
*****
A contractual arrangement might include clauses on the resolution of disputes, such as
arbitration. These provisions may allow for decisions to be made without unanimous consent
among the parties that have joint control. The existence of such provisions does not prevent the
arrangement from being jointly controlled and, consequently, from being a joint arrangement. This
is explained in below illustration:
Illustration 13: Resolution of disputes without unanimous consent
Entity A and Entity B established a contractual arrangement whereby the decision related to
relevant activities are required to be taken by unanimous consent of both the parties. However, in
case of any dispute with any vendor or customer of the arrangement, entity A has right to take
necessary decisions for the resolution of disputes including decisions of going for the arbitration or
filing a suit in court of law. Whether the arrangement is a joint arrangement?
Solution:
The arrangement is a joint arrangement since the contractual arrangement requires decisions
about relevant activities to be taken by unanimous consent of both the parties. The right available
with entity A to take decisions for resolution of disputes will not prevent the arrangement from
being a joint arrangement.
*****

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The following flow chart summarises the requirements of assessing joint control:

When an arrangement is outside the scope of Ind AS 111, an entity accounts for its interest in the
arrangement in accordance with relevant Ind AS, such as Ind AS 110, Ind AS 28 or Ind AS 109.
If facts and circumstances change, an entity shall reassess whether it still has joint control of the
arrangement.

5.4 TYPES OF JOINT ARRANGEMENT

Once it is determined that an arrangement is a joint arrangement, the entity needs to determine
whether the joint arrangement is a joint operation or a joint venture depending upon the rights and
obligations of the parties to the arrangement. This determination is relevant because the way the
joint arrangement is accounted for i.e. whether it is a consolidation of assets, liabilities, income
and expenses or use of equity method specified under Ind AS 28.
Joint operation and joint venture are defined below:

A joint operation is a joint arrangement

A joint venture is a joint arrangement
whereby the parties that have joint control of
whereby the parties that have joint control of
the arrangement have rights to the assets,
the arrangement have rights to the net
and obligations for the liabilities, relating
assets of the arrangement. Those parties
to the arrangement. Those parties are called
are called joint venturers.
joint operators.

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As mentioned above, for classification of a joint arrangement between joint operation and joint venture,
the parties shall assess their rights and obligations arising from the arrangement. When making that
assessment, an entity shall consider the structure of the joint arrangement. Further, if the joint
arrangement is structured through a separate vehicle then the entity shall consider the following.
The terms of the
The legal form of the When relevant, other
contractual
separate vehicle facts and circumstances
arrangement

Each of the above factors are discussed below in detail. If facts and circumstances change, an
entity shall reassess whether its earlier conclusion on the type of joint arrangement has changed.
5.4.1 Assessment of whether a joint arrangement is a joint operation or
a joint venture
When assessing whether a joint arrangement is a joint operation or a joint venture, an entity
should first determine whether the joint arrangement is structured through a separate vehicle or
not. Some joint arrangements are not structured through a separate vehicle and some joint
arrangements are structured through a separate vehicle.
A separate vehicle is defined in Ind AS 111 as a separately identifiable financial structure,
including separate legal entities or entities recognised by statute, regardless of whether those
entities have a legal personality. Examples of a separate vehicle include partnership, company,
trust, association of persons, government authority, etc.
Below chart summarise the classification of a joint arrangement based on the structure of the
arrangement.

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5.4.1.1 Joint arrangements not structured through a separate vehicle

