Addis Ababa University

School of Commerce
Department of Accounting & Finance

Advanced Financial Accounting

AcFn- 3151

Presentation PowerPoint
2020/21 AY
Dakito Alemu (PhD)
Assistant professor of Accounting and Finance
30/05/2024

Section I

Joint Arrangements
(IFRS 11)

AcFN 3151, Ch.1

Forms of Business Organizations
6
• The following are types of business organizations
recognized under this Code:-
1) General partnership;
2) Limited partnership;
3) Limited liability partnership;
4) Joint venture;
5) Share company;
6) Private limited company;
7) One person private limited company.
1) N.B: All business organizations other than a joint venture shall
acquire legal personality upon registration in a commercial
register.
AcFN 3151, Ch.1
 IFRS 11, Introduction 10

• 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.
AcFN 3151, Ch.1
International Financial Reporting Standards

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.
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
 Assessing joint control
16

AcFN 3151, Ch.1

 Test Your Understanding 1 17

• Three parties (A, B and C) establish an

arrangement whereby:
• A has 50% of the voting rights in the arrangement;
B has 30%; and C has 20%.
• The contractual arrangement between A, B and C
specifies that at least 75% of the voting rights are
required to make decisions about the relevant activities
of the arrangement.

Required:
Assess whether the arrangement gives all the parties
control of the arrangement collectively.
AcFN 3151, Ch.1
 Solution 18

Even though A can block any decision, it

does not control the arrangement because it
needs the consent of either B or C.
• Since the terms of the contractual
arrangement (i.e. at least 75% of the voting
rights are required to make decisions about
the relevant activities) imply that A and B have
joint control of the arrangement because decisions
about the relevant activities of the arrangement
cannot be made without both A and B agreeing.
AcFN 3151, Ch.1
 Test Your Understanding 2 19

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
(50%+).
Required:
Assess whether the arrangement gives all
the parties control of the arrangement
collectively.
AcFN 3151, Ch.1
 Test Your Understanding 3 20
• Three parties establish a separate legal entity (entity X)
in which the three entities have different shares of
voting rights.
• Entity X’s activities constitute a business (as defined in
IFRS 3).
• D has 50% of the voting rights in the arrangement; and
• E & F each have 25%.
• The contractual arrangement b/n D, E & F specifies that at
least 75% of the voting rights are required to make
decisions about the relevant activities of the arrangement.
Required:
• Assess whether the arrangement gives all the
parties control (joint control) of the arrangement
collectively.
AcFN 3151, Ch.1
Solution 21
• In this case, although entity D can block any decision, it
does not control the arrangement alone because it needs the
agreement of either entity E or F.
• Entities D, E and F collectively control the arrangement; however,
there is more than one combination of parties that can agree in order
to reach the 75% threshold:
 Combination of D and E 75% Control
 Combination of D and F 75% Control
 Combination of E and F 50% No control
 Consequently, because there is more than one combination of
parties that could control entity X (i.e. either entities D and E , or
entities D and F), joint control does not exist.
 Therefore the combination of shareholder interests and the
contractual arrangement does not give rise to a joint
arrangement, and the arrangement falls outside of the scope of
IFRS 11.
AcFN 3151, Ch.1
 Types of Joint Arrangement 22

• An entity shall determine the type of joint

arrangement in which it is involved.
• The classification of a joint
arrangement as a:
–Joint operation [Refer: IFRS 11
paragraph 15] or
–Joint venture [Refer: paragraph 16]
depends upon the:
– Rights and
– Obligations of the parties to the arrangement.
AcFN 3151, Ch.1
 Classification 24
Not structured through Structured through a
a separate vehicle * separate vehicle *
Assessment
Assess the parties’ rights and of the parties’
obligations arising from the rights and
arrangement by considering: obligations
(a) the legal form of the separate
vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances
Parties have rights to the assets Parties have rights
and obligations for the liabilities to the net assets

Joint operation Joint venture

Accounting
reflects
Accounting for assets, liabilities, revenues Accounting for an
the parties’
and expenses in accordance with the investment using the rights and
contractual arrangements equity method obligations
AcFN 3151, Ch.1
 28

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
AcFN 3151, Ch.1
 Accounting for a joint
29

