JOINT ARRANGEMENTS

TOPIC OUTLINE

LECTURE NOTES
BASIC CONCEPTS
JOINT ARRANGEMENTS - an arrangement of which two or more parties have joint
control.
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
ACCOUNTING FOR JOINT ARRANGEMENTS
SUMMARY OF ACCOUNTING TREATMENTS (FULL PFRS)
NATURE OF APPLICABLE
TYPE OF ACCOUNTING
RELATIONSHIP REPORTING
INVESTMENT TREATMENT
WITH INVESTEE STANDARDS
Recognize own assets,
liabilities, revenues and
PFRS 11 AND OTHER expenses plus share in
JOINT OPERATION
JOINT CONTROL RELEVANT PFRSs assets, liabilities,
revenues and expenses in
joint operation
JOINT VENTURE PFRS 11 PAS 28 Equity Method
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.

Joint Operation
Merchandise Contributions xx Merchandise Withdrawals xx
Purchase returns, discounts and
Purchases and Freight-in xx allowances 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

Contributions and Investments xx Sales and other income received xx
Cost and expenses paid for the Withdrawals of contributions or
joint operation xx investments xx
Share in the profit of joint Share in loss of the joint
operation xx 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
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 Fair Value Model Equity Model
Model Inv. In JV
Original Inv. In JV xx Inv. In JV xx xx
Investment Cash xx Cash xx xx
Cash
Inv. In JV xx P/L xx xx
Transaction Costs
Cash xx Cash xx Inv. In JV xx
Cash
Cash xx Cash xx
Cash Dividends xx
P/L xx P/L xx
Cash xx
Inv. In JV
Year-end FV Inv. In JV xx
Adjustment P/L xx

Share in Net
income xx
Inv. In JV xx
Share of P/L xx P/L
Impairment Loss Inv. In JV xx xx
P/L xx
Inv. In JV

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.

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 Net income (loss) Dividends declared

2019 P 700,000 P 200,000
2020 (P 2,000,000) -
2021 1,500,000 -
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?
MOGUL AXE
Share in net income (1M x 60%) P600,000 (1M x 40%) P400,000
Downstream sale of inventories:
(P40,000 x 20%) (8,000) -
Upstream sale of inventories:
- (P60,000 x 40% x 40%) (9,600)
Upstream sale of depreciable asset:
(50,000 x (1.5/2) x 60%) 22,500
Downstream sale of depreciable asset:
(90,000 x (2.75/3) (82,500)
Investment Income P614,500 P307,900
Dividends received (400,000 x 60%) (240,000) (400,000 x 40%) (160,000)
Beginning balance 1,000,000 2,000,000
Investment balance P1,374,500 P2,147,900
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 COST MODEL FV MODEL
Beginning balance P330,000 P330,000 P300,000
Ending balance 450,000 330,000 400,000
[(500,000 – 100,000) x 30%) + 330,000]
Recoverable amount 380,000 380,000 -
Impairment loss 70,000 - N/A
Adjusted ending balance 380,000 330,000 400,000

Transaction costs - - (30,000)

Share in P/L (500K x 30%) 150,000 - -
Dividend income - (100K x 30%) 30,000 (100K x 30%) 30,000
Change in FV - - 100,000
Impairment loss (70,000) - -
Net amount in P/L 80,000 30,000 100,000

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 FURION
Assets:
[3M + (1M x 60%)] 3,600,000 [5M + (1M x 40%)] 5,400,000
Liabilities:
[4M + (2M x 60%)] 5,200,000 [1M + (2M x 40%)] 1,800,000
Sales revenue:
(5M – 700K – 800K) x 60% 2,100,000 (5M – 700K – 800K) x 40% 1,400,000

5. 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.
• 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:
NO SEPARATE BOOKS
BOOKS OF A BOOKS OF B BOOKS OF C
Joint
C D Operation 10
Joint Operation 10 Joint Operation 10