A joint arrangement that is not structured through a separate vehicle is a joint operation.
In such case, the contractual arrangement often describes the nature of the activities that are the
subject of the arrangement and how the parties intend to undertake those activities together. The
contractual arrangement also establishes the parties’ rights to the assets, and obligations for the
liabilities, relating to the arrangement. The contractual arrangement could also specify how the
revenues and expenses that are common to the parties are to be shared among them.
This is explained in below illustration:
Illustration 14: Joint operation
P Ltd. and Q Ltd. are two construction entities and they have entered into a contractual
arrangement to jointly construct a metro rail project.
The construction of metro rail project involves various activities such as construction of
infrastructure (like metro station, control room, pillars at the centre of the road, etc.) for the metro,
laying of the tracks, acquiring of the coaches of the metro, etc. The total length of the metro line to
be constructed is 50 kms. As per the arrangement, both the parties are responsible to construct
25 kms each. Each party is required to incur its own cost, use its own assets, incur the liability and
has right to the revenue from their own part of the work.
Determine whether the arrangement is a joint operation or not?
Solution:
The arrangement is a joint operation since the arrangement is not structured through a separate
vehicle and each party has rights to the assets, and obligations for the liabilities relating to their
own part of work in the joint arrangement.
*****
In some cases, the parties to a joint arrangement might agree, for example, to share and operate
an asset together. However, such arrangements are still a joint operation since they are not
structured through a separate vehicle.
In such a case, the contractual arrangement establishes the parties’ rights to the asset that is
operated jointly, and how output or revenue from the asset and operating costs are shared among
the parties. This is explained in below illustration:
Illustration 15: Joint operation by sharing an asset
RS Ltd. and MN Ltd. entered into a contractual arrangement to run a business of providing cars of
hire. The cars will be owned by both the parties jointly. The expenses to run the car (like driver
salary, petrol, maintenance, insurance, etc.) and revenues from the business will be shared
between both the parties as agreed in the contractual arrangement. Determine whether the
arrangement is a joint operation or not?

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Solution:
The arrangement is a joint operation since the arrangement is not structured through a separate
vehicle.
*****
5.4.1.2 Joint arrangements structured through a separate vehicle
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a
separate vehicle can be either a joint venture or a joint operation.
As mentioned earlier, when the joint arrangement is structured through a separate vehicle, an
entity should consider i) legal form of the separate vehicle, ii) the terms of the contractual
arrangement and, when relevant, iii) any other facts and circumstances to assess whether the
arrangement is a joint venture or a joint operation. Each of these factors are further explained
below.
5.4.1.2.1 The legal form of the separate vehicle
The legal form of the separate vehicle is relevant when assessing the type of joint arrangement.
For example, there may be a situation where the legal form of a separate vehicle causes the
separate vehicle to be considered in its own right (i.e. the assets and liabilities held in the
separate vehicle are the assets and liabilities of the separate vehicle and not the assets and
liabilities of the parties). In such case, the legal form of the separate vehicle indicates that the
arrangement is a joint venture.
If the legal form of the separate vehicle indicates that the arrangement is a joint venture then the
entity should further evaluate the terms of contractual arrangements and any other relevant facts
and circumstance to see whether those factors indicate that the arrangement is a joint operation or
not. However, if the legal form indicates that the arrangement is a joint operation (i.e. in a situation
where the legal form does not confer separation between the parties and the separate vehicle)
then there is no need to evaluate any other factor and the arrangement is concluded to be a joint
operation.
Illustration 16: Legal form indicates the arrangement to be a joint venture
Entity X and Entity Y are engaged in the business of Engineering, Procurement and Construction
(EPC) for its customers. Both the parties have jointly won a contract from a customer for executing
an EPC contract and for that the parties have established a new entity XY Ltd. The contract will be
executed through XY Ltd.
All the assets required for the execution of the contract will be acquired and liabilities relating to
the execution will be incurred by XY Ltd. in its own name. Entity X and entity Y will have share in
the net profits of XY Ltd. in the ratio of their shareholding i.e. 50% each. Assuming that the
arrangement meets the definition of a joint arrangement, determine whether the joint arrangement
is a joint operation or a joint venture?

