Advance

1. Chapter 4
Joint arrangements
and
Public Enterprises

2. IFRS 11
Joint Arrangements

3. Introduction
• 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.
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4. 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

5. Formation
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 B.O.Ds(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
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6. Introduction
• 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
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7. Figure: Assessing joint control

8. 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. 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.
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Example: Assessing joint control

10. 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.

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.
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Example: Assessing joint control

12. 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

13. Assess the parties’ rights and
obligations arising from the
arrangement by considering:
(a) the legal form of the separate
vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances
Joint operation Joint venture
Assessment
of the parties’
rights and
obligations
Accounting for assets, liabilities, revenues
and expenses in accordance with the
contractual arrangements
Accounting for an
investment using the
equity method
Not structured through a
separate vehicle *
Structured through a
separate vehicle *
Parties have rights
to the net assets
Parties have rights to the assets
and obligations for the liabilities
Accounting
reflects
the parties’
rights and
obligations
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Classification

14. Separate vehicles
Contractual
terms
Other
Legal form
Yes
Yes
No
No
No
Yes
Joint Venture
Joint
Operation
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Do the parties have rights to the assets
and obligations for the liabilities?
Do the parties have contractual rights to
the assets, and obligations for the
liabilities?
Is the arrangement designed so:
a) Its activities primarily aim to provide
parties with an output, and
(b) It depends on the parties for settling
liabilities?

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

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

17. 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
establishes each party’s share
in the profit or loss relating to
the activities of the
arrangements
• The contractual arrangement
establishes the allocation of
revenues and expenses on the
basis of the relative performance
of each party to the joint
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

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: Construction and real estate 18

19. • 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)
Example:
Mining 19

20. 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

21. 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

22. • 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.
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Equity method

23. 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

24. 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

25. 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

26. 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

27. • 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.
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Disclosures

28. 28
Joint arrangements and associates
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
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29. • 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
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Judgements and estimates

30. PUBLIC Enterprises
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31. 1.2 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
… .

32. • 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

33. 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

34. 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

35. 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.

36. 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

37. 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

38. DISSOLUTION AND WINDING-UP
Grounds for Dissolution.
• An enterprise may be dissolved for any one of the
following reasons:
1.The 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.