Inbound 320506396223752749 PDF

Preview

Summary

AFAR01 – JOINT ARRANGEMENTSRELATED STANDARDS – PFRS 11 – JOINT ARRANGEMENTS; PAS 28 –INVESTMENTS IN ASSOCIATES AND JOINT VENTURESTOPIC OUTLINELECTURE NOTESBASIC CONCEPTSJOINT ARRANGEMENTS - an arrangement of which two or more parties have joint control. JOINT CONTROL - the contractually agreed shari...

Description

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

AFAR01 – JOINT ARRANGEMENTS RELATED STANDARDS – PFRS 11 – JOINT ARRANGEMENTS; PAS 28 – INVESTMENTS IN ASSOCIATES AND JOINT VENTURES TOPIC OUTLINE Definition of Terms Basic Concepts

Types of Joint Arrangements Full PFRS

JOINT ARRANGEMENTS Accounting for Joint Arrangements

PFRS for SMEs Presentation and Disclosure

LECTURE NOTES BASIC CONCEPTS JOINT ARRANGEMENTS JOINT CONTROL

-

an arrangement of which two or more parties have joint control. the contractually agreed sharing of control of an arrangement which exists only when decisions about the relevant activities require UNANIMOUS CONSENT of the parties sharing control.

NOTES: (1) In contrast with significant influence and control, joint control is obtained by an investor through contractual agreement with fellow investors. No sole joint operator or venture obtains leverage over another joint operator or joint venture in respect of voting rights over financial and operating decisions. (2) Joint control exists when all of the parties to the contractual arrangement act collectively (or together) in directing the activities that significantly affect the returns of the arrangement. TYPES OF JOINT ARRANGEMENT The following are the types of joint arrangements under PFRS 11: (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. Those parties are called JOINT OPERATORS. (b) 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. Those parties are called JOINT VENTURERS. An entity applies judgment when determining the type of joint arrangement in which it is involved. Such judgment shall be made as follows: (1) Determine the type of joint arrangement by considering the entity’s rights and obligations arising from the arrangement. (2) Assess the rights and obligations by considering the following: (a) Structure and legal form of the arrangement, NOTE: A joint arrangement that is NOT structured through a SEPARATE VEHICLE is a JOINT OPERATION. A joint arrangement in which assets and liabilities relating to the arrangement are held in a SEPARATE VEHICLE can EITHER be JOINT VENTURE or JOINT OPERATION. A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognized by statute, regardless of whether those entities have a legal personality. (b) Terms of the contractual agreement, (c) Other facts and circumstances

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA

Page 1

of 12

Aim…Believe..Claim

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

ACCOUNTING FOR JOINT ARRANGEMENTS SUMMARY OF ACCOUNTING TREATMENTS (FULL PFRS) APPLICABLE ACCOUNTING TYPE OF REPORTING TREATMENT INVESTMENT STANDARDS Recognize own assets, liabilities, revenues and expenses plus share in PFRS 11 AND OTHER JOINT OPERATION JOINT CONTROL RELEVANT PFRSs assets, liabilities, revenues and expenses in joint operation JOINT VENTURE PFRS 11 PAS 28 Equity Method

NATURE OF RELATIONSHIP WITH INVESTEE

ACCOUNTING FOR JOINT OPERATION (NO SEPARATE RECORDS ARE MAINTAINED) No separate records are maintained for a joint operation usually if it is short-lived. In order to assess the performance of the joint operation, management accounts are prepared. Management accounts are accounts used for internal reporting purposes only. These are closed or eliminated when general purpose financial statements are prepared. A management account “JOINT OPERATION” is used to assess the financial performance of the entity. The following is the T-account of the joint operation account. Merchandise Contributions

Joint Operation xx Merchandise Withdrawals Purchase returns, discounts and xx allowances

