Advanced financial accounting

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.
3

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
5

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
6

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.
9
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.
11
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
13
Classification

14. Separate vehicles
Contractual
terms
Other
Legal form
Yes
Yes
No
No
No
Yes
Joint Venture
Joint
Operation
14
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. 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.

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)
Example:
Mining 20

21. 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

22. 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

23. 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.

24. 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

25. 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

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.
26
Equity method

27. 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

28. 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

29. 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

30. 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

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.
31
Disclosures

32. 32
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
32

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
33
Judgements and estimates

34. Examples

35. 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.

36. 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.

37. 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

38. 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)

39. 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 … .

40. 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

41. • 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

42. 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

43. 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.

44. 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

45. 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.

46. 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

47. 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.

48. 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.

49. 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

50. End of Chapter four