Chapter 18

Investment in Joint Arrangements, Associates and Joint Ventures

(IFRS 11 AND IAS 28) Part 1
Investments In Joint Arrangements
• A joint arrangements as defined in IFRS 11 is an arrangements of which two or more parties have
joint control. Despite the diverse form and structures, all joint arrangements have two
characteristic in common, and they are:
• The parties are bound by a contractual arrangement; and
• This is usually though not necessary evidenced in writing by a formal contract amongst parties or by the articles
or by-laws of the joint venture.
• The contractual arrangements gives two or more of those parties joint control of the arrangement.
• Requires that all parties must collectively control the arrangement, no single party is in the position to control
unilaterally the joint arrangement.

• Party to a joint arrangement is an “entity that participates in a joint arrangement” , regardless of

whether the entity has joint control of the arrangement.
• A separate vehicle is a separately identifiable financial structures, including separate legal entities or
entities recognize by statue. It may be in a form of a corporation.
Contractual Arrangements
• Contractual arrangements sets outs the term upon which parties participate in the activity that is
the subject of the arrangement. Contractual arrangements generally specify the following:
• Purpose, activity and duration of the joint arrangement
• Appointment of members of the board of directors (or equivalent governing body)
• Decision making process
• Matters requiring decisions from the parties
• Voting right of the parties
• Required level of agreement for those matter
• Capital or other contributions requirements
• Sharing of assets, liabilities, revenues, expenses, or profit or loss relating to the joint arrangement.
Joint Control
• Joint control is the contractually agreed sharing of control of an arrangement, which exist only
when decisions about the relevant activities require the unanimous consent of the parties sharing
control.
• An entity that is the party to an arrangement has to assess whether the contractual arrangement
gives all the parties, or a group of the parties, control of the arrangement collectively. All the
parties, or a group of the parties, control of the arrangement collectively when they act together to
direct the relevant activities that significantly affect the arrangement.
• The key aspect of joint control are as follows:
• “Contractually Agreed”
• “Control and relevant activities”
• “Unanimous consent”
Classification of a Joint Arrangement
Joint arrangement are established for a variety of purpose and can be established using different structures and legal
forms. A joint arrangement is classified as either Joint Operation or Joint Venture

• Joint Operation • Joint Venture

• It is a joint arrangement whereby the • It is a joint arrangement whereby the
parties that have joint control of the parties that have joint control of the
arrangement have right to the assets, arrangement have rights to the net assets
and obligations for the liabilities of the of the arrangement.
arrangement. • They are called Joint Venturers.
• They are called Joint Operator
• To manage the activities of the joint
arrangement joint operator may appoint
a manager, who will be an employee of
the joint operator.
Structure of Joint Arrangement
• Joint arrangement not structured through a separate vehicle
• A joint arrangement not structured through a separate vehicle is a joint operation.
• The contractual arrangement establishes the parties right to the assets and liabilities relating to the
arrangement, and the parties’ right to the corresponding revenues and obligations for the corresponding
expenses.
• The contractual arrangement often describes the nature of the activities that are the subject of the arrangement
and how the parties intend to undertake those activities together.