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

AcFN 3151, Ch.1

Equity Method
Models Initial Subsequent Ending balance
recognition adjustments

Cost Transaction • Impairment Cost –

Model price + loss impairment loss
transaction
cost

Fair Transaction o No adjustment Fair value

price
value
Equity Transaction o Net income Transaction price +
o Net loss transaction cost +
Model price + o Dividend net income – net
transaction o Impairment loss – dividend –
impairment loss
31 cost loss
 Equity Method 32

• 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 statement 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.
AcFN 3151, Ch.1
 Example : Statement of P / L

33

joint venture
 Statement of Financial Position

34

joint venture
EXAMPLE : 35

• 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
AcFN 3151, Ch.1
Example : 36

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

AcFN 3151, Ch.1

 AB Company (a joint venture)
Balance Sheet
37
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

AcFN 3151, Ch.1

 Equity Method 38

– Initial recognition of an equity

investment: investor at the
transaction price (including
transaction costs)
– subsequently adjust to reflect :
–share of the profit or loss & OCI of
the Ass (+)
–distributions received from the Ass (-)
– Impairment losses
A) EQUITY METHOD
39

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

AcFN 3151, Ch.1

 After Acquisition
• As joint venture earns a profit -- its net assets increase
– the investor recognizes its share of the profit and
increases the carrying amount of the investment for its
share of the increase in the joint venture’s net assets
joint venture

• As joint
venture incur losses
– The effect is reducing the investment income
reported

joint venture

– What if the amount of losses are above the

40 balance we have in the investee??
 IAS 28 – Application of the Equity Method
• Dividends
– as joint venture declares/pays dividends, its net
assets decrease
– investor recognizes its share of the reduction
as the dividend is received
• This entry reflects the conversion of the investment
into cash by the investor

joint venture

• Investments in associates under equity

method reported as non-current assets
41
 Losses in excess of investment
balance
• If an entity’s share of losses of a joint
venture
1) equals or
2) exceeds its interest in the associate or
joint venture, the entity discontinues
recognizing its share of further losses.

42
 Test Your Understanding 4: Equity method
• On 1/1/20X1 A enters in to a contractual
arrangement with B Co.
• And buys 30% of AB JV for Birr 300,000.
• AB’s profit = Birr 80,000 for the year ended 31/12/20X1.
• On 31/12/20X1 B declared a dividend of Birr100,000.
• As of 31/12/20X1 the Recoverable Amount of A’s investment
in AB = 290,000 (ie FV 293,000 less costs to sell 3,000).
Required
Record all the journal entries for Co A
 Impairment Losses
• After application of the equity method, including
recognizing the joint venture’s losses in accordance
with paragraph 38,
– the entity applies paragraphs 41A–41C to
determine whether there is any objective evidence
that its net investment in the associate or joint
venture is impaired
• The entity applies the impairment
requirements in IFRS 9 to its other interests in
the associate or joint venture that are in the
scope of IFRS 9
44
 Cont’d…
• 41A- The net investment in an associate or joint venture
is impaired and impairment losses are incurred iff,
– there is objective evidence of impairment
as a result of one or more events that
occurred after the initial recognition of the
net investment (a ‘loss event’).
• Objective evidence that the net investment is
impaired includes observable data that comes to the
attention of the entity about the following loss
events:

45
 Cont’d…
• (a) significant financial difficulty of the associate
or joint venture;
• (b) a breach of contract, such as a default or
delinquency in payments by the associate or joint
venture;
• (d) it becoming probable that the associate or
joint venture will enter bankruptcy or other
financial reorganization; or
• (e) the disappearance of an active market for the
net investment because of financial difficulties of
the associate or joint venture.
46
 The impairment decision
LOWER OF:

CARRYING VALUE RECOVERABLE

(NBV) AMOUNT

HIGHER OF:

