Acct3011 Joint Operations PDF

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Joint Operations - Definitions – AASB 11 Joint arrangement – “an arrangement whereby two or more parties have joint control” para 4 Joint control “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” para 7 – Note – same definitions as in AASB128 as we saw last week – Used for large projects in mining, property development & construction industries as projects require varying degrees of management, resources & finance. Common in the mining industry which requires insignificant venture/up-front capital. Usually individual companies are not willing to take such risky investment by themselves, so they undertake large, new, speculative projects with other shareholder(s). Joint arrangements and joint control – Key feature of a joint arrangement: there will be a contract assigning joint control to all parties to the JA. – We therefore need to refer to the agreement to identify: – whether there is ‘control’ as defined by AASB10 joint control – whether control is in the hands of more than one party, and therefore assess all details of the relationship including voting rights of joint venturers – What the joint venture will do & for how long – Who has responsibility for management – Contribution of funds – How the output, income, expenses or results of the joint venture will be shared

Joint venture – (as we saw last week) “is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangements” para 16 Joint operation “is a joint arrangement whereby the parties that have joint control of the arrangement have rights to individual the assets, and obligations for the liabilities” para 15 Not a separate legal identity like joint venture. Investors won’t have rights to the net assets, but, according to their contract, a right to a share of each individual asset, obligation and expense of the joint operation. Assessing rights and obligations requires professional judgement with consideration to structure, legal form, terms of the agreement, and other factors (see para 17) Joint ventures – Separate entity usually involved (e.g. company, partnership or trust) – Corporate form is often used when limited liability is an issue as a jointly controlled company can enter into contracts in its own name & borrow funds – Usually share profits of the entity but venturers’ can share in output (thus a right to ‘net assets’) – Joint venture entity maintains accounting records to prepare its own financial statements – Joint venturer must apply the equity accounting method AASB 11(para 24). Equity accounting logical for a JV? Contract says the investors have rights to a share of the Net Assets.

Joint operation – the focus today – Separate entity is generally not formed – Uses joint operators’ assets & resources – Each operator normally undertakes their own borrowings – Joint operation maintains accounting records for internal management purposes only

 usually a part of the question

Management fee is supposed to be 100. Therefore the joint operation will have a liability of 50 This is just cash transactions

This table shows accruals

ABC (20%) = 2 000 +360 – 480 = 1880 (9400*20%) Accounting by the joint operator – And now, all joint operators must apply the ‘line by line proportional method’ and so recognise: – Share of assets and liabilities held/incurred jointly – Share of expenses of the JO + expenses incurred directly – Share of income of the JO + sales earned directly – That is, we speak of the ‘line by line method’ for JOs (i.e., proportional consolidation) para 20 The other side of these journal entries will be the elimination of the investment. Accounting by the Joint Operator - the line by line method

– Step 1 – Record contributions to JO – If the operator has contributed a non-cash asset, consider whether risks of ownership have been transferred – Step 2 – At the end of each reporting period recognise our share of every asset, liability and expense along with any distribution of inventory. – Step 3 – As required, record or adjust depreciation for % of JO assets recognised by operator in the operators’ financial statements. Depreciation rates determined by each operator’s accounting policies The line by line method applied within the joint operator: Step 1 – (a) the balance in interest in joint operation will become 0

(c) -Assets. (d) – liabilities proportional line by line through Journal entries (Not consolidation worksheet)

Share of expenses

- LMN has now fully eliminated its interest (or investment) in the JO Interest in JO. LMN 1/7/x9 Cash and 5 000 30/6/x0 (c) Assets borrowings Cash 900 (c) Assets 30/6/x0 (d) - liabilities 210 6 110

4 910 1 200 6 110

Step 3 – Depreciation and LMN recording of management fee

$50 cash payment during the year, $50 still owing. $50 (50% share of 100) is effectively payment to MNL itself i.e. mng. fee rev 

Finally, Distribution of output

ABC = 900 sales revenue CoP 640 = cost of production 480 + depreciation (further CoP) 60 + mining lease 100 CoGS = 640*75%, Inventory 640*25% Evaluation of the line by line method – Does the operator’s interest in an asset meet the definition of asset? (Framework para 4.3; ‘a present economic resource controlled by the entity…..’ it’s meets definition, JO agreement saying the investor has a right of a share. E.g. Mining lease, ABC has a right of 20% of the $5m. – The joint operator doesn’t unilaterally control the asset; control is shared (note – while we name each of these assets and liabilities ' in JO’, they end up merged into those line items on the consolidated BS and P&L – Potentially distort the operator’s financial statements because it is showing assets we fully control with assets we don’t fully control. – And then all of this is muddied in with investments in subsidiaries and associates potentially confusing for users to understand the entirety of what they are seeing. – BUT – arguably reflects the substance & economic reality of an operator’s interest in a JO – the agreement says that operator does have a right to that share of assets etc. Possible exam questions on this topic? The exam: We could ask a technical question including consideration of accounting by the joint operator, focused on contributing in cash, possibly including management fees, required depreciation of NCAs, distribution of output, and subsequent sale of output. We would not ask a question focused on contribution of other assets (eg NCAs) or including other intercompany transactions (that is, focus on 8.6.2 in the textbook and on example 8.7 part b) as your guidance on exam depth) Consider also the potential for written questions. For example: – Explaining the line by line method, explaining how the accounting outcomes for a joint operator would differ depending on whether the joint arrangement was a joint venture or a joint operation, etc...