MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

DEPARTMENT OF ACCOUNTANCY

ACT130: Accounting for Special Transactions

Joint Arrangements

LESSON OBJECTIVES
At the end of this module, you will be able to:
1. Know joint arrangement and state its characteristics;
2. Know the difference between a joint operation and a joint venture;
3. Account for joint operations
4. Describe the accounting requirements for joint ventures

OVERVIEW
Accounting for interest in joint ventures and strategic alliances through joint control was previously
covered in the former PAS 31, Interests in Joint Ventures. The first version of the former PAS 31
was issued by the IASC in December 1990, a revised version was issued by the IASB in
December 2003, and in between then and the current PFRS 11, there were amendments made
for improvements. The change in approach is necessary to reflect more accurately the substance
of an entity’s involvement in joint arrangements.

ABSTRACTION
Joint Arrangement
Joint arrangement is “an arrangement of which two or more parties have joint control.” (PFRS
11.4)

Essential Elements in the Definition of Joint Arrangements:

a) Contractual arrangements
b) Joint Control

Contractual Arrangement
The existence of contractual arrangement for sharing of control over an investee distinguishes
interests in joint arrangements from other investments, such as investments in equity securities
measured at fair values (PFRS 9), investment in associate (PAS 28), and investment in subsidiary
(PFRS 3 and PFRS 10). PFRS 11 is not applicable in the absence of such an agreement.

Evidence of Contractual Arrangement

The contractual arrangement may be evidenced in a number of ways, for example, by contract
between parties or minutes of discussion between the parties. In some cases, the arrangement
is incorporated in the articles or other by-laws of the joint arrangement. Whatever its form, the
contractual arrangement is usually in writing and deals with such matters as:
a. The activity, duration and reporting obligations of the joint arrangement;
b. The appointment of the board of directors or equivalent governing body of the joint
arrangement and the voting rights of the parties;
c. Capital contributions by the parties, and
d. The sharing by the parties of the output, income, expenses or results of the joint
arrangement.

The contractual arrangement establishes joint control over the joint arrangement. Such a
requirement ensures that no single party is in a position to control the activity unilaterally.

Joint Control

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Joint control is “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.” (PFRS 11.7)

In contrast with significant influence and control, an investor obtains joint control over an investee
through a contractual agreement with fellow investors. Financial and operating decisions relating
to the joint arrangement’s activities require consent of each of the parties sharing joint control. No
single party obtains leverage over another in respect to voting rights over financial and operating
decisions.

Joint control exists when all parties sharing joint control over the arrangement act collectively in
directing the activities that significantly affect the returns of the arrangement.

An arrangement is considered a joint arrangement even if not all of the parties to the arrangement
have joint control. It is sufficient that at least two of those parties share joint control.

PFRS 11 distinguishes between:

a. Parties that have joint control of a joint arrangement (referred to as joint operators or joint
venturers), and
b. Parties that participate in, but do not have joint control of, a joint arrangement.

Party to a joint arrangement is “an entity that participates in a joint arrangement, regardless
of whether that entity has joint control of the arrangement.” (PFRS 11 - Appendix A)

Nature of Types of Interest in Applicable Accounting

Relationship Investment Voting Rights Reporting Treatment for
with Investee of Investee Standard Investment

Regular Investor Investment in Less than 20% PFRS 9 Fair Value

FVPL or FVOCI

Significant Investment in 20% to 50% PAS 28 Equity Method**

Influence Associate

Control Investment in 51% to 100% PFRS 3 and Consolidation**

Subsidiary PFRS 10

Joint Control a. Joint Contractually PFRS 11 & other Recognize own

Operation Agreed relevant assets, liabilities,
standards revenues and
expenses plus
share in the
asset, liabilities,
revenue, and
expenses in the
joint operation

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

b. Joint PFRS 11 and Equity Method**

Venture PAS 28

**However, in the separate financial statements, investments in associates, subsidiaries, and

joint ventures are accounted for either: (a) at cost, (b) at fair value in accordance with PFRS 9,
(c) using the equity method.

Types of Joint Arrangement

An entity is required to determine the type of joint arrangement in which it is involved. The types
of joint arrangements are:
a. Joint Operations – is “a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the assets and obligation for the liabilities, relating to the
arrangement. Those parties are called joint operators.” (PFRS 11.15)
b. Joint Ventures – 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 call joint
venturers.” (PFRS 11.16)

An entity applies judgement when determining the type of joint arrangement in which it is involved
by:
a. Considering its rights and obligations arising from the arrangement.
b. Assessing its rights and obligations in relation to the:
i. Structure and legal form of the arrangement,
ii. Terms of the contractual agreement, and
iii. Other facts and circumstances.