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Solution:
The legal form of the separate vehicle is a company. The legal form of the separate vehicle causes
the separate vehicle to be considered in its own right. Hence, it indicates that the arrangement is a
joint venture. In this case, the parties should further evaluate the terms of contractual
arrangements and other relevant facts and circumstance to conclude whether the arrangement is a
joint venture or a joint operation.
*****
Illustration 17: Legal form indicates the arrangement to be a joint operation
Two entities have established a partnership firm with each party having 50% share in the net
profits of the firm. Assuming that the arrangement meets the definition of a joint arrangement,
determine whether the joint arrangement is a joint operation or a joint venture?
Solution:
In this case, the parties to the arrangement should evaluate whether the legal form creates
separation between the partners and the partnership firm. If the parties conclude that they have
rights in the assets and obligations for the liabilities relating to the partnership firm then this would
be a joint operation. If the assessment of legal form of the partnership firm indicates that the firm
is a joint operation then there is no need to evaluate any other factors and it is concluded that the
partnership firm is a joint operation.
*****
5.4.1.2.2 Assessing the terms of the contractual arrangement
Generally, the rights and obligations conferred through contractual arrangement are consistent
with the rights and obligations conferred by the legal form of the separate vehicle. However, in
some case the contractual arrangement alters the rights and obligations conferred by the legal
form of the separate vehicle.
If the contractual arrangement indicates that the arrangement is a joint operation then there is no need to
evaluate any other facts and circumstances and the arrangement is concluded to be a joint operation.
Illustration 18: Assessing the terms of the contractual arrangement
Continuing with the illustration 16 above, assume that Entity X and Entity Y have entered into a
separate agreement whereby they have agreed that each party has an interest in the assets of the
XY Ltd. and each party is liable for the liabilities of XY Ltd. in a specified proportion. Determine
whether the joint arrangement is a joint operation or a joint venture?
Solution:
In this case, the terms of the separate agreement may cause the arrangement to be a joint operation.
*****

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The following table provides some examples (not an exhaustive list) of some common terms
present in contractual arrangements of parties to a joint operation and a joint venture:

Assessing the terms of the contractual arrangement

Joint operation Joint venture
The terms of the The terms provide the parties with The terms provide the parties
contractual rights to the assets, and with rights to the net assets of
arrangement obligations for the liabilities, the arrangement.
relating to the arrangement.
Rights to assets The parties share all interests (e.g. The assets brought into the
rights, title or ownership) in the arrangement or subsequently
assets relating to the arrangement acquired by the joint
in a specified proportion. arrangement are the
arrangement’s assets. The
parties have no interests (i.e. no
rights, title or ownership) in the
assets of the arrangement.
Obligations for The parties to the joint The joint arrangement is liable
liabilities arrangement share all liabilities, for the debts and obligations of
obligations, costs and expenses in the arrangement.
a specified proportion. The parties are liable to the
arrangement only to the extent of
The parties to the joint their respective investments in
arrangement are liable for claims the arrangement or to their
raised by third parties. respective obligations to
contribute any unpaid or
additional capital to the
arrangement.

Creditors of the joint

arrangement do not have rights
of recourse against any party
with respect to debts or
obligations of the arrangement.
Revenues, expenses, Revenues and expenses are Each party has share in the profit
profit or loss allocated on the basis of the or loss relating to the activities of
relative performance of each party the arrangement.
to the joint arrangement.
However, the parties might have

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agreed to share the profit or loss

relating to the arrangement on the
basis of a specified proportion such
as the parties’ ownership interest
in the arrangement. This would not
prevent the arrangement from
being a joint operation if the parties
have rights to the assets, and
obligations for the liabilities,
relating to the arrangement.
Guarantees The parties to joint arrangements might provide guarantees to third
parties that, for example, receive a service from, or provide financing
to, the joint arrangement. The provision of such guarantees does not,
by itself, determine that the joint arrangement is a joint operation. The
feature that determines whether the classification of joint arrangement
is whether the parties have obligations for the liabilities relating to the
arrangement (whether they are guaranteed by the parties or not is
irrelevant).