• Joint arrangement structure through a separate vehicle

• A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate
vehicle can be either a joint venture or a joint operation. However whether a party is a joint venture or a
joint operator depends on the party’s right to the assets, and obligations for the liabilities, relating to the
arrangement that are held in a separate vehicle. The following factors need to be consider are:
• Legal for of the separate vehicle
• Contractual terms and conditions
• Other facts and circumstances.
• Legal form of the Separate Vehicle
• The legal form of the separate vehicle must be assessed to determine whether it gives the parties right to
net assets, or right to the assets and obligations for the liabilities of the arrangement.
• The parties may conduct the joint arrangement through a separate vehicle whose legal form causes the
separate vehicles to be considered in its own right (the asset and liabilities held in the separate vehicle
are the assets and liabilities of the separate vehicle and not the assets and liabilities of the parties. In
such a case the assessment of the rights and obligations conferred upon the parties by the legal form of
the separate vehicle indicates that the arrangement is a joint venture.
• If the parties conduct the joint arrangement in a separate vehicle whose legal form does not confer
separation between the parties and the separate vehicle then the arrangement is a joint operation.
• The legal form of the separate vehicle may be a corporation or a partnership. A corporation generally
confers separation between the parties and the separate vehicle and also provides the parties with rights
to net assets, the liabilities of a corporation are usually limited to the corporation. Similar with the
partnership, however, a partnership that limit s the liabilities of its partner to their investment is
effectively giving those partners rights to the net assets, which arrangement would be a joint venture.
• Example:
• X and Y jointly establish a corporation (C) over which the
have joint control. The fact that there is a separate vehicle,
and the legal form of the separate vehicle (a corporation)
preliminary indicates that C is a joint venture.
Contractual Terms
• However, the contractual arrangement states that X and Y The contractual terms of the
have rights to the asset of C and are obligated for the arrangements should be examine to
liabilities of C in a specified proportion. Effectively this determine if they provide the parties
contractual term reverse the effects of the legal form. with right to the net assets or rights to
the net assets and liabilities. The
Therefore C is a joint operation. contractual terms of the joint
arrangement may reverse the effect of
• Note that when the contractual arrangement specifies that the parties the legal form and give the parties
have rights to the assets and obligation for the liabilities, relating to the rights to the assets and obligation for
arrangement, they are parties to a joint operation and do not need to the liabilities.
consider other facts and circumstances purpose of classifying the joint
arrangement.
Other Facts and Circumstances
• Other facts and circumstances if the  preliminary assessment of the legal form and the contractual terms of
the joint arrangement to not specify that the parties have rights to the asset, and obligations for the
liabilities, it may be presumed that a joint arrangement is a joint venture. However, the parts must consider
any other facts and circumstances to determine whether the parties have rights to the assets and
obligations for the liabilities, which would make it a joint operation.
•  To determine whether a joint arrangement is a joint operation or a joint venture, the purpose and design of
the joint arrangement should be understood. It is equally important to know whether the joint
arrangement:
• Primarily aims to provide the parties with an output (the parties have rights to substantially all of the economic
benefits of the assets).
• Depends on the parties on a continuous basis for settling its liabilities.

• If both of the above characteristics of the joint arrangement are present, then such arrangement is a joint
operation
• The example below illustrates how the facts and circumstances make the joint arrangement a joint
operation, even if the legal form and contractual terms point towards the joint arrangement being in joint
venture
Example
• X and y jointly establish a corporation(C) over which they have joint control. The existence of a
separate vehicle initially indicates that the asset and liabilities held in C or the assets and liabilities
of C, and therefore C is a joint venture. There are no contractual terms indicating that X and Y
have rights to the asset, or obligations for the liabilities, so the arrangement still appear to be a
joint venture.
•  However, X and Y  agree to the following:
• X and Y will purchase all the output produced by C equally.
• C  cannot sell any off the output to third parties, unless X and Y approve it. Because the purpose of the arrangement is
to provide X and Y with output they require, sales to third parties are expected to be uncommon and not material.
• The price of the output sold to X and Y  is set by X and Y at a level that is designed to cover the costs of production
and administrative expenses incurred by C. The arrangement is intended to operate at a break-even level.
• Analysis
• The obligation of X and Y to purchase all of the output produced by C reflects   the exclusive dependence
of C upon X and Y for the generation of cash flows implying that X and Y have an obligation for the
liabilities of C.
• The fact that X and Y have rights to all of the output produced by C means that X and Y have rights to all
of the economic benefits of the assets of C.