Inventory Payable
10 to A 1Payable to A

Joint Operation Joint Operation Joint Operation

Cash Payable to A 5Payable to A
Joint Operation 20
Joint Operation 20 Joint Operation 20

Payable to C Payable
20 to C 2Cash

Joint Operation 50Joint Operation 25 Joint Operation 50

Payable to B JO
50- Cash 2Payable to B

AP 50
Rec. from B 80 - Cash 80 Rec. from B 80

Joint Operation Joint

80 Operation 8Joint Operation

Joint Operation 55Joint Operation 55 Joint Operation 55

Payable to B Cash
55 in bank 5Payable to B

Payable to C Payable to C 30 Inventory 30

Joint Joint 3 Joint 30

Opera Opera Opera
tion tion tion
Joint Operation Joint Operation 420 Joint Operation 420

Payable to B Payable to A Payable

1 to A 140

Payable to C Payable to C Payable

1 to B 140

Sh. In JO Sh. In JO 1 Sh. In JO 140

Profit Profit Profit
Payable to B Payable to A 245 Payable to A 245

Payable to C Payable to C 310 Payable to B 245

Cash Cash 245 Cash 310

Rec. from B JO - Cash Rec.

8 from B 800

Joint Operation
10
Merchandise Contributions Merchandise
0 Withdrawals -
Purchase returns, discounts and
Freight-in 5 allowances -
25 80
Purchases 0 and other income items
Sales 0
Expenses 55
Unsold merchandise 30
42
income 0

WITH SEPARATE BOOKS

BOOKS OF A BOOKS OF B BOOKS OF C
CD Intere 10
s NO ENTRY NO NO ENTRY
t
ENTRY NO ENTRY
i
n NO ENTRY
J
O
Invent 10
o
r
y
Intere
s
t

i
n
 J
O
Cash
Interest in JO
NO ENTRY Cash
Interest in JO 50
NO ENTRY NO ENTRY
AP 50

NO ENTRY NO ENTRY NO ENTRY

Interest in JO 55
NO ENTRY Cash in bank 55 NO ENTRY

1 Interest in JO Interest in JO Interest in JO

2 Sh. In JO Profit Sh. In JO Profit Sh. In JO Profit 1

NO ENTRY NO ENTRY Inventory

Interest in JO 3

3 Cash Cash Cash

Interest in JO Interest in JO 245 Interest in JO 310
 SEPARATE BOOKS
10
Inventory 0
A
10
A, Capital 0
Freight-in 5
B A, Capital 5
20
Cash 0
C
20
C, Capital 0
25
Purchases 0
D
20
Cash 0
B, Capital 50
80
Cash 0
E
80
Sales 0
Expenses 55
F B, Capital 55
Inventory, end 30
80
Sales 0
10
Inventory, beg. 0
G Freight-in 5
25
Purchases 0
Expenses 55
42
Income summary 0
42
Income summary 0
14
H. A, Capital 0
1 14
B, Capital 0
14
C, Capital 0
H. C, Capital 30
2 Inventory, end 30

6. AKASHA INC., BANE CORP. and CHEN CO. The joint operators shall make initial contributions P10,000
each. Profit and loss shall be divided equally. The following data relate to the joint operation’s
transactions:
AKASHA BANE CHEN
Joint Operation P8,000 cr. P10,000 cr. P12,000 cr.
Expenses paid from JO cash 5,000 2,000 3,000
Value of inventory taken 5,000 6,000 4,000
REQUIREMENTS: (a) Compute for the joint operation’s sales; (b) Determine the cash settlement to
AKASHA.
Joint Operation
30,00 70,00
Initial Contributions 0 Sales and other income items 0
10,00
Expenses 0
Credit balance 30,000

Joint Operation
Initial Contributions 30,000 Sales and other income items 70,000
Expenses 10,000 Unsold merchandise 15,000

Net income 45,000

Contributions 10,000
Share in profit 15,000
Inventory taken (5,000)
Cash settlement – receipt 20,000
Advanced Financial Accounting and Reporting by Karim G. Abitago, CPA
Page 13 of 12
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