FVLCD EV or V
 Basic Formulas
• Carrying amount (CA) =Transaction price +
transaction cost + Net income - net loss –
dividend
• Recoverable amount (RA) = Higher of
Value-in-use or Fair value less cost to sell)
– Value-in-use = present value of future cash
inflows
• Impairment loss exist iff CA > RA
– Impairment loss = carrying amount –
recoverable amount
48 – Thus, RA = CA – Impairment loss
 Discussion Question
• On 1 January 20x1 Entity A incurred $2,000 transactions
costs when it acquired 25% of Entity Z’s equity for
$200,000
– for simplicity, assume no implicit goodwill and no fair
value adjustments
• Entity Z’s profit for 20x1 = $100,000
• On 31 December 20x1 Entity Z declares a dividend of
$120,000
• At 31 December 20x1 the recoverable amount
(replacement cost) of Entity A’s investment in Entity Z =
$190,000
– (i.e fair value of $195,000 less cost to sell $5,000 )
 Cont’d…
What is the balance of Entity A’s investment in
Entity Z at 31 December 20x1 (equity
method) ? Choose one of:
1) $190,000;
2) $195,000;
3) $200,000;
4) $202,000;
5) $225,000; or
6) $227,000.
 Summary of Joint Arrangements –IFRS 11
• IFRS 11 applies to all parties subject to a 52joint
arrangement.
• A joint arrangement (JA):
  Binds the parties by way of contractual agreement
(does not have to be in writing, instead it is based on the
substance of the dealings between the parties)
  Gives two (or more) parties joint control.
• Joint arrangements are classified either as:
 Joint operation - parties have rights to the assets, and
obligations for the liabilities of the JA
 Joint venture - parties have rights to only the net assets
of the JA.
 Classification depends upon the assessment of the rights and
obligations of the parties, and considers the JA’s: (i) Structure; (ii) Legal
form; (iii) Contractual terms; (iv) Other facts and circumstances
AcFN 3151, Ch.1
 Summary-Joint control
• Joint control is based on the same control principle as53IFRS
10 Consolidation (i.e. Power, exposure to variable returns,
ability to use power to affect variable returns).
• Joint control is the contractually agreed sharing of control in
relation to decisions regarding the relevant activities and
requires the unanimous consent of the controlling parties (refer
to IFRS 10 for definition of relevant activities).
• This can be explicit or implicit:
•  E.g. joint control exists if two parties hold 50% voting rights,
and a 51% majority is required to make decisions regarding
relevant activities
•  E.g. joint control does not exists if, after considering all
contractual agreements, the minimum required majority of
voting rights can be achieved by more than one combination of
parties agreeing together.
AcFN 3151, Ch.1
 Disclosures 55

IFRS 12 Disclosure of Interests in Other

Entities
• (i) Risks associated with an entity’s
interests in joint ventures and
associates
Commitments relating to joint ventures
Contingent liabilities incurred relating to joint
ventures or associates (including its share of
contingent liabilities incurred jointly with other
investors), unless the probability of loss is
remote.
AcFN 3151, Ch.1
2) Nature, extent and financial effects of interests
in joint arrangements and associates, 56
 The name of the joint arrangement or associates
  The nature of the entity’s relationship with the joint arrangement or
associate
  The principal place of business (and country of incorporation, if
applicable and different from the principal place of business) of the joint
arrangement or associate
  The proportion of ownership interest or participating share held by
the entity and, if different, the proportion of voting rights held (if
applicable)
  Measurement: whether equity method or at fair value
  If measured using equity method: the fair value of its investment
in the joint venture or associate (if a quoted market price is
available)
  Summarised financial information about the joint venture or
associate.
 unrecognised share of losses of a joint venture or associate
 Disclosure: Joint arrangements and associates
57

Judgements and estimates

• 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
AcFN 3151, Ch.1
 58

Section II

Public Enterprises
PUBLIC ENTERPRISES LAW PROCLAMATION
NO. 25/1992

AcFN 3151, Ch.1

 Content of Proclamation #25/1992 59

• CHAPTER 1. GENERAL PROVISIONS

• CHAPTER 2. ESTABLISHMENT OF ENTERPRISES, LEGAL
PERSONALITY AND CAPACITY
• CHAPTER 3. ORGANIZATION AND MANAGEMENT OF AN
ENTERPRISE
• CHAPTER 4. CAPITAL OF ENTERPRISES
• CHAPTER 5. NAME OF AN ENTERPRISE AND TRADEMARK
• CHAPTER 6. ACCOUNTS AND AUDITING OF ACCOUNTS OF
ENTERPRISES
• CHAPTER 7. AMALGAMATION AND DIVISION
– Amalgamation by taking over of one enterprise by the other or by the
formation of a new enterprise.
• CHAPTER 8. DISSOLUTION AND WINDING-UP
• CHAPTER 9. MISCELLANEOUS PROVISIONS