5.4.1.2.3 Assessing other facts and circumstances

When the legal form of the separate vehicle and the terms of the contractual arrangement indicate
that the arrangement is a joint venture, the parties should evaluate other relevant facts and
circumstance to assess whether the arrangement is a joint operation or not. If the other relevant
facts and circumstances also do not have evidence of the arrangement being a joint operation then
the arrangement is concluded to be a joint venture.
The other relevant facts and circumstances that should be evaluated which might indicate that the
arrangement is a joint operation are as follows. If both the following conditions are satisfied then
the arrangement is a joint operation.
• The arrangement’s activities primarily aim to provide the parties with an output (i.e. the
parties have rights to substantially all the economic benefits of the assets held in the
separate vehicle); and
• The parties are substantially the only source of cash flows contributing to the continuity of
the operations of the arrangement. Hence, the arrangement depends on the parties on a
continuous basis for settling the liabilities relating to the activity conducted through the
arrangement.
Illustration 19: Assessing other facts and circumstances
Two parties structure a joint arrangement in an incorporated entity i.e. Entity A in which each party
has a 50% ownership interest. The purpose of the arrangement is to manufacture materials

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required by the parties for their own, individual manufacturing processes. The arrangement
ensures that the parties operate the facility that produces the materials to the quantity and quality
specifications of the parties. The legal form of Entity A (an incorporated entity) through which the
activities are conducted initially indicates that the assets and liabilities held in Entity A are the
assets and liabilities of Entity A. The contractual arrangement between the parties does not specify
that the parties have rights to the assets or obligations for the liabilities of Entity A. There are
following other relevant facts and circumstances applicable in this case:
• The parties agreed to purchase all the output produced by Entity A in a ratio of 50:50. Entity
A cannot sell any of the output to third parties, unless this is approved by the two parties to
the arrangement. Because the purpose of the arrangement is to provide the parties with
output they require, such sales to third parties are expected to be uncommon and not
material.
• The price of the output sold to the parties is set by both parties at a level that is designed to
cover the costs of production and administrative expenses incurred by Entity A. On the basis
of this operating model, the arrangement is intended to operate at a break-even level.
Based on the above fact pattern, determine whether the arrangement is a joint operation or a joint
venture?
Solution:
The legal form of Entity A and the terms of the contractual arrangement indicate that the
arrangement is a joint venture. However, the other relevant facts and circumstances mentioned
above indicates that:
• the obligation of the parties to purchase all the output produced by Entity A reflects the
exclusive dependence of Entity A upon the parties for the generation of cash flows and, thus,
the parties have an obligation to fund the settlement of the liabilities of Entity A.
• the fact that the parties have rights to all the output produced by Entity A means that the parties
are consuming, and therefore have rights to, all the economic benefits of the assets of Entity A.
These facts and circumstances indicate that the arrangement is a joint operation. The conclusion
about the classification of the joint arrangement in these circumstances would not change if,
instead of the parties using their share of the output themselves in a subsequent manufacturing
process, the parties sold their share of the output to third parties.
If the parties changed the terms of the contractual arrangement so that the arrangement was able
to sell output to third parties, this would result in Entity A assuming demand, inventory and credit
risks. In that scenario, such a change in the facts and circumstances would require reassessment
of the classification of the joint arrangement. Such facts and circumstances would indicate that the
arrangement is a joint venture.
*****

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 14.134 FINANCIAL REPORTING

The following flow chart summarises the above principles an entity should follow to classify an
arrangement when the joint arrangement is structured through a separate vehicle:

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CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS OF GROUP ENTITIES 14.135