• This facts and circumstances indicate that the arrangement is a joint operation
• Variation 1:  If, instead of X and Y using their share of the output themselves, they sold their share of the
output to third parties, it would still be a joint operation
• Variation 2: if X and Y changed the terms of the contractual  arrangement whereby C was able to sell
output to third parties, this would result in C  assuming demand, inventory and credit risks. As such X and
Y would not have substantially all of the economic benefits. Accordingly, the joint arrangement would be
classified as a joint venture.
• Output taken by only one party
• The examples above discussed joint arrangement in which the parties to the said arrangement share
in the output. However, in some cases, only one party receives or purchases all of the output. This
may be the case when:
• One of the  parties is not in the business that is the activity of the joint arrangement (e.g.  A local
government has joint control with a foreign entity). Generally the party that does not receive output
is compensated in some other manner, relative to its respective interests in the joint arrangement.
•  The party that receives all of the output thus acting as an agent for the other parties to  the joint
arrangement, and acting on their behalf. In such cases
• In such cases, it should be confirmed that there actually is joint control. An examination of the facts
and circumstances may indicate that the party that received all of the output controls the
arrangement.
• However, if there were joint control, this would likely be a joint operation. This is because the parties
collectively have rights to substantially all of the economic benefits of the assets of the joint
arrangement. 
• Example
• A separate vehicle is established over which two parties have
joint control. Neither the legal form nor the contractual terms
of the joint arrangement gives the parties rights to the assets Parties provide cash
or obligation for the liabilities of the arrangement. Other
facts and circumstances are as follows: flows
• The purpose of the joint arrangement is to construct a If a joint arrangement depends on the
parties on a continuous basis to settle its
residential complex for selling residential units to the public. liabilities, this would be indicative that the
parties have an obligation for the liabilities
• Contributed equity by the parties is sufficient to purchase relating to the arrangement. The
land and raise the debt finance from third parties to fund arrangement does, is a joint operation.
construction. However homer when parties provide cash
flows only at the inception and no other
• Sales  proceeds will be used as follows: parties are expected to provide cash flows
• Repayment of external debt until the end of the activity, the joint
arrangement is not a joint operation. This
• Remaining profit distributed to parties is because they are not providing cash on
a  continuing basis and are not expected to
have an obligations in the normal course of
business.
Analysis Variation

• Since there is a separate vehicle, and because • the contributed equity is not sufficient to purchase the
neither the legal form nor the contractual terms of land and race death financing. There is an exception or
the joint arrangement give the parties rights the requirement that the parties will have to contribute cash
assets or obligation for the liabilities of the vehicle, to the joint arrangement through a series of cash calls.
Determining whether the series of cash calls implies
the preliminary analysis indicates that this  is a joint
that the parties are substantially the only source of cash
venture. Even if the parties are the only source of
flows contributing to the arrangement, and whether the
cash flows at inception, the joint arrangement
parties have an obligation for the liabilities of the
cannot be said to be a joint operation. There is
arrangement is a matter of judgment. If the joint
nothing in the facts and circumstances that suggest arrangement gives the parties rights to the net assets, it
the parties have rights to the assets or obligation for would be a joint venture; otherwise it is a joint
the liabilities. Since, the parties only expected to operation.
receive any net profits after the external debt is
repaid the arrangement is that of a joint venture.
Accounting for Joint Operation
For a joint operation, the joint operator recognizes its:
• Assets, including its share of any assets held jointly
• Liabilities, including its share of any liabilities incurred jointly.
• Revenue from the sale of its share of the output arising from the joint operation.
• Share of the revenue from the sale of the output by the joint operation.
• Expenses, including its share of any expenses incurred jointly.
• For joint arrangement not structured through a separate vehicle, the contractual arrangement establishes the
parties' rights to the assets, and obligations for the liabilities, and the parties' rights to the corresponding
revenues and obligation for the corresponding expenses.
• Illustration
• On January  1, 2017, Entity A  together with another joint
operator, set up a separate vehicle to undertake a joint
operation. The arrangement provides for both parties to have
joint control over the separate vehicle. Entity A purchased
property, plant and equipment of P5 million for the joint
operation. It also borrowed P20 million from a bank to partly
finance its capital contribution to the joint operation.
•  For its capital contribution, Entity A recorded its interest in
the joint operation at P30 million, being the amount of cash
contribution of front. Apart from recording its assets and
liabilities to the joint operation directly, Entity A has rights to
a 60% share in the property, plant and equipment cough the
separate vehicle, a 50% share in the current asset, and the
75% share of the liabilities incurred by the separate vehicle.
Its share of revenue from the sale of the output produced the
separate vehicle is 55% while its share of the expenses
incurred jointly is 60%.
Extracts from the financial statements
of the separate vehicle for the first year
of operation follows:
The journal entries in the books of Entity A  to account for
its interest in the joint operation is as follows:
Property, Plants and Equipment 5m
Cash 5m
To record directly the purchase of fixed asset
Cash 20 m
Bank Borrowings 20 m
To record direct liability incurred
In addition, Entity A recognizes its share of assets, liabilities, revenue, and expenses directly in the
separate vehicle as follows:

