University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department
Accounting for Business Combinations
Mr. Jun Brian Alenton
CPA, CMA, CAT, RCA, MICB, MBA

Module 2: JOINT ARRANGEMENTS

GLOSSARY OF TERMS:
Joint arrangement 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 the unanimous consent of the parties sharing control

Joint operation 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

Joint venture A joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement

Joint venturer A party to a joint venture that has joint control of that joint
venture

Party to a joint An entity that participates in a joint arrangement, regardless of

arrangement whether that entity has joint control of the arrangement

Separate vehicle A separately identifiable financial structure, including separate

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

SCOPE OF PRFS 11
This standard covers and is applicable to all entities that are a party to a joint
arrangement.

JOINT ARRANGEMENT is a contractual agreement whereby two or more parties undertake an

economic activity that is subject to JOINT CONTROL. This means no single venturer or operator
should be in a position to control the joint arrangement unilaterally. Each
venturer/operator that participates in the joint control of the joint arrangement must be
identified and disclosed appropriately.

A joint arrangement has the following characteristics

o the parties are bound by a contractual arrangement, and
o the contractual arrangement gives two or more of those parties joint control of the
arrangement.

The diagram above shows the assessment to consider whether it is a joint arrangement or
not.

JOINT CONTROL is the CONTRACTUALLY AGREED sharing of control of an arrangement, which exists
only when the decisions about the RELEVANT ACTIVITIES require the unanimous consent of the
parties sharing control. The relevant activities of an arrangement are those that
significantly affect the investee’s RETURNS, and the investor must have the POWER and
capability to affect these variable returns to which it is exposed, or has rights, under

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the terms of the contractual agreement. Often, the agreement among the parties is in writing,
but not always.
Under IFRS 11, a JOINT ARRANGEMENT is either a JOINT OPERATION or a JOINT VENTURE. An entity
sharing control in the joint arrangement must assess its rights and obligations arising
from the undertaking. If the entity has rights to the assets and obligations for the
liabilities relating to the arrangement, then the undertaking is a joint operations and
parties sharing control are called JOINT OPERATORS. If an entity has rights to the net
assets, the arrangement is a JOINT VENTURE and parties sharing control are called JOINT
VENTURERS.

In assessing its rights and obligations, the venturer or the operator must look into the
(1) structure and legal form of the arrangement; (2) terms of the contractual agreement;
and (3) other relevant facts and circumstances. For example, if the activities of the joint
arrangement will not be carried through a SEPARATE VEHICLE, then the arrangement is a joint
operation. If carried in a separate vehicle, then its legal form could help assess the
nature of an entity’s rights and obligations: if it is a general partnership, the arrangement
is deemed to be a joint operations because the entity would still have rights to the assets
and obligations for liabilities; if it is a corporation, the arrangement is deemed to be a
joint venture as the corporation itself would have rights to assets and obligations for
liabilities (not the venturer), unless the terms of the contractual agreement and other
facts and circumstances would show otherwise. In all cases, these three factors unilaterally
or collectively determine the nature of an entity’s rights and obligations relating to the
joint arrangement.
Accounting by the venturer or by the operator for its interest in the joint arrangement
would then be entirely different.

The illustration above sets out the changes in the classification of Joint Arrangements
(Joint Ventures in PAS 31).

The illustration above sets out the scenarios for understanding when collective joint
control and unanimous consent exist.

FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT

1. IFRS-11 requires a joint operator to recognize and measure the assets and liabilities
(and recognize the related revenues and expenses) in relation to its interest in the

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 arrangement in accordance with relevant IFRSs applicable to the particular assets,
liabilities, revenues, and expenses.
2. IFRS-11 requires a joint venture to recognize an INVESTMENT and to account for that
investment using the EQUITY METHOD in accordance with PAS 28 – INVESTMENTS IN
ASSSOCIATES AND JOINT VENTURES, unless the entity is exempted from applying the equity
method as specified in that standard.