5.4.2 Multiple joint arrangements under single framework agreement

Sometimes the parties may be bound by a framework agreement that sets up the general
contractual terms for undertaking one or more activities. Under a single framework agreement, the
parties might establish different joint arrangements for different activities to be performed under
the framework agreement. Even though all such joint arrangements are related to the same
framework agreement, their type might be different i.e. one joint arrangement can be a joint
operation and another joint arrangement can be a joint venture. This is explained in below
illustration:
Illustration 20: Multiple joint arrangements under single framework agreement
AB Ltd. and CD Ltd. have entered into a framework agreement to manufacture and distribute a
new product i.e. Product X. The two activities to be performed as per the framework agreement
are i) Manufacture of Product X and ii) Distribution of Product X. The manufacturing of the product
will not be done through a separate vehicle. The parties will purchase the necessary machinery in
their joint name. For the distribution of the product, the parties have established a new entity
ABCD Ltd. All the goods manufactured will be sold to ABCD Ltd. as per price mutually agreed by
the parties. Then ABCD Ltd. will do the marketing and distribution of the product. Both the parties
will have joint control over ABCD Ltd.
The legal form of ABCD Ltd. causes it to be considered in its own right (ie the assets and liabilities
held in ACD Ltd. are the assets and liabilities of ABC Ltd. and not the assets and liabilities of the
parties). Further, the contractual arrangement and other relevant facts and circumstances also do
not indicate otherwise.
Determine whether various arrangements under the framework agreement are joint operation or
joint venture?
Solution:
The manufacturing of Product X is not done through a separate vehicle and the assets used to
manufacture the product are jointly owned by both the parties. Hence, the manufacturing activity is
a joint operation.
The distribution of Product X is done through a separate vehicle i.e. ABCD Ltd. Further, AB Ltd.
and CD Ltd. do not have rights to the assets, and obligations for the liabilities, relating to
ABCD Ltd. Hence ABCD Ltd. is a joint venture.
*****

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5.5 ACCOUNTING OF JOINT OPERATIONS

In this section, we will discuss following concepts related to accounting of joint operations:
 Accounting of interest in joint operations in separate and consolidated financial statement of
joint operator
 Accounting for sales or contributions of assets to a joint operation in separate and
consolidated financial statement of joint operator
 Accounting for purchases of assets from a joint operation in separate and consolidated
financial statement of joint operator
 Accounting by an entity that is a party to the joint operation but does not have joint control
5.5.1 Accounting of interest in joint operations in separate and
consolidated financial statement of joint operator
A joint operator shall recognise in its separate and consolidated financial statements in relation
to its interest in a joint operation:
a) its assets, including its share of any assets held jointly;
b) its liabilities, including its share of any liabilities incurred jointly;
c) its revenue from the sale of its share of the output arising from the joint operation;
d) its share of the revenue from the sale of the output by the joint operation; and
e) its expenses, including its share of any expenses incurred jointly.
A joint operator shall account for the assets, liabilities, revenues and expenses relating to its
interest in a joint operation in accordance with the Ind ASs applicable to the particular assets,
liabilities, revenues and expenses.
Illustration 21: Accounting of interest in joint operation
P and Q form a joint arrangement PQ using a separate vehicle. P and Q each own 50% of the
capital of PQ. However, the contractual terms of the joint arrangement states that P has the rights
to all of Machinery and the obligation to pay Bank Loan in PQ. P and Q have rights to all other
assets in PQ and obligations for all other liabilities in PQ in proportion to their share of capital (i.e.
50% each).
PQ’s balance sheet is as follows:

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CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS OF GROUP ENTITIES 14.137

Balance sheet
Liabilities ` Assets `
Capital 1,50,000 Machinery 2,50,000
Bank Loan 75,000 Cash 50,000
Other Loan 75,000
3,00,000 3,00,000
How should P record in its financial statements its rights and obligations in PQ?
Solution:
Under Ind AS 111, P should record the following in its financial statements, to account for its rights
in the assets of PQ and its obligations for the liabilities of PQ.
Machinery 2,50,000
Cash 25,000
Capital 75,000
Bank Loan 75,000
Other Loan 37,500
*****
Illustration 22: Accounting of interest in joint operation
AB Ltd. and BC Ltd. have established a joint arrangement through a separate vehicle PQR. The
legal form of the separate vehicle does not confer separation between the parties and the separate
vehicle itself. Thus, both the parties have rights to the assets and obligations for the liabilities of
PQR. As neither the contractual terms nor the other facts and circumstances indicate otherwise, it
is concluded that the arrangement is a joint operation and not a joint venture.
Both the parties own 50% each of the equity interest in PQR. However, the contractual terms of
the joint arrangement state that AB Ltd. has the rights to all of Building No. 1 owned by PQR and
the obligation to pay all of the debt owned by PQR to a lender XYZ. AB Ltd. and BC Ltd. have
rights to all other assets of PQR and obligations for all other liabilities of PQR in proportion of their
equity interests (i.e. 50% each)
PQR’s balance sheet is as follows:
Balance sheet
Liabilities ` Assets `
Debt owed to XYZ 240 Cash 40
Employee benefit plan obligation 100 Building 1 240
Equity 140 Building 2 200
480 480
How should AB Ltd. record in its financial statements its rights and obligations in PQR?