xx

Purchases and Freight-in xx Sales returns, discounts and allowances xx Sales and other income items xx Expenses xx Unsold merchandise xx Net loss xx Net income xx NOTE: The T-account shown above is similar to an income summary account. Each joint operator shall set-up a joint operation account and personal accounts (i.e., receivable or payable) of other joint operators in his books. Any cash received or paid by the manager of a joint operation is recorded by the manager in cash account which may be described as “joint operation – cash (JO-Cash)” account. ACCOUNTING FOR JOINT OPERATION (SEPARATE RECORDS ARE MAINTAINED) Joint operators may want to set-up separate records for the joint operation. The separate records will be kept by one of the joint operators – normally the appointed manager. Each joint operator may set-up an “Interest in Joint Operation” account which will be used by each joint operator in recording his own investments withdrawals and share in profits or losses of the joint operation. Interest in Joint Operation x Contributions and Investments x Sales and other income received xx Cost and expenses paid for the x Withdrawals of contributions or joint operation x investments xx Share in the profit of joint x Share in loss of the joint operation x operation xx NOTE: A DEBIT BALANCE in the T-account means cash RECEIPT (receivable) while a CREDIT BALANCE means cash PAYMENT (payable) on cash settlement of the joint operation. ACCOUNTING FOR JOINT VENTURES An entity shall apply PFRS 11 first to determine the type of arrangement in which it is involved. If the entity determines that it has an interest in a joint venture, the entity shall recognize its interest as an investment and account for it using EQUITY METHOD in accordance with PAS 28. Under equity method, the investment is initially recognized at cost and adjusted thereafter for the post acquisition change in the investor’s share of net assets of the investee. Investment in Associate xx Share in Dividends xx Investment Income (P/L)* xx Share in Investee’s OCL (OCL) xx Share in Investee’s OCI (OCI) xx Impairment Loss (P/L) xx End. Balance

xx

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA of 12

Page 2

Aim…Believe..Claim

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

NOTE: Investment income (share in profit or loss) is recognized only to the extent of unrelated investor’s interests in the joint venture. Thus if a transaction is: (a) Downstream (from venturer to joint venture) – eliminate entire unrealized profit (b) Upstream (from joint venture to venture) – eliminate investor’s share in unrealized profit. IFRS for SMEs provide three (3) methods of accounting for its interest in the joint venture: (a) the cost model, (b) the fair value model, and (c) the equity model. SUMMARY OF ACCOUNTING TREATMENTS (PFRS for SMEs) Transactions Cost Model Fair Value Model Equity Model Original Inv. In JV xx Inv. In JV xx Inv. In JV xx Investment Cash xx Cash xx Cash Transaction Costs

Cash Dividends

Inv. In JV Cash

xx

Cash P/L

xx

P/L xx

xx

Year-end FV Adjustment

xx Cash

Cash P/L

xx

Inv. In JV P/L

xx

Inv. In JV Cash

xx

xx

Cash Inv. In JV

xx

xx

Inv. In JV P/L

xx

P/L

P/L

xx

xx Inv. In JV

xx

xx

xx

Share in Net income Share of Impairment Loss

xx

xx

Inv. In JV

xx

xx

PRESENTATION AND DISCLOSURE Investments accounted for under the equity method are presented as non-current assets in the statement of financial position. However, when such investments are classified as held for sale in accordance with PFRS 5, they are presented as current assets.

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA of 12

Page 3

Aim…Believe..Claim

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

DISCUSSION EXERCISES STRAIGHT PROBLEMS: INVESTMENT IN JOINT VENTURES (FULL PFRS)

1.

On January 1, 2019, RAIGOR CORP. and EARTHSHAKER INC. incorporated STONEHOOF COMPANY which has its fiscal and operational autonomy. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of STONEHOOF will require the unanimous consent of both entities. Both RAIGOR and EARTHSHAKER will have rights to the net assets of STONEHOOF. Both entities invested P500,000 each equivalent to 40:60 capital interest of STONEHOOF COMPANY. The financial statements of the joint venture for its 3-year operation are as follows: Year 2019 2020 2021

Net income (loss) P 700,000 (P 2,000,000) 1,500,000

Dividends declared P 200,000 -

REQUIREMENTS: Determine (a) the investment income for the years 2019-2021; (b) the balance of investment in joint venture for the years ended December 31, 2019-2021 for both RAIGOR and EARTHSHAKER? SOLUTION: RAIGOR INVESTMENT INCOME (LOSS) INVESTMENT BALANCE 2019 (700,000 x 40%) 280,000 [280,000 – (200,000 x 40%)] + 500,000 700,000 2020 (2M x 40%) vs. 700,000 (700,000) (700,000 – 700,000) 2021 (1.5M x 40%) – 100,000 500,000 500,000 NOTE: For 2020, there is unrecognized loss amounting to P100,000. Before the entity recognize any investment income, recognize the loss first. EARTHSHAKER INVESTMENT INCOME (LOSS) INVESTMENT BALANCE 2019 (700,000 x 60%) 420,000 [420,000 – (200,000 x 60%)] + 500,000 800,000 2020 (2M x 60%) vs. 800,000 (800,000) (800,000 – 800,000) 2021 (1.5M x 60%) – 400,000 500,000 500,000 NOTE: For 2020, there is unrecognized loss amounting to P400,000. Before the entity recognize any investment income, recognize the loss first.

