Chapter 4

Joint arrangements
and
Public Enterprises
 IFRS 11
Joint Arrangements
Introduction 3

• IFRS 11 Joint Arrangements

establishes principles for financial
reporting by parties to a joint
arrangement.
• The standard must be applied by all
entities who are party to a joint
arrangement.
IFRS 11 JOINT ARRANGEMENTS
• A joint arrangement is an arrangement in which
two or more parties have 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
• An entity that is a party to an arrangement must
assess whether the contractual arrangement gives
all the parties, or a group of the parties, control of
the arrangement collectively
Formation 5

The contractual arrangement is usually in writing,

whatever its form, and it will deal with the
following issues surrounding the joint venture.
• Its activity, duration and reporting obligations
• The appointment of its [Link](or equivalent) &
the voting rights of the parties
• Capital contributions to it by the parties
• How its output, income, expenses or results are
shared between the parties
 Introduction 6

• Reasons for:
 opportunity to gain new capacity and
expertise
 enter related businesses or new geographic
markets or gain new technological
knowledge
 gives access to greater resources, including
specialized staff and technology
 shares risks
 can be flexible
Figure: Assessing joint control
 Example: Assessing joint control
3 parties (D, E and F) establish an arrangement whereby:
D has 50% of the voting rights in the arrangement; and E
and F each have 25%. The contractual arrangement
between D, E and F specifies that at least 75% of the
voting rights are required to make decisions about the
relevant activities of the arrangement.

Requirement
Assess whether the arrangement gives all the parties control
of the arrangement collectively.
 9
Example: Assessing joint control
Solution
Even though D can block any decision, it does not control the
arrangement because it needs the agreement of either E or F.
In this example, D, E and F 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 D and
E or D and F). 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.
 Example: Assessing joint control
An arrangement is established whereby G and H
each have 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.

Requirement
Assess whether the arrangement gives all the parties control of
the arrangement collectively.
Example: Assessing joint control 11

Solution
G and H have joint control of the arrangement
only if the contractual arrangement specifies
that decisions about the relevant activities of the
arrangement require both G and H agreeing.
 Forms of Joint arrangements
Joint operation or Joint venture
• A joint arrangement is 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
• 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
Classification 13

Not structured through a Structured through a

separate vehicle * separate vehicle *
Assessment
Assess the parties’ rights and of the parties’
obligations arising from the rights and
arrangement by considering: obligations
(a) the legal form of the separate
vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances
Parties have rights to the assets Parties have rights
and obligations for the liabilities to the net assets

Joint operation Joint venture

Accounting
reflects
Accounting for assets, liabilities, revenues Accounting for an
the parties’
and expenses in accordance with the investment using the rights and
contractual arrangements equity method obligations
 Separate vehicles 14

Legal form Do the parties have rights to the assets

and obligations for the liabilities? Yes

No
Contractual Do the parties have contractual rights to

Joint Operation
terms the assets, and obligations for the Yes
liabilities?
No
Other Is the arrangement designed so:
a) Its activities primarily aim to provide Yes
parties with an output, and
(b) It depends on the parties for settling
liabilities?
No
Joint Venture
 The terms of the contractual arrangements are key to deciding whether the
arrangement is a joint venture or joint operation

Joint operation Joint venture

• The parties to the joint arrangement – The parties to the joint
have rights to the assets, and arrangement have rights to net
obligations for the liabilities relating assets, of the arrangement( i.e it
to the arrangement is a separate vehicle, not the
• The parties to the joint arrangement parties, that have rights to the
share all interest( eg rights, title or assets, and obligations for the
ownership) in the assets relating to liabilities.
the arrangement in a specified – The assets brought to the
proportion (eg in proportion to the arrangement or subsequently
parties ownership interest in the acquired by the joint arrangement
arrangement or in proportion to the are the arrangement’s assets. The
activity carried out through the parties have no interests (i.e no
arrangement that is directly attribute rights, title or ownership) in the
to them assets of the arrangements
 The terms of the contractual arrangements are key to deciding whether the
arrangement is a joint venture or joint operation

Joint operation Joint venture

• The parties share all • The joint arrangement is liable for
liabilities ,obligations, costs and the debts and obligations of the
expenses in a specified arrangement. The parties are
proportion(eg in proportion to liable to the arrangements only to
their ownership interest in the the extent of their respective
arrangement or in proportion to investments in the arrangement
the activity carried out through or obligations to contribute any
the arrangement that is directly unpaid or additional capital to the
attributed to them. The parties to arrangement or both . Creditors
the joint arrangement are liable of the joint arrangement do not
for claims by third parties have rights of recourse against
any party
 The terms of the contractual arrangements are key to deciding whether the
arrangement is a joint venture or joint operation