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Solution:
Under Ind AS 111, AB Ltd. should record the following in its financial statements, to account for its
rights in the assets of PQR and its obligations for the liabilities of PQR.
`
Assets
Cash 20
Building 1 * 240
Building 2 100
Liabilities
Debt (third party) ^ 240
Employee benefit plan obligation 50
Equity 70

* Since AB Ltd. has the rights to all of Building No. 1, it records the amount in its entirety.
^ AB Ltd. has obligation for the debt owed by PQR to XYZ in its entirety
*****

5.5.2 Accounting for sales or contributions of assets to a joint operation in

separate and consolidated financial statement of joint operator
When a joint operator sells or contributes any asset to the joint operation, it is in effect transacting
with the other parties to the joint operation and hence the joint operator shall recognise gains and
losses resulting from such transactions only to the extent of the other parties’ interest in the
joint operation.
Illustration 23: Accounting for sales or contributions of assets to a joint operation
A Ltd. is one of the parties to a joint operation holding 60% interest in a joint operation and the
balance 40% interest is held by another joint operator. A Ltd. has contributed an asset held by it
to the joint operation for the activities to be conducted in joint operation. The carrying value of the
asset sold was ` 100 and the asset was actually sold for ` 80 i.e. at a loss of ` 20. How should
A Ltd. account for the sale of asset to joint operation in its books?
Solution:
A Ltd. should record the loss on the transaction only to the extent of other party’s interest in the
joint operation.
The total loss on the transaction is ` 20. Hence, A Ltd. shall record loss on sale of asset to the
extent of ` 8 (` 20 x 40%) which is the loss pertaining to the interest of other party to the joint

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CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS OF GROUP ENTITIES 14.139

operation. The loss of ` 12 (` 20 - ` 8) shall not be recognised as that is unrealised loss.

Further, while accounting its interest in the joint operation, A Ltd. shall record its share in that
asset at value of ` 60 [A Ltd. share of asset ` 48 (` 80 x 60%) plus unrealised loss of ` 12].
The journal entry for the transaction would be as follows:
Bank Dr. ` 32
Loss on sale Dr. `8
To Asset ` 40

*****
When above transactions provide evidence of a reduction in the net realisable value of the
assets to be sold or contributed to the joint operation, or of an impairment loss of those assets,
those losses shall be recognised fully by the joint operator.
5.5.3 Accounting for purchases of assets from a joint operation in separate
and consolidated financial statement of joint operator
When a joint operator purchases any asset from the joint operation, it shall not recognise its
share of the gains and losses until it resells those assets to a third party.
Illustration 24: Accounting for purchases of assets from a joint operation
A Ltd. is one of the parties to a joint operation holding 60% interest in the joint operation and the
balance 40% interest is held by another joint operator. A Ltd. has purchased an asset from the
joint operation. The carrying value of the asset in the books of joint operation was ` 100 and the
asset was actually purchased for ` 80 i.e. at a loss of ` 20. How should A Ltd. account for the
purchase of asset from joint operation in its books?
Solution:
A Ltd. should not record its share of the loss until the asset is resold to a third party.
The joint operation has sold the asset at ` 80 by incurring a loss of ` 20. Hence, A Ltd. shall
record the asset at ` 92 [Purchase price ` 80 + A Ltd.’s share in loss ` 12 (` 20 x 60%)].
Further, while accounting its interest in the joint operation, A Ltd. shall not record any share in the
loss incurred in sale transaction by the joint operation.
The journal entry for the transaction would be as follows:
Asset Dr. ` 32
To Bank ` 32
*****