2.

On January 1, 2019, MOGUL CORP. and AXE INC. incorporated DOTA INC. by investing P1,000,000 and P2,000,000, respectively for a capital ratio of 60:40. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of DOTA will require the unanimous consent of both entities. Both MOGUL and AXE will have rights to the net assets of DOTA. During 2019, DOTA’s financial statements provided the following data:  DOTA reported a net income of P1,000,000 for 2019 and paid cash dividends of P400,000 on December 31, 2019.  During 2019, MOGUL sold inventory to DOTA for P100,000 with a 40% gross profit on the transaction. 80% of the goods sold were sold by DOTA to third parties during the year.  During 2019, DOTA sold inventory to AXE for P200,000 with a 30% gross profit on the transaction. 60% of the goods were sold by AXE to third parties during the year.  On July 1, 2019, DOTA sold MOGUL a machinery at a loss of P50,000. At the time of sale, the machinery has remaining useful life of 2 years.  On October 1, 2019, AXE sold DOTA an equipment at a gain of P90,000. At the time of sale, the machinery has a remaining life of 3 years. REQUIREMENTS: (a) What is the investment income to be reported by MOGUL and AXE for the year ended 2019? (b) What is the balance of investment in DOTA INC. be reported by MOGUL and AXE on December 31, 2019? Share in net income (1M x 60%) Downstream sale of inventories: (P40,000 x 20%) Upstream sale of inventories:

MOGUL P600,000 (8,000) -

Upstream sale of depreciable asset: (50,000 x (1.5/2) x 60%) Downstream sale of depreciable asset: Investment Income Dividends received (400,000 x 60%) Beginning balance Investment balance

(1M x 40%)

AXE P400,000 -

(P60,000 x 40% x 40%)

(9,600)

22,500 _______ P614,500 (240,000) 1,000,000 P1,374,500

(90,000 x (2.75/3) (400,000 x 40%)

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA of 12

(82,500) P307,900 (160,000) 2,000,000 P2,147,900

Page 4

Aim…Believe..Claim

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

INVESTMENT IN JOINT VENTURES (PFRS for SMEs)

3.

On January 1, 2019, YURNERO INC., a small and medium enterprise (SME), invested P300,000 cash in a joint venture for 30% interest. Transaction costs of 10% of the purchase price were incurred by YURNERO.

On December 31, 2019, the joint venture reported net income of P500,000 and declared and paid cash dividends of P100,000. Also on that date, the fair value of the investment in joint venture is P400,000 and the estimated cost to sell is 10% of the fair value. The value in use of the investment is estimated at P380,000. REQUIREMEENTS: (a) What is the carrying amount of Investment in Joint Venture account to be reported by YURNERO as of December 31, 2019? (b) What is the net amount presented in profit or loss during 2019? Under the following models: (1) Equity Model (3) Fair Value Model (2) Cost Model SOLUTION: EQUITY MODEL Beginning balance P330,000 Ending balance 450,000 [(500,000 – 100,000) x 30%) + 330,000] Recoverable amount 380,000 Impairment loss 70,000 Adjusted ending balance 380,000 Transaction costs Share in P/L (500K x 30%) Dividend income Change in FV Impairment loss Net amount in P/L

150,000 (70,000) 80,000

(100K x 30%)

COST MODEL P330,000 330,000

FV MODEL P300,000 400,000

380,000 330,000

N/A 400,000

30,000 _______30,000

(30,000) (100K x 30%) 30,000 100,000 _______100,000

INVESTMENT IN JOINT OPERATIONS 4. LICH CORP. and FURION INC. incorporated DOTA INC. to manufacture a microchip to be used by the incorporating entities as component for their final products of cellular phones and tablets. The contractual agreement of the incorporating entities provided that the decisions on relevant activities of DOTA INC. will require the unanimous consent of both entities. LICH and FURION have rights to the assets and obligations for the liabilities, relating to the arrangement. The ordinary shares of DOTA will be owned by LICH and FURION in the ratio of 60:40. At the end of first operation of DOTA, the financial statements provided the following data: Inventory P1,000,000 Accounts payable P2,000,000 Land 3,000,000 Note payable 1,000,000 Building 5,000,000 Loan payable 4,000,000 Share capital 1,000,000 Retained earnings 1,000,000 Sales revenue 5,000,000 The contractual agreement of LICH and FURION also provided for the following concerning the assets and liabilities of DOTA INC:  LICH owns the land and incurs the loan payable of DOTA INC.  FURION owns the building and incurs the note payable of DOTA INC.  The other assets and liabilities are owned or owed by LICH and FURION on the basis of their capital interest in DOTA INC.  The sales revenue of DOTA includes sales to LICH and FURION in the amount of P1,000,000 and P2,000,000, respectively. As of the end of the first year, LICH and FURION were able to resell 30% and 60% of the inventory coming from DOTA to third persons. REQUIREMENTS: What is the amount of total assets, total liabilities and sales revenue to be reported by both LICH and FURION, respectively? SOLUTION: LICH Assets: [3M + (1M x 60%)] Liabilities: [4M + (2M x 60%)] Sales revenue: (5M – 700K – 800K) x 60%