Joint operation Joint venture

• The contractual arrangement  The contractual arrangement
establishes the allocation of establishes each party’s share
revenues and expenses on the in the profit or loss relating to
basis of the relative performance the activities of the
of each party to the joint arrangements
arrangement. For example, the
contractual arrangement might
establish that revenues and
expenses are allocated on the
basis of the capacity that each
party uses in plant operated
jointly
 Example: Construction and real estate 18

• A separate vehicle is established, over which two parties

have joint control.
• The purpose of the Joint Arrangement is to construct and sell
residential units to the public
• Neither the legal form nor the contractual terms give the
parties rights to the assets or obligations for the liabilities of
the arrangement
• Contributed equity by the parties is sufficient to buy the land
and raise debt finance for the construction
• Sales proceeds will be used to repay external debt and
remaining profit is distributed to parties
• Parties provide guarantee to financier
 Example-2
• A & B successfully tendered jointly for a contact to give consultancy
services for a large corporation in return for Br3 million.
Contractual arrangement between A & B:
– each uses its own finances, facilities and employees in the
consultancy activity
– “A” designed the accounting, finance and IT systems and prepares the
related manuals at a cost of Br800,000.
– “B” designs the operations, HRD, and marketing systems and prepares
the related manuals at a cost of Br1 million.
– A & B share equally in the Br3 million billed & received jointly to the
corporation.
Example:
Mining 20

• A and B jointly establish a corporation D over which

they have joint control to process the ore from the
mine C
• A & B have agreed to the following:
• A & B will purchase all the output produced by D in a
ratio of 60:40 (in proportion to ownership interest in D)
• D cannot sell the output to third parties
• Price of the output is set by A and B at a level to cover
production and admin costs (i.e. D breaks even)
 Accounting for a joint operation
• A joint operator shall recognise in relation to its
interest in a joint operation:
 its assets, including its share of any assets held
jointly
 its liabilities, including its share of any liabilities
incurred jointly
 its revenue from the sale of its share of the output
arising from the joint operation
 its share of the revenue from the sale of the output
by the joint operation
 its expenses, including its share of any expenses
incurred jointly
Accounting for a joint Operations-Example

• Lyon has a 40% share of a joint operation, a

natural gas station. The following information
relates to the joint arrangement activities:
• The natural gas station cost $15 million to
construct and was completed on 1 January 2015.
Its useful life is estimated at 10 years. • In the year,
gas with a direct cost of $22 million was sold for
$30 million.
• Additionally, the joint arrangement incurred
operating costs of $1.5
Accounting for a joint Operations-Example

• million during the year. creen Recorder • Assets,

liabilities, revenue and costs are apportioned on
the basis of the shareholding.
• Lyon has only contributed and accounted for its
share of the construction cost, paying $6 million.
The revenue and costs are receivable and
payable by the other joint operator who settles
amounts outstanding with Lyon after the year-end
(31 December 2015) Show how Lyon would
account for the above in its consolidated financial
statements for the year ended December 2015.
Accounting for a joint Operations-Example
Solution
Statement of profit or loss of Lyon
Revenue………………................. 30,000,000 *0.4= 12,000,000
CGS………………………………. 22,000,000*0.4= (8,800,000)
Operation expense ………………… 1,500,000*0.4= (600,000)
Depreciation expense…………………………….(600,000)
Net income……………………………………2,000,000
Statement of financial position of Lyon
Asset
Account receivable…………………………………...2,000,000
PPE at cost 15M *0.4……………………..................6,000,000
Acc. Depreciation expense (6000,000/10)=..........(600,000)
Net PPE............................................................................5,400,000
Accounting for a joint venture

• A joint venturer should recognise its interest in a joint

venture as an investment and should account for that
investment using the equity method in accordance with
IAS 28 unless the entity is exempted from applying the
equity method
Equity method 26