Property, plant and equipment (60%x100) 60 m

Current Asset( 50%x 60) 30 m
Expenses(60% x 60) 36 m
Liabilities (75% x 80) 60 m
Revenue (55% x 100) 55 m
Interest in joint operation 11 m

The assets, liabilities, revenue and expenses are recognized and combined with those of Entity A's own
financial statements. The interest in joint operation at the end of the reporting. Is reduced to P19 million.
• Illustration
• Company A and Company B (the parties) are two companies
whose businesses are in public and private construction
services. They set up a contractual arrangement to work
together for the purpose of fulfilling a contract with the
government for the design and construction of a road
between two cities. The contractual arrangement provides for
the participation shares of Companies A and B and joint
control of the arrangement, the subject matter of which is the
completion and delivery of the road.
•  The part is set up a separate vehicle (entity X) through
which to conduct the arrangement. Entity X, on behalf of
Companies A and B  enters into a contract with the
government. The parties agreed that the asset and liabilities
relating to the arrangement or held in entity X.
The contractual arrangement between Companies A and B establishes
that:
(a.)  the rights to all the assets needed to undertake the activities of the arrangement are shared by the parties equally
(b.)  the parties have several  and joint responsibility for all operating and financial obligations relating to the activities
of the arrangement equally
(c.) the revenue and expenses resulting from the activities of the arrangement is shared by Companies A and B,  60: 40,
respectively.
• For purposes of operating and overseeing the activities, Companies A and B appoint an operator, who will be an
employee of one of the parties. Companies A and B agreed that the activities will be executed by the operator's
employees  " no gain or loss " basis.
•  In accordance with the terms specified in the contract with the government, entity X invoices the construction
services to the government on behalf of the parties.
The following are the summary transactions of the joint arrangement.
• Entered into a fixed price contract with the government for the construction of the road, P100
million.
• Purchased construction equipment,P50 million on account. The parties hold this equipment jointly.
• Materials purchased on account, P20 million.
• Labor paid to the construction workers, P10 million.
• Operation expenses including salaries of the employees amounted to P5 million.
• Received the 1P00 million contact price from the government.
The joint operation for their interests in the joint arrangement (joint operation) as follows:
Company A Company B
Property, plant and Equipment 25 m Property, plant and equipment 25 m

Accounts Payable 25m Accounts Payable 25 m

To record equipment purchased held jointly(50%) To record equipment purchased held jointly (50%)

Construction Cost(Materials) 10 m Construction Cost (material) 10 m

Accounts Payable 10 m Accounts Payable 10 m

To record its share in the material purchased (50%) To record its share of the materials purchased (50%)

Construction Costs(labor) 6m Construction Cost (Labor) 4m

Cash 6m Cash 4m

To record its share on the labor paid (60%) To record its share of the labor paid (40%)

