CHAPTER ONE

Over view of accounting for joint ventures and Public enterprises

1. Accounting for joint ventures
1.1 Nature of Joint Venture Businesses
A joint venture is an association of two or more persons based on contract who combine their
money, property, knowledge, skills, experience, time or other resources in furtherance of a
particular project or undertaking, usually agreeing to share the profits and the losses and each
having some degree of control over the venture.
The following terms related to joint venture.
Joint venture: a contractual agreement whereby two or more parties undertake an economic
activity that is subject to joint control.
Venture: a party to a joint venture and has joint control over that joint venture.
Investor in a joint venture: a party to a joint venture and does not have joint control over that
joint venture
Control; the power to govern the financial and operating policies of an activity so as to obtain
benefits from it.
Joint control: the contractually agreed sharing of control over an economic activity.

Whether a joint venture exists is a question of fact to be decided according to the facts and
circumstances of each case.  Generally, the object and the motive behind a joint venture are the
anticipated profits derived from a specific business enterprise.
 Some of the essential elements of a joint venture include:
 A communal interest and joint effort in reaching the purpose of the joint venture
 The right of each co-venturer party to control and manage property to be used in the
venture
 The right of each co-venturer party to direct the policy of conduct of which will guide the
joint venture
 Sharing in both the profits and losses from the venture
 The existence of a contract between the various parties
 Proportionate contributions by each party
 Mutual risk-sharing

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However, none of these elements alone are sufficient. Thus, a joint venture exists when two or
more persons combine in a joint business enterprise for their mutual benefit with an
understanding that they are to share in the profits or losses and each to have a voice in its
management.
 Benefits of joint venture
Businesses of any size can use joint ventures to strengthen long-term relationships or to
collaborate on short-term projects. A successful joint venture can offer:
 access to new markets and distribution networks
 increased capacity
 sharing of risks and costs with a partner
 access to greater resources, including specialized staff, technology and finance
A joint venture can also be very flexible. For example, a joint venture can have a limited life
span and only cover part of what you do, thus limiting the commitment for both parties and the
business' exposure.
 The risks of joint ventures
Collaborating with another business can be complex. It takes time and effort to build the right
relationship.
Problems are likely to arise if:
 The objectives of the venture are not 100 per cent clear and communicated to everyone
involved.
 The partners have different objectives for the joint venture;
 There is an imbalance in levels of expertise, investment or assets brought into the venture
by the different partners;
 Different cultures and management styles result in poor integration and cooperation
 the partners don't provide sufficient leadership and support in the early stages
1.2 Types of Joint ventures
Joint ventures may appear in incorporated or unincorporated form (i.e. a joint venture need not
result in the creation of a separate legal entity). “Strategic alliances” in which companies agree to
work together to promote each other’s products or services may also be considered joint
ventures.

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Depending on the underlying economic activity, it can be established as business enterprise or as
project. Moreover, based on the contractual agreement between ventures, Joint venture can be
organized in one of the following three ways:

 Jointly controlled operations. There may not be a joint venture legal entity. Instead, the
joint venture uses the assets and other resources of the ventures. Each venturer uses its
own assets, incurs its own expenses, and raises its own financing. The joint venture
agreement states how the revenue and expenses related to the joint venture are to be
shared among the ventures.
 Jointly controlled asset. Ventures may jointly control or own the assets contributed to or
acquired by a joint venture. Each venture may receive a share of the assets' output and
accept a share of the expenses incurred. There may not be a joint venture legal entity.
 Jointly controlled entities. This type of joint venture involves a legal entity in which each
venture has an interest. The new legal entity controls the joint venture's assets and
liabilities, as well as its revenue and expenses; it can enter into contracts and raise
financing. Each venture is entitled to a share of any output generated by the new entity. A
jointly controlled entity maintains its own accounting records and prepares financial
statements from those records. If a venture contributes cash or other assets to a jointly
controlled entity, the venture records this transfer as an investment in the jointly
controlled entity.
According to the new standard IFRS 11 which was being applied starting from January 1, 2013,
classification and accounting treatment of joint arrangements is summarized in the flowchart
below:
IFRS 11 Joint arrangement

No legal entity Separate legal entity

Joint operation/Assets Joint venture

Recognition of A,L, R,
Equity method
Exp.