• Recognize the investment initially at cost, then

adjusting for the post-acquisition change in the
investor’s share of net assets of the joint venture.
• Presentation:
• a one-line entry in the st. of comprehensive income
‘investor’s share of the joint venture’s profit or loss’ and a
separate line item for other comprehensive income.
• a one-line item in the SoFP—Investment in joint
venture.
 EXAMPLE :
• A Co. and B Co. each invested Br. 320,000 for a 50% interest in
AB joint venture on January 1, 2002.
The condensed financial statements for the joint venture, AB
Company, for 2002 were as follows:
AB Company (a joint venture)
Income Statement
For the Year Ended December 31, 2002
Revenue Br.1,600,000
Less: Costs and expenses (1,200,000)
Net income Br. 400,000
– Division of net income:
– Company A Br. 200,000
– Company B 200,000
– Total Br. 400,000
 Example …
AB Company (a joint venture)
Statement of Venturers’ Capital
For the Year Ended December 31, 2002
A Co. B Co.
Combined

Investments, Jan. 1, 2002 Br. 320,000 Br. 320,000 Br. 640,000

Add: Net Income 200,000 200,000 400,000
Venturers’ capital, Dec. 31 520,000 520,000 1,040,000
 AB Company (a joint venture)
Balance Sheet
December 31, 2002
Assets
Current assets Br. 1,280,000
Other assets 1,920,000
Total assets Br. 3,200,000
Liabilities & Venturers’ Capital
Current Liabilities Br. 640,000
Long-term Liabilities 1,520,000
Venturers’ capital:
A Company Br. 520,000
B Company 520,000 1,040,000
Total Liabilities & Venturers’ Capital Br. 3,200,000
 A) EQUITY METHOD
Recognition of investments in a joint venture
Jan. 1 Investment in AB Company 320,000
Cash 320,000

Recognition of proportionate share in earnings of a JV

Dec. 31 Investment in AB Company 200,000

Investment Income 200,000
 Disclosures 31

• The IFRS requires an entity to disclose information that

enables users of FS to evaluate:
• the nature of, and risks associated with, its interests in
other entities; and
• the effects of those interests on its financial position,
financial performance and cash flows.
Joint arrangements and associates 32

Nature, extent and financial effects of interests in joint

arrangements and associates,
• List and nature of interests
• Quantitative financial information
• Unrecognised share of losses of JVs and associates
• Fair value (if published quoted prices available)
• Nature and extent of any significant restrictions on transferring
funds
Nature of, and changes in, the risks associated with the
involvement
• Commitments and contingent liabilities
Judgements and estimates 33

• An entity must disclose information about significant

judgements and assumptions it has made in
determining…
• joint control (see IFRS 11) of an arrangement
• type of joint arrangement when the arrangement has
been structured through a separate vehicle
Examples
 EXAMPLE-1
• Arthur Company and Beatrice Company each
invested Br 400,000.00 for a 50% interest in
ARBE joint venture on January 1, 2019. At
December 31, 2019, ARBE reported a Net Income
of Br 300,000.00 and also on December 21, 2019
it declared a dividend of Br 100,000.00.
 Example-2
• On 1/3/2014 EEP buys 30% of Entity B for Br120
million(Assume through this interest EEP gained Joint control
over B).
• Entity B’s profit = Br80 million for the year ended 31/12/2014
(including Br66.67million from March to Dec). On 20/12/2014
Entity B declared a dividend of Br100 million. The fair value of
EEP`s share in B at December 31,2014 is Br 110,000,000.00.
• Entity B reported loss of Br400 million for year ended
31/12/2015 and declared no dividend. It also reported profit of
Br300 million for year ended 31/12/2016 and declared no
dividend.
 Solution
For EEP personal account
1/3/2014-------Investment in B....120,000,000.00
Cash...............120,000,000.00

31/12/2014----Investment in B....20,000,000.00
Income from B....20,000,000.00
(66,666,666.66*0.3)

20/12/2014----Dividend receivable………..30,000,000.00
Investment in ARBE….30,000,000.00
(100,000,000.00*0.3)

At the end of 2014, EEP`s Investment in B account was

Br 110,000,000.00
 Solution
31/12/2015-----Loss from B……120,000,000.00
Investment in B……..110,000,000.00
Liability to B…………..10,000,000.00
(400,000,000.00*0.3)

31/12/2016----- Investment in B……..80,000,000.00

Liability to B………….10,000,000.00
Income from B……….90,000,000.00
(300,000,000.00*0.3)
 PUBLIC Enterprises

Defn: are autonomous or semi-autonomous bodies owned

by the gov’t & engaged in providing services and or
products.

Background:
• The growth of public enterprises has been partly by
nationalization and partly through creation of new ones.

