BALID, LEAH L.

ACCOUNTING FOR SPECIAL TRANSACTIONS

CHAPTER 6: 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 arrangement:

a. Contractual arrangement
b. Joint control
Contractual arrangement may be evidenced in various ways, for example, by contract, by minutes
of discussions between the parties, or by inclusion in the articles or by laws of the joint
arrangement. Whatever its form, the contractual arrangement is usually in writing.

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. (PFRS 11.7)

Contrast joint control with the ff.:

Significant influence is the power to participate in financial and operating policy decisions of an
investee but is not control or joint control over those policies.

Control is the power to govern the financial and operating policies of an investee so as to obtain
benefits from it.

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

PFRS 11 distinguishes between:

a. parties that have joint control in the arrangement ( referred to as joint operators or joint
venturers).
b. Parties that participate in, but do not have joint control of, a joint arrangement is a party to a
joint arrangement – “an entity that participates in a joint arrangement, regardless of whether
the entity has joint control of the arrangement.”

Nature of Type of Interest in Standard Accounting

relationship investment voting rights
with investee of investee
Regular FVPL or FVOCI Less than 20% PFRS 9 Fair value
investor asset
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
a. Joint Contractually PFRS 11 and
 operation agreed other relevant
PFRS

Joint control

b. Joint PFRS 11 and

venture PAS 28

EXAMPLES: 75% VOTING RIGHTS IS NEEDED

A B C ANALYSIS:
50 % 30% 20% A and B have joint
control
50% 25% 25% Its either the
combination of A
and B or A and C,
parties would need
to specify.

Types of joint arrangement and rights and obligations

Joint arrangements are either joint operations or joint ventures:

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. [PFRS 11:15]

Rights to the assets and obligations for the liabilities of the joint 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. Those parties are called joint
venturers. [PFRS 11:16]

Rights to the net assets of the joint arrangement

ASSESSMENT OF RIGHTS AND OBLIGATIONS

 JA that is not structured through a separate vehicle is a joint operation.

 JA which assets and liabilities relating to the arrangement are held in a separate vehicle can
be either a joint venture or a joint operation.

SEPARATE VEHICLE- separately identifiable financial structure, including separate legal

entities or entities recognized by statute, regardless of whether those entities have a legal
personality.

JOINT OPERATION

A joint operator recognizes its own assets, liabilities, income and expenses plus its share in
the joint operation’s assets, liabilities, income and expenses. These items are accounted for under
other PFRSs applicable to the particular assets, liabilities, income and expenses.
CCOUNTING 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
CCOUNTING 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
CCOUNTING 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
CCOUNTING 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
CCOUNTING 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
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  xx Merchandise Withdrawals

 Purchases and Freight-in xx  xx Purchase returns, discounts
 Sales returns and discounts xx  xx Sales and other income items
 Expenses xx  xx Unsold merchandise
Net loss xx xx Net income

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.

Illustration

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  xx Sales and other income received

 Cost and expenses paid for the joint  xx Withdrawals of contributions or
operation xx investments
 Share in the profit of joint operation xx  xx Share in loss of the joint operation

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
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Illustration

A, B and C formed a joint operation. The following were the transactions:

a. A transferred inventory, costing P400, to C, the appointed manager. A paid freight of P20 on the
transfer.

b. B transferred P400 cash to C.

c. C purchased inventory worth P500. Of that amount, P400 were paid using the joint operation's
cash and P100 were on account of C.

d. C made cash sales of P1,600.

e. C paid operating expenses of P110 using his personal cash. The joint operation was completed and
the unsold inventory worth P60 was charged to C. The profit was divided equally.

Requirements: Provide the (a) journal entries, (b) compute for the profit or loss, and (c) determine the
cash settlements under each of the following assumptions:

I. No separate books are maintained for the joint operation

II. Separate books are maintained for the joint operation

I. No separate books maintained

A. Journal Entries

A’s Books B’s Books C’s Books

a
Joint Operation 420 Joint Operation 420 Joint Operation 420
Inventory 400 Payable to A 420 Payable to A 420
Freight 20

b
Joint Operation 400 Joint Operation 400 JO – Cash 400
Payable to B 400 Cash 400 Payable to B 400

c
Joint Operation 100 Joint Operation100 Joint Operation 500
Payable to C 100 Payable to C 100 JO – Cash 400
Accounts Payable 100
Operation 420 Payable to A 420 Joint Operation 420 Payable to A 420