Operating Expenses Operating expenses 2m

Cash Cash 2m

To record its share in the expenses paid (60%) To record its share of the expenses paid (40%)

Cash 60 m Cash 40 m

Construction Revenue 60 m Construction Revenue40 m

To record revenue (60% of the contract price) To record revenue (40% of the contract price)
• The joint arrangement is carried out through a separate
vehicle whose legal form does not confirm separation
between the parties and the separate vehicle (i.e.  assets and
liabilities held in entity X the parties' assets and liabilities).
This is reinforced by the terms agreed by the parties in their
contractual arrangement, which state that the Companies A
and B have rights to the assets, and obligations for the
liabilities, relating to the arrangement that is conducted Analysis
through entity X. The joint arrangement is a joint operation.
• Companies A and B  recognized in their financial statements
their share of the assets (e.g.  Property, plant and equipment)
and their share of any liabilities from the arrangement on the
basis of their agreed participation share.
• Each also recognizes its share of the revenue resulting from
the construction services provided by the government on a
60:40 ratio.
Transactions between a joint operator and a joint operation

Accounting  for sales for contributions of assets to a joint operation

• When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or
contribution of assets, the joint operator shall recognize gains and losses resulting from  such a transaction
only to the extent of the other parties' interests in the joint operation.
•  When such transaction provide evidence of a reduction in the net realizable value of the assets to be sold or
contributed to the joint operation, or of an impairment loss of those assets, those losses shall be recognized
holy by the joint operator.
Accounting for purchases of assets from a joint operation
• When an entity enters into a transaction with a joint operation in which it is a joint operator, such as purchase
of assets, it shall not recognize its share of the gains and losses until it resolves those assets to a third party.
•  When such transactions provide evidence of a reduction in the net realizable value of the assets to be
purchased or of an impairment loss of those assets coma a joint operator shall recognize its share of those
losses.
Difference from proportionate consolidation

• The accounting for a joint operation is not the same as the "proportionate consolidation" used to
account for joint venture. There are two main difference between recognizing assets, liabilities,
revenues and expenses relating to the activity of the joint operation and proportionate consolidation.
1. The rights and obligations, as specified in the contractual arrangement that an entity has with respect to the
assets liabilities, revenues, and expenses relating to joint operation might differ from its ownership interest in
the joint operation.
2. The parties' interests in a joint operation or recognized in their separate statements. Consequently, there's no
difference in what is recognized in the parties' separate financial statements and the parties'  consolidated
financial statements.