• Some industries are also reserved for the public sector as

a matter of national policy. EX: Airways, defense
industries, railways, tele, energy, Shipping … .
 Formation Provision:
• Every enterprise shall be established by regulation and
the establishment regulation shall contain:
– The name of the enterprise
– A st. the enterprise shall be governed by the proc.
– The purpose for which the enterprise is established
– The authorized capital
– The amount of initial capital paid up both in cash & in kind
» Not less than 25% of Auth. Cap.
– A st. that the ent. shall not be liable beyond its T-assets
= Limited Liability St.
– The head office of the enterprise
– A st. that may authorize the enterprise to open branches
– The name of the supervising authority
– The duration for which the enterprise is established
• Why Public enterprises?
– Limitation of the free price mechanism
– Basic industries need huge [big] investment
– Government’s duty to help in economic dev’t
– Creation of economic surpluses and their utilization
– Final choice of projects are made in the interest of
the economy as a whole
– If social benefits exceed social costs in the case of any service,
then its production should be taken up
– Limitation on demand of merit goods on account of
price if left in private hands
– The overall economic policy of a country may
dictate the use of public enterprises in some sectors
 ORGANIZATION
• Each enterprise shall have:

– A supervising authority
» Designated by the Council of Ministers
» Ex: FDRE Public Financial Enterprises Agency

– A management board (3-12 In number)

– Management

– Necessary staff
 Accounting for Public Enterprises
• Public enterprises are state owned, state
controlled business enterprises.
• They are characterized by public purpose,
public o/ship & control.
• Their accounting aspect is the same as
business accounting with minor differences in
the owners’ equity section as there are no
shares and shareholders in PEs.
 Capital Section of PEs
The following are the capital items in PEs
• State capital… original value of NAs of PE formed
• Legal Reserve… 5% of net earning of each year
» until the fund equals 20% of the capital
» Obj: Covering Losses & Unforeseen expenses

• Other reserve funds… for contingency

purposes/OCEs
• Ex: Forex Translation diff of CBE

• State dividend… similar to dividend in businesses

• Appraisal Surplus… excess obtained from appraisal of
assets
 DISSOLUTION AND WINDING-UP

Grounds for Dissolution.

• An enterprise may be dissolved for any one of
the following reasons:
[Link] expiry of the life of the enterprise as fixed in its est. reg.;
2) Completion of the venture for which the ent. was established;
3) Failure of the purpose or impossibility of performance;
4) Loss of 75% of the P-U-C of the enterprise;
5) By decision of the Council of Ministers
6) Decision of the court declaring the enterprise bankrupt.
 Basic Events with Accounting Issue
• Formation
Assets……xxxx
State Capital…..xxxx

• Operation
Income Summary…..xxx
Legal Reserve…….……. xxxx
Other Reserves…….……xxxx
State Dividend Payable.. xxxx

• Privatization

• Liquidation
 Exercises
1. Entities A and B own 55 per cent and 10 per cent respectively of the ordinary
shares that carry voting rights at a general meeting of shareholders of entity Z.
Strategic decisions in entity Z require approval by investors holding more than
60 per cent of the voting power. Is there a Joint control? Discuss.

2. Entity A researches and develops drugs. Entity B manufactures drugs and

promotes them commercially. Entities A and B enter into a contractual
arrangement whereby they equally participate in the results of research and
development and the commercial promotion of a particular drug that is yet to
be invented. In accordance with the contractual arrangement entity A
undertakes the research and development activities and entity B undertakes
the manufacturing and commercial activities. The entities share all costs and
revenues. Identify this example as JO or JV? Clearly state your reasons.
 Cont….
3. On 1 January 20X1 entities A and B each acquired 30 per cent
of the ordinary shares that carry voting rights at a general
meeting of shareholders of entity Z for Br 300,000. Entities A
and B immediately agreed to share control over entity Z. For
the year ended 31 December 20X1 entity Z recognized a
profit of Br 400,000. On 30 December 20X1 entity Z
declared and paid a dividend of Br 150,000 for the
year 20X1. At 31 December 20X1 the fair value of each
venturer’s investment in entity Z is Br 425,000. However,
there is no published price quotation for entity Z.
 Cont…..
4. H Corporation and A company invested $200,000 and $300,000 Respectively in an
unincorporated joint venture on January 1, 2012. They agreed to share the profit
or loss of the joint venture in 2:3 ratio. Condensed financial statements for the
joint venture were as follows.
H and A Joint Venture
Income Statement
For year Ended December 31,2012

Revenue $1,250,000
Less: Cost and Expenses 937,500
Net income $312,500
Division of Net income:
H Corporation $??? = (a)
A Company ??? = (b)
Total $312,500
End of Chapter four