5.

FURION

3,600,000

[5M + (1M x 40%)]

5,400,000

5,200,000

[1M + (2M x 40%)]

1,800,000

2,100,000

(5M – 700K – 800K) x 40% 1,400,000

ABADDON INC., BALANAR CORP. and CLINKZ CO. agreed to form a joint operation. Profit or loss of the joint operation shall be divided equally. The following were the transactions during the year:  Inventory costing P100 was sent by ABADDON to CLINKZ.  Freight paid by ABADDON on the inventories sent to BALANAR amounted to P5.

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA of 12

Page 5

Aim…Believe..Claim

AFAR 01_JOINT ARRANGEMENTS

BATCH 2020

Cash of P200 was sent by CLINKZ to BALANAR to be used to purchase additional inventory. BALANAR purchased additional inventory amounting to P250, P50 of which were made on account of BALANAR.  Cash sales made by BALANAR amounted to P800.  Operating expenses amounting to P55 were paid by BALANAR using his own cash.  Unsold inventories at year-end amounted to P30 and CLINKZ is charged the unsold inventory at cost. REQUIREMENTS: (a) Journalize the transactions above assuming there is a separate books maintained and no separate books maintained; (b) Compute for the joint operation net income (loss) and the final cash settlement for each joint operator.  

SOLUTION:

A B C D

E F

BOOKS OF A Joint Operation 100 Inventory Joint Operation 5 Cash Joint Operation 200 Payable to C Joint Operation 50 Payable to B Rec. from B Joint Operation Joint Operation Payable to B

H. 1

Payable to C

H. 2

Joint Operation Joint Operation Payable to B Payable to C

H. 3

Sh. In JO Profit Payable to B Payable to C Cash

NO SEPARATE BOOKS BOOKS OF B Joint Operation 100 Payable to A Joint Operation 5 Payable to A Joint Operation 200 Payable to C Joint Operation 250 JO - Cash AP JO - Cash 800 Joint Operation Joint Operation 55 Cash in bank

100 5 200 50

800 800 55 55 30

Payable to C 30

420 140 140 140 245 310 245

Rec. from B

800

C

H. 1

5

NO ENTRY

140 140 140 245 310 245

140

30 420 140 140 140 245 245 310 800

800 30 420

NO ENTRY Interest in JO Cash

200 200

50 NO ENTRY

50

Interest in JO Sh. In JO Profit

55

Rec. from B

NO ENTRY

140

800

Sh. In JO Profit Payable to A Payable to B Cash

NO ENTRY

Interest in JO Cash in bank

50

30

NO ENTRY

AP

NO ENTRY

200

BOOKS OF C

NO ENTRY

NO ENTRY

5

55

Joint Operation Joint Operation Payable to A Payable to B

800

100

800

Inventory

NO ENTRY

Interest in JO

Interest in JO Sh. In JO Profit

55

Rec. from B Joint Operation Joint Operation Payable to B

Joint Operation 10 0 Merchandise Withdrawals Purchase returns, discounts and 5 allowances 25 0 Sales and other income items 55 Unsold merchandise Net income

100

NO ENTRY

F

800

WITH SEPARATE BOOKS BOOKS OF B

D

E

200 50

30

JO - Cash

Purchases Expenses

B

200

420

Sh. In JO Profit Payable to A Payable to C Cash

Freight-in

A

5

30

Joint Operation Joint Operation Payable to A Payable to C

Merchandise Contributions

BOOKS OF A Interest in JO 100 Inventory Interest in JO 5 Cash

100

BOOKS OF C Joint Operation 100 Payable to A Joint Operation 5 Payable to A Joint Operation 200 Cash Joint Operation 50 Payable to B

NO ENTRY 55

NO ENTRY

55 140 140

Interest in JO Sh. In JO Profit

Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA of 12

140 140

Page 6

Aim…Believe..Claim