• When a joint operator has rights to a specified percentage of all assets and obligations for the same
percentage of all the liabilities, there will  probably be no difference between the accounting for a joint
operation and proportionate consolidation. However, when the joint operator has different rights to
various assets, or different obligations for various liabilities the financial statement would be different
compared with proportionately consolidating a uniform percentage of all assets and liabilities.
• A and B  established a joint arrangement (AB) using a
separate vehicle, but the legal form of the separate vehicle
does not confer separation between the parties and the
separate vehicle itself. That is, A and B have rights to the
assets and obligations for the liabilities of AB (a joint
operation).  Neither the contractual terms, nor the other
facts and circumstances indicate otherwise.
•  A and B  owns 50% of the equity in AB. However, the
contractual terms of the joint arrangement states that A has Example
the rights to all of the computer equipment and obligation
to pay all the accounts payable in AB. A and B have rights
to all other assets in AB  and obligations for all the other
liabilities in AB proportionate to their  equity interest
(50%).
Accounting for Joint Venture
Accounting for Joint Venture
• A joint venturer shall recognize its interest in a joint venture as an investment that shall account for
that investment using the equity method. The proportionate consolidation as an option is
eliminated.
•  Under the equity method, the investment in joint venture is initially recognized at cost, and
adjusted thereafter for the post acquisition change in the venturer's net assets. The venturer's profit
or loss includes its share of the joint venture's other comprehensive income includes its share of
the joint venture's other comprehensive income.
• Two real estate companies, Company R and Company S
set up a separate vehicle(Entity RS) for the purpose of
acquiring and operating a shopping center. The contractual
arrangement between the parties establishes joint control
of activities that are conducted by Entity RS. Picture of
Entity RS's legal form is that the entity, not the parties, has
rights to the assets, and obligation for the liabilities,
relating to the activities of the arrangement. This activities
include the rental of the retail units, managing the car
park, maintaining the center and establishing the
Illustration
reputation and customer base for the center as a whole.
The terms of the contractual arrangement are such that:
•  Entity RS  owns the shopping center. The contractual arrangement does not specify that the
parties have rights to the shopping center.
• The parties are not liable in respect to the liabilities of Entity RS. If the entity is unable to pay any
of its liabilities, the liability of each party to third party will be limited to the party's unpaid
contribution.
• The parties have the right to sell or pledge their interests in Entity RS.
• Each party receives a share of the income from the shopping center (which is the rental income net
of the operating costs) in accordance with its interest in Entity RS.
Summary transactions of the joint arrangement for 2016
and 2017 are as follows:
2016:
1. Company R contributed 6 million for a 60% interest in the net assets of Entity RS and Company S   fitted for million for a 40%
interest in the net assets of Entity RS.
2. Entity RS wired a shopping center at a cost of 12 million.
3. Major repairs  incurred to renovate the building amounted to 3 million. This is capitalized to extend the remaining life of the
building to 15 years.
4. Operating expenses(including depreciation) for the year amounted to 2.5 million.
5. Rental income collected from the tenants, 3 million.
6. Net income or loss for the year was distributed to the venturers in accordance with their interest in the joint venture.
2017:
7. Operating expenses(including depreciation) incurred for the year, 4 million.
8. Rental income collected for the year, 6 million.
9. Dividends paid at the end of the year, 200,000.
10. Net income or loss for the year was distributed among the venturers.
The venturers account for their interests in the joint arrangement (joint venture) using the equity method as
follows:

• 2016: 2017:
Investment in joint venture P6,000,000 Cash P120,000
Cash      P6,000,000
Investment in joint venture P120,000
To record contribution in the joint venture
To record dividends received(60% of 200,000)
Investment in joint venture P300,000
Investment in joint venture P1,200,000
Income from joint venture P300,000
Profit from joint venture P1,200,000
To record 60% of the net profit for the year of 500,000(a 3 To record 60% of the net profit for the year of P2m (P6 m
million rental income less 2.5 million operating expenses)
less P4 m) 
In the separate financial statement of Company R, in the investment in joint venture account will be as
follows:
2016: Investment in Joint Venture P6,300,000
2017: Investment in Joint Venture 7,380,000
2017:
Company S
Cash 80,000
2016:
Investment in joint venture 80,000
Investment in joint venture P4,000,000
To record dividend received (40% x P200,000)
Cash P4,000,000

To record contribution in the joint venture Investment in joint venture 800,000

Investment in joint venture P200,000 Income from joint venture 800,000

Income from joint venture P200,000 To record 40% of the net profit that year.

