Joint Ventures are formed when two or more companies join hands to form an entity. Read this article to know in detail about Accounting Standard 27, Financial Reporting of Interests in Joint Ventures including types of joint ventures, disclosure requirements, etc.
Introduction – Financial Reporting of Interests in Joint Ventures
AS 27 Financial Reporting of Interests in Joint Ventures establishes guidelines that help us in the recording of assets, liabilities, income, and expenses of joint ventures. This standard also helps in the preparation of consolidated financial statements and making adjustments relating to joint ventures in those consolidated financial statements.
Regardless of the structures or forms under which the joint venture operations take place, this standard should also be followed in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income, and expenses in venturers’ and investors’ financial statements.
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Types of Joint Ventures
1. Jointly Controlled Operations
Some joint ventures operate by utilising the resources and assets of the venturers rather than forming a company, partnership, or other entity or creating a financial structure that is distinct from the venturers themselves. Each entrepreneur carries their inventories and employs their fixed assets. Additionally, it obtains its funds, incurs its expenses and liabilities, and is responsible for all of its financial responsibilities. Along with the venturer’s comparable activities, the joint venture’s activities may be carried out by the venturer’s workers. The joint venture agreement typically stipulates how profits from jointly controlled operations and any shared costs will be distributed among the venturers.
A venturer should recognise the following in its separate financial statements and subsequently in its consolidated financial statements about its interests in jointly operated operations: the property it owns, the obligations it assumes, the costs it incurs, and the portion of the joint venture’s profits that it receives.
No adjustments or other consolidation procedures are necessary concerning the venturer’s assets, liabilities, income, and expenses when it presents consolidated financial statements because they are already recognised in the venturer’s separate financial statements and, as a result, in its consolidated financial statements.
2. Jointly Controlled Assets
A venturer should recognise the following in its separate financial statements and subsequently in its consolidated financial statements about its interest in jointly controlled assets:
- Share in jointly controlled assets
- Liabilities that have been incurred
- Joint share of liabilities
- Income and expenses from the sale of output of joint venture.
The venturer’s assets, liabilities, income, and expenses are already recorded in its separate financial statements, and as a result, these items do not require any modifications or other consolidation procedures when the venturer provides consolidated financial statements.
3. Jointly Controlled Entity
A joint venture that involves the creation of a company, partnership, or other entity in which each venturer has an interest is known as a jointly controlled entity. The entity runs similarly to other businesses, with the exception that the venturers’ agreement creates joint authority over the entity’s economic activity.
A jointly controlled entity manages the joint venture’s assets, accrues liabilities and costs, and generates income. It is allowed to sign agreements under its name and raise money for joint venture activities. Although some jointly controlled businesses also involve a sharing of the production of the joint venture, each venturer is entitled to a share of the profits of the jointly controlled entity.
The venturers may contribute assets that will be managed jointly to an entity that is jointly controlled. There are also cases where joint ventures are set up to handle certain specific areas such as marketing, product creation, distribution, and also after-sales support services.
The records as well as the financial statement are prepared and kept separately by a jointly controlled entity.
Reporting in Financial Statement of Venturer
Financial Reporting of Interests in Joint Ventures firm should be reported as an investment in a venturer’s separate financial statements. The jointly controlled entity often receives financial or other resource contributions from each venturer. These contributions are recorded in the venturer’s accounting records and recognised as investments.
Consolidated Financial Statement of Venturer
It is mandatory to prepare a consolidated financial statement for the venture except in the following cases-
- When the Financial Reporting of Interests in Joint Ventures in the entity is acquired with a view to subsequent disposal soon and
- The operates under severe long-term restrictions that significantly limit its ability to transfer funds to the venturer.
Apart from these two cases, a venturer should report its interest in a jointly controlled entity using proportionate consolidation in its consolidated financial statements.
Transactions Between Venturer and Joint Venture
The gain or loss at the time of the sale or donation of the asset by the venturer must be consistent with the overall transaction’s conditions. Although the substantial risks and benefits of ownership are transferred by the venturer, only that portion of gain or loss attributable to the interest of other venturers should be recognised. In case of a decrease in the NRV i.e. net realisable value of current assets or an impairment loss, the venturer should record the whole amount of the loss.
In case of the purchase of an asset by the venturer, he/she should wait to recognise its share of the joint venture’s profits from the transaction till the asset is sold to a third party that is not associated with the joint venture. A venturer should account for its share of losses from these transactions in the same manner as profits, except that losses should be reported right once if they lower net realisable value.
Learn more about Risks of Joint Ventures
Disclosure
The venturer is required to disclose all the contingent liabilities from the total of other contingent liabilities except when there is a tiny chance of a loss. These are-
- Contingent liabilities the venturer has incurred in connection with its interests in joint venturers and share in contingent liability with other ventures
- It is necessary for the venturer to separately declare the total value of the following commitments from other obligations concerning its stakes in joint ventures; Any investments made by the venturer in connection with its interests in joint ventures, its share of investments made with other venturers, and its investment in the joint ventures themselves.
- The venturer must submit all its partnerships. If there is a jointly run firm, then the name, % of ownership interest, and country of incorporation or domicile.
- All the assets, liabilities, income, and expenses that relate to the ownership in the jointly owned firms must be indicated by the venturer in the separate financial statements.
Conclusion
We hope that this article has clarified in detail about financial reporting of interests in joint ventures, types of joint ventures, how to report transactions between them, and other statutory disclosure requirements.
In case of further clarification regarding Financial Reporting of Interests in Joint Ventures, you can contact us at Vakilsearch, we offer Joint Venture Documentation preparation services to ensure all the above points are kept in mind.
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