AcFN 3151, Ch.1

 60
Public Enterprises
Definition: are autonomous or semi-autonomous bodies owned
by the gov’t & engaged in providing services and or products.
Enterprise” means a wholly state owned public enterprise
established pursuant to this Proclamation to carry on for gain
manufacturing, distribution, service rendering or other economic
and related activities;
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, Telecome, energy, Shipping … .
AcFN 3151, Ch.1
Why Public enterprises? 61

Because:
– Limitation of the free price mechanism
– Basic industries need huge investment
– Government’s duty to help in economic development
and discharge its social responsibility
– 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
– The overall economic policy of a country may dictate the
use of public enterprises in some sectors

AcFN 3151, Ch.1

Formation Provision 62

Every enterprise shall be established by regulation and

the establishment regulation shall contain:
– The name of the enterprise
– A statement 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 Authorized Capital
– A statement that the entity shall not be liable beyond its total
assets = Limited Liability St.
– The head office of the enterprise
– A statement that may authorize the enterprise to open branches
– The name of the supervising authority
– The duration for which the enterprise is established
AcFN 3151, Ch.1
ORGANIZATION AND MANAGEMENT OF63AN
ENTERPRISE (CHAPTER 3)
• 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)

– A general manager, deputy general managers as may be

necessary; and

– All Necessary staff

AcFN 3151, Ch.1
 CAPITAL OF ENTERPRISES (CHAPTER644. )
• The supervising authority shall cause the initial capital
needed to establish an enterprise to be allocated by the
Government.
• The capital may be paid in cash or in kind.
– Where it is paid in kind the supervising authority shall
ensure that the property is correctly valued by experts
• The amount of the paid up capital of an enterprise
at the time of its establishment shall not be less than
25% of its authorized capital.
• The authorized capital of an enterprise shall be fully
paid up within 5 years from the date of its
establishment.
AcFN 3151, Ch.1
 65

ACCOUNTS AND AUDITING

OF ACCOUNTS OF
ENTERPRISES (CHAPTER 6. )

AcFN 3151, Ch.1

 Accounting for Public Enterprises 66

• Each enterprise shall keep books of

accounts following GAAP/IFRS.
• PEs are characterized by public
purpose, public o/ship & control.
• Theiraccounting aspect is the same as
business accounting with minor
differences in the owners’ equity section as there
are no shares and shareholders in PEs.

AcFN 3151, Ch.1

 Capital Section of PEs 67

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 it has to pay
dividend within 7 months after the end of the accounting period
• Appraisal Surplus… excess obtained from appraisal of assets

AcFN 3151, Ch.1

 Reserve Funds and their Utilization.
• An enterprise shall establish and maintain a 68legal
reserve fund.
• Without prejudice/bias to the provisions of other laws
providing otherwise, any enterprise shall annually transfer
– 5% of its net profits to the legal reserve fund
– until such reserve fund equals 20% of the capital of the
enterprise.
• The legal reserve fund may be utilized for
covering:
– a) Losses; and
– b) unforeseeable expenses and liabilities.

AcFN 3151, Ch.1

Basic Events with Accounting Issue 69

• Formation

Assets……………………..xxxx
State Capital……………………..xxxx

• Operation
Income Summary…..xxx
Legal Reserve…….……. xxxx
Other Reserves…….……xxxx
State Dividend Payable.. xxxx

• Privatization

• Liquidation

AcFN 3151, Ch.1

 DISSOLUTION AND WINDING-UP 70
Grounds for Dissolution.
An enterprise may be dissolved for any one of the
following reasons:
 The expiry of the life of the enterprise as fixed in its est. reg.;
 Completion of the venture for which the enterprise was
established;
 Failure of the purpose or impossibility of performance;
 Loss of 75% of the P-U-C of the enterprise;
 By decision of the Council of Ministers
 Decision of the court declaring the enterprise bankrupt.

AcFN 3151, Ch.1

 71

END of
CHAPTER I

AcFN 3151, Ch.1