To record 40% of the net profit for year

In the separate financial statement of Company S, investment in joint venture account will be as follow:
2016: Investment in Joint Venture P4,200,000
2017: Investment in Joint Venture 4,920,000
Investment in Associates
Investment in Associates
• IAS 28 defines and associates as " an entity over which the investor has significant influence ".
This includes  an unincorporated entity such as a partnership, over which the investor has
significant influence and that is neither a subsidiary nor an interest in a joint venture.
• The test whether an investment qualifies as an associate is the existence of significant influence,
which is defined in the Standard " the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies". For significant
influence to arise, the investor must normally own substantially equity interest in the investee.
Equity Method of Accounting for an Associates
• An entity recognizes its interest in an associate by applying the equity method under the equity
method, the investment is initially recorded at cost and the carrying amount is increased or
decreased by the investor's share of the profits or losses of the joint venture or associate after the
date of acquisition. The investor takes its share of post acquisition profits or losses irrespective of
whether dividends are distributed. Dividends received from a joint venture or an associate's nearly
reduce the carrying amount of the investment.
• The carrying amount of the investment must also be adjusted for changes in the investor's share of
the components of other comprehensive income of the joint venture or associates after the
acquisition date.
•  Under the equity method, the investor recognizes its share of an investee's other net asset
changes(other than profit or loss or other comprehensive income and dividend received) directly in
the investor’s equity.
Components of carrying amount of investment
• In the consolidated financial statements of the investor, the carrying amount of the investment in
associate or joint venture is not eliminated but shown as a separate item as investment in joint
venture or associate, which may consist of the following components:
• Cost of Investment xx
Add: Share of post-acquisition changes in net assets:
Post-acquisition retained earnings xx
Post-acquisition other(OCI) xx
Other net asset changes xx
Carrying amount in the consolidated financial position xx
• P Inc acquired a 30% interest in the equity capital of S
Inc  on January 1,2013  paying P600,000 in cash. At this
date, the share premium(APIC) and retained earnings of S
Inc were P100,000 and P400,000, respectively. Included
in the property, plant and equipment account of S Inc was
a land recorded at its book value of P200,000. At
acquisition date, this land was said to have a fair value of
P400,000. The issued share capital of S Inc consisted of
1,000,000 ordinary shares of P1 each and had remained
unchanged over the previous 10 years.
Illustration
•  In 2017, S Inc revalued its land at P800,000 and
incorporated the new value in its account. The financial
position of S Inc as at December 31, 2017 is as follows:
 In 2017, S Inc revalued its land at
P800,000 and incorporated the new
value in its account. The financial
position of S Inc as at December 31,
2017 is as follows:
• Required:
• Calculate the goodwill arising on the acquisition of the equity interest in S Inc.
• Show the:
• journal entries in the separate books of P Inc to record the acquisition of the equity interest in S Inc;
• adjustment in the consolidated accounts of P Inc for 2017  in accordance with the equity method.

• Present a note to the carrying amount of investment in S Inc in the consolidated financial position.
• Note that the broad principles underlying the
consolidation procedures used in the acquisition of a
subsidiary are also applicable on the acquisition of an
investment in an associate or joint venture. On acquisition
of an investment in an associate or a joint venture, the fair
value of the purchase consideration given is compared Explanation
with the fair value of the underlying net assets and any
resulting difference is attributable to goodwill on
acquisition. The goodwill on acquisition of a joint venture
or an associate is, however, not shown separately but is
included in the carrying amount of the investment.
Solution
Preparation of Consolidated
Financial Statements
Preparation of Consolidated Financial Statements
• Under the equity method, the carrying amount of the investment in an associate or a joint venture
would change from one period to another if the net assets of the associate or joint venture change
due to profits or losses and components of other comprehensive income.
• In the consolidated profit or loss, the group would take its share of the associate's or joint venture's
profit after tax and controlling interest that passes through its profit or loss. Similarly, if there are
other post acquisition changes in equity, such as revaluation surplus and foreign exchange reserves
in the associate or joint venture, the group would take its share of such reserves in its consolidated
other comprehensive income. The share of profits or losses and components of other
comprehensive income are then included in the respective group's reserves in the statement of
changes in equity.
• Note that although the investor, in its separate accounts, would take credit for dividends from the
associate or joint venture, such dividends are irrelevant from the viewpoint of the group and must
be eliminated on consolidation.
Illustration
• Required
• Using a consolidation worksheet, show the journal
entries for the equity method;
• Prepare a note to show the carrying amount of
investment in the associate.
Solution
End of Part 1
By: Vergara Hannah Katrina E.