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Joint ventures involve the creation of a separate legal entity. They are different from
collaborative arrangements, jointly controlled operations and jointly controlled assets, in which
activities normally are not conducted through a separate entity, like a corporation or partnership.
1.3 Accounting for investment in JV Businesses
Generally accepted accounting principles (GAAP) recognize three different approaches to the
financial reporting of investments:
 The fair-value method.
 The consolidation of financial statements.
 The equity method.
Accounting for a joint venture depends upon the level of influence exercised over the venture.
Because voting power, typically accompanies ownership of equity shares, influence increases
with the relative size of ownership. The resulting influence can be very little, a significant
amount, or, in some cases, complete control. If a significant amount of influence is exercised, the
equity method of accounting must be used provided that the investor company is in incorporated
form.
How can we know existence of significant Influence?
The essential rules governing the existence of significant influence are:
 Voting power. Significant influence is supposed to be present if an investor and its
subsidiaries hold at least 20 percent of the voting power of a joint venture. This is the
overriding rule governing the existence of significant influence.
 Board seat. The investor controls a seat on the joint venture’s board of directors.
 Personnel. Managerial personnel are shared between the entities.
 Policy making. The investor participates in the policy making processes of the joint venture.
For example, the investor can affect decisions concerning distributions to shareholders.
 Technological dependency or Technical information. Essential technical information is
provided by one party to the other.
 Transactions. There are material transactions between the entities.

No single one of these guides should be used exclusively in assessing the applicability of the
equity method. Instead, all are evaluated together to determine the presence or absence of the
sole criterion: the ability to exercise significant influence over the investee. To provide a degree
of consistency in applying this standard, the FASB provides a general ownership test: If an

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investor holds between 20 and 50 percent of the voting stock (direct or indirect) of the investee,
significant influence is normally assumed and the equity method is applied.

 Equity Method

If significant influence is present, an investor should account for its investment in a joint venture
using the equity method. There is a possibility for extended application of Equity Method
Applicability; for some investments that either fall short of or exceed 20 to 50 percent ownership,
the equity method is nonetheless appropriately used for financial reporting.
The equity method employs the accrual basis for recognizing the investor’s share of investee
income. Accordingly, the investor recognizes income as it is earned by the investee. In essence,
the equity method mandates that the initial investment be recorded at cost, after which the
investment is adjusted for the actual performance of the joint venture. The following calculation
illustrates how the equity method operates:
+ Initial investment recorded at cost
+/- Investor's share of joint venture profit or loss
- Distributions received from the joint venture
= Ending investment in joint venture 
The investor’s share of the joint venture’s profits and losses are recorded within the income
statement of the investor. In applying the equity method items appearing separately in the
investee’s income statement require similar treatment by the venture, for example if the joint
venture records changes in its other comprehensive income, the venture (investor) should record
its share of these items within other comprehensive income, as well. This handling is intended to
mirror the close relationship between the two companies. However; the non-operating income
should be reported as a separate item only if the figure is considered to be material with respect
to the venture’s (investor’s) own operations.

If a joint venture reports a large loss, or a series of losses, it is possible that recording the
investor’s share of these losses will result in a substantial decline of the investor’s recorded
investment in the joint venture. If so, the investor stops using the equity method when its
investment reaches zero. If an investor’s investment in a joint venture has been written down to
zero, but it has other investments in the joint venture (such as loans), the investor should
continue to recognize its share of any additional joint venture losses and offset them against the

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other investments, in sequence of the seniority of those investments (with offsets against the
most junior items first). If the joint venture later begins to report profits again, the investor does
not resume use of the equity method until such time as its share of joint venture profits have
offset all joint venture losses that were not recognized during the period when use of the equity
method was suspended.