Rights and Obligations Arising from the Arrangement

The classification of joint arrangements requires the parties to assess their rights and obligations
arising from the arrangement.
a. If the contractual arrangement confers to the parties that have joint control rights to the
assets and obligation for the liabilities of joint arrangement, the arrangement is a joint
operation.
b. If the contractual arrangement confers to the parties that have joint control rights to the
net assets of the joint arrangement, the arrangement is a joint venture.

Assessment of Right and Obligations

Structure and legal form of the arrangement:
a. A joint arrangement that is not structured through a separate vehicle is a joint operation.
b. A joint arrangement in which the assets and liabilities relating to the arrangement are held
in a separate vehicle can either be a joint venture or a joint operation.

Separate Vehicle – “a separately identifiable financial structure, including separate entities or

entities recognized by statue, regardless of whether those entities have a legal personality.”
(PFRS 11 – Appendix A)

Accounting for Joint Operation Transactions

Separate accounting records may or may not be required for the joint operation itself and financial
statements may or may not be prepared for the joint operation. However, the joint operators may
prepare management accounts so that they can assess the performance of the joint operation.

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

Management accounts are used for internal reporting purposes only. These are closed or
eliminated when general purpose financial statements are prepared. A management account may
take the form of a “Joint Operation” account as shown below:

Joint Operation
Merchandise Contributions xxx xxx Merchandise Withdrawals
Freight-In xxx xxx Purchase Returns, Discounts, and Allow.
Sales Returns, discounts, and Allow. xxx xxx Sales and other items of Income
Expenses xxx xxx Unsold merchandise, if any
Loss Profit

Accounting for Joint Ventures

An entity first applies PFRS 11 to determine the type of arrangement in which its is involved. If
the entity determines that it has an interest in a joint venture, the entity recognizes that interest
as an investment and account for it using equity method under PAS 28 Investment in Associates
and Joint Ventures, unless the entity is exempted from applying equity method, the investment is
initially recognized at cost, subsequently adjusted for the investor’s share in the changes in equity
of the investee. Such share includes the investor’s share in the investee’s (1) profit or loss, (2)
dividends declared, (3) results of discounted operations, and (4) other comprehensive income.

APPLICATION
Problem 1 (Joint Operation)
A, B, and C 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:
a. Inventory costing P100 was sent by A to B.
b. Freight paid by A on the inventories sent to B amounted to P5.
c. Cash of P200 was sent by C to B to be used to purchase additional inventories.
d. B purchased additional inventories amount to P250, P50 of which were made on
account of B.
e. Cash sales made by b amounted to P800.
f. Operating expenses amounting to P55 were paid by B using his own cash.
g. Unsold inventories at year-end amounted to P30.

Preparation of pertinent entries:

Books of A Books of B Books of C
a. Joint Operations 100 Joint Operations 100 Joint Operations 100
Merch. Invty. 100 Payable to A. 100 Payable to A. 100

b. Joint Operations 100 Joint Operations 100 Joint Operations 100

Cash 100 Payable to A. 100 Payable to A. 100

c. Joint Operations 200 Joint Operations 200 Joint Operations 200

Payable to C. 200 Payable to C. 200 Cash 200

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 MINDANAO STATE UNIVERSITY - GENERAL SANTOS CITY
COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY
DEPARTMENT OF ACCOUNTANCY

d. Joint Operations 50 Joint Operations 50 Joint Operations 50

Payable to B 50 Cash 50 Payable to B 50

e. Receivable from B 800 Cash 800 Receivable from B 800

Joint Operations 800 Joint Operations 800 Joint Operations 800

f. Joint Operations 55 Joint Operations 55 Joint Operations 55

Payable to B 55 Cash 55 Payable to B 55

Using the T-Account shown above, compute the Profit/Loss of the Joint Operation. Your answer
must be P420 Profit. Note: account for the Unsold Inventory

Problem 2 (Joint Venture)

On January 1, 20x1, ABC Co. entered into a joint arrangement classified as a joint venture. For
an investment of P500,000, ABC Co. obtained 30% interest in the Joint Venture, Inc. During the
year, Joint Ventures, Inc. reported profit of P1,000,000 and other comprehensive income of
P200,000, for a total comprehensive income of P1,200,000. Joint venture, Inc. declared
dividends of P600,000 during the year.
Requirement: How much is the carrying amount of the investment in joint venture on December
31, 20x1?

Solution:
Initial Investment, 1/1/x1 P500,000
Share in Profit (1M x 30%) 300,000
Share in OCI (200T x 30%) 60,000
Less: Dividends (600T x 30%) (180,000)
Carrying Amount, 12/31/x1 P680,000

REFERENCES
BALOCATING, R. (2015). Advanced Accounting. Quezon City: C&E Publishing, Inc.
Dayag, A. J. (2015). Advanced Accounting 1. Manila: Lajara Publishing House.
MILLAN, Z. V. (2018). Accounting for Special Transactions. Baguio City: Bandolin Enterprise.