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When above transactions provide evidence of a reduction in the net realisable value of the
assets to be purchased or of an impairment loss of those assets, a joint operator shall recognise
its share of those losses.
5.5.4 Accounting by an entity that is a party to the joint operation but does
not have joint control
A party that participates in, but does not have joint control of, a joint operation shall also account
for its interest in the arrangement in its separate and consolidated financial statements as follows:
A party that participates in, but does not have joint control of, a joint operation – Whether the
party has rights to the assets, and obligations for the liabilities, relating to that joint operation?

Yes No

Account as per requirements mentioned Account as per the Ind ASs applicable
above for a joint operator to that interest

5.6 ACCOUNTING OF JOINT VENTURES

5.6.1 Accounting in the consolidated financial statements
A joint venturer shall recognise its interest in a joint venture as an investment and shall account for
that investment using the equity method in accordance with Ind AS 28, unless the entity is
exempted from applying the equity method as specified in that standard. These requirements are
discussed in detail in unit 6.
5.6.2 Accounting in the separate financial statements
In its separate financial statements, a joint venturer shall account for its interest in a joint venture
in accordance Ind AS 27. These requirements are discussed in detail in unit 7.
5.6.3 Accounting by an entity that is a party to the joint venture but does
not have joint control
A party that participates in, but does not have joint control of, a joint venture shall also account for
its interest in the arrangement in its separate and consolidated financial statements as follows:

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Whether the party has significant influence over the joint venture?
No Yes

Account in separate and

Account as per requirements consolidated financial
of Ind AS 109 statements as per Ind AS 27
and Ind AS 28 respectively

5.7 ACCOUNTING FOR ACQUISITIONS OF INTERESTS IN

JOINT OPERATIONS IN SEPARATE AND
CONSOLIDATED FINANCIAL STATEMENT OF JOINT
OPERATOR
When an entity acquires an interest in a joint operation in which the activity of the joint operation
constitutes a business, as defined in Ind AS 103, it shall apply, to the extent of its share in the
joint operation, all the requirements of business combinations accounting as per Ind AS 103, and
other Ind ASs, that do not conflict with the guidance in Ind AS 111. Necessary disclosure shall also
be made as required by those Ind ASs in relation to business combinations.
The principles on business combinations accounting that do not conflict with the guidance in
Ind AS 111 include but are not limited to following:

Recognising acquisition- Recognising deferred tax that arise

related costs as expenses in from initial recognition of assets or
Measuring identifiable assets
the periods in which the costs liabilities, except for deferred tax
and liabilities at fair value
are incurred and the services liabilities that arise from initial
are received recognition of goodwill

Recognising the excess of the consideration Impairment testing of goodwill acquired in

transferred over the net assets as goodwill business combination

The above requirements also apply to the formation of a joint operation if, and only if, an
existing business, as defined in Ind AS 103, is contributed to the joint operation on its formation
by one of the parties that participate in the joint operation. However, these requirements do not
apply to the formation of a joint operation if all of the parties that participate in the joint operation
only contribute assets or groups of assets that do not constitute businesses to the joint
operation.

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A joint operator might increase its interest in a joint operation in which the activity of the joint
operation constitutes a business, as defined in Ind AS 103, by acquiring an additional interest in
the joint operation. In such cases, previously held interests in the joint operation are not
remeasured if the joint operator retains joint control.
A party that participates in, but does not have joint control of, a joint operation might obtain joint
control of the joint operation in which the activity of the joint operation constitutes a business as
defined in Ind AS 103. In such cases, previously held interests in the joint operation are not
remeasured.
If the transaction of acquisition of interest in the joint operation is a common control transaction
as defined in Ind AS 103 then an entity should not apply the requirements mentioned above. In
such case, the entity shall apply the accounting specified in Appendix C of Ind AS 103.

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