A. Accounting for a corporate joint venture

A corporate joint venture refers to a corporation owned and operated by a small group of
business (the “joint ventures’ as a separate and specific business or project for the mutual
benefit of the members of the group). A government may also be a member of the group.
 Each joint venture may participate in the overall management of the venture directly or
indirectly.
 The ownership of a corporate joint venture seldom changes and its stock is usually not
publicly traded.
 Important points to bear in mind are:
1. A separate rate of accounting records is to be established for every corporate joint
venture of large size and long duration.
2. Each venture’s capital account is credited in the accounting records of the joint
venture for the amount of cash or non cash investments.
3. The use of Accrual basis of accounting and periodic financial statements for the
venture permit regular reporting of the share of net income or net loss allocable to
each venture.
4. The accounting records of such a corporate joint venture include the usual ledger
accounts for assets, liabilities, owner’s equity revenue and expenses.
5. The entire accounting process should be in conformity with GAAP.
 Investors should account for investments in common stock of a corporate joint
venture by the equity method.
B. Accounting for an incorporated joint venture
In an incorporated joint venture the investor (venturer) owns an undivided interest in each
asset and is proportionately liable for its share of each liability. Two alternative methods for
accounting for an unincorporated joint venture may be adopted by investors. These are

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1. The equity method of accounting for the investments and
2. The proportionate share method of accounting for the investment.
Example: Alem Company and Gebre Company each invested $500,000 for a 50% interest in
an un incorporated joint venture on January 2-2018 condensed financial statements for the
joint venture, Algo Co. for 2018 were as follows.
Revenue 1,500,000
Costs and expenses 1,000,000
Net income $500,000
Division of Net income
Alem Company (50%) 250,000
Gebre company (50%) 250,000

ALGO Company
A joint Venture
Statement of ventures capital
For year ended Dec 31, 1998
Alem Co Gebre Co Combined
Investment on January 2, 2018 500,000 500,000 1000,000
Add: Net income for the year 250,000 250,000 500,000
Ventures capital end of the year 750,000 750,000 1,500,000

B/sheet
Assets Liabilities and Venture capital
Current Assets(given) 1,800,000 Current liable (given) 800,000
Other Assets (given) 2,500,000 Long term debt (given) 750,000
Alem Capital 750,000
Gebre Capital 750,000
Total Assets 4,300,000 4,300,000

Required:
Record the journal entries by Alem Company and Gebre Company by:
A. The equity method of Accounting and
B. The proportionate share method of Accounting.

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  Under the equity method of accounting both Alem company and Gebre company
would prepare the following journal entries to reflect their investments in AlGo
Company.
January 2 , 2018
Investment in AlGo Company 500,000
Cash 500,000
(Entry by the separate companies (Alem and Gebre)
Dec 31, 2018
Invest in AlGe Company 250,000
Investment income 250,000
(Entry in the partners in their own companies)
B. Under the proportionate share method of accounting, in addition to the above two journal
entries, both Alem Co and Gebre Co. would prepare the following journal entry for their
respective shares of the asset, liabilities, revenue and expenses of AlGo Company.
Dec 31 2018
Current Assets 50% cash 900,000
Other Assets 50% 1,250,000
Costs and expenses 500,000
Investment income 250,000
Current liabilities 50% equally 400,000
Long ter Liability 1,000,000
Revenue 750,000
Investment in AlGo Company 750,000

Dissolved or Terminated?

Dissolution or termination of a joint venture will depend largely on the facts of the
circumstances.  Joint ventures may be terminated through the following means:

 According to termination or dissolution provisions in the joint venture contract.  (Most

joint venture contracts will state a date upon which the venture is to expire)
 According to a court-ordered decree

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  At the will of any one of the co-venturers.  Again, provisions regarding at-will dissolution
will likely be contained in the contract.
The following are some of the common reasons why joint ventures are dissolved:

 The stated aims of the venture have not been met, or have already been satisfied
 The aims of the venture have become impossible to fulfill
 One or more parties disagree with the aims of the venture, or have developed different
business goals
 Market conditions have rendered the joint venture unprofitable, inappropriate, or irrelevant
 Legal or financial hardships have arisen

Upon dissolution, the different co-ventures are usually entitled to profits which are proportionate
to the amount of contributions that they have provided.  Or, distributions may be dictated by the
terms contained in the contract.  Debts will also be dealt with similarly.

However, if there are any outstanding claims or liabilities, these will likely be deducted from the
party’s distributions during the wind-up phase.  Finally, a party to a joint venture may be
terminated from the project prior to dissolution if they have significantly refused to perform their
obligations.