PFRS 11 provides that the investment in the JV be accounted for by the venturer applying
the EQUITY METHOD only, as follows:
• in the balance sheet, initially record the investment in the joint venture at cost
and adjust thereafter for the post-acquisition change in the venturer’s share of net
assets of the joint venture; the increase in net assets will equate to the profit/loss
recorded by the joint venture and any increases in reserves created directly in
equity.
• in the income statement, recognize the venturer’s share of the profit or loss of the
joint venture.
• the equity method, as described in PAS 28, is also a consolidation technique, often
being described as a one-line- consolidation method.

The diagram above shows the summarized comparison between the types of Joint Arrangement.

The illustration above shows the assessment in the classification of Joint Arrangements.

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If the joint arrangement is not structured in a separate vehicle, it is classified as a
joint operation. However, if the arrangement is structured in a separate vehicle, further
assessment needs to be considered to classify such arrangement. The following needs to be
considered for the classification:

Legal Form of the Separate Vehicle

After establishing that a separate vehicle exists, the second step is to analyze the legal
form of the separate vehicle. The legal form of the separate vehicle must be assessed to
determine whether it gives the parties rights to the net assets, or rights to the assets
and obligations for the liabilities of the arrangement. In simple terms, the test for legal
from depends on the answer to the question: does the separate vehicle confer separation
between the parties and the separate vehicle? If yes, the arrangement is treated as a joint
venture, otherwise, it will be treated as a joint operation.

Contractual Agreement
The next step is to examine the contractual arrangements to determine if they provide the
parties with rights to the net assets or rights to the assets and obligations to the
liabilities. This is because even if the legal form of the separate vehicle establishes
rights for each of the parties, the contractual terms of the joint arrangement may unwind
the effects of the legal form and give the parties rights to the assets and obligations for
the liabilities.

The table above summarizes the common contractual terms in a joint arrangement.

Other Facts and Circumstances

If the preliminary assessment of the legal form and the contractual arrangements indicate
that a joint arrangement may be a joint venture, then the parties must consider any other
facts and circumstances to determine whether the parties have the rights to the assets and
obligation for liabilities.

It is critical to understand the purpose and design of the joint arrangement, whether it:
1. primarily aims to provide the parties with an output
2. depends on the parties on a continuous basis for settling its liabilities.

The table above summarizes the other facts and circumstances the needs to be considered.

Accounting for Sales or Contribution 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, it is conducting the transaction
with the other parties to a joint operation and, as such, the joint operator shall

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 recognize gains and losses resulting from such a transaction only to the extent of
the other parties’ interest in the joint operation.

• When such transactions provide evidence of a reduction in the NRV of the assets to be
purchased or of an impairment loss of those assets, a joint operator shall recognize
its share of those losses.

Types of joint arrangement

An entity is required to determine the type of joint arrangement in which it is involved.
The types of joint arrangement are:
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)
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.” (PFRS 11.16)

An entity applies judgment when determining the type of joint arrangement in which it is
involved by:
a. Considering its rights and obligations arising from the arrangement.
b. Assessing its rights and obligations in relation to the:
i. structure and legal form of the arrangement,
ii. terms of the contractual agreement, and
iii. other facts and circumstances.

Remember the following:

JOINT OPERATION:
RIGHTS TO & JOINT VENTURE:
OBLIGATIONS FOR: RIGHTS TO:

ASSETS = LIABILITIES + EQUITY

DISCLOSURE Requirements:

The table above sets out the summary of disclosure requirements of joint arrangements under
PFRS 12.

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JOINT VENTURES (PFRS for SMEs)
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. This means
that the proportionate consolidation method may not be used if the venturer is an SME. The
equity method available to the SME is similar to the equity method discussed under IAS 31.
To establish similarities and differences among the three methods, the following are pro-
forma entries for selected transactions.

Transactions Cost Model Fair value Model Equity Model

Original investment Inv. in JV X Investment in JV x Inv. in JV X
Cash X Cash x Cash X
Transaction cost Inv. in JV X Profit and Loss X Inv. in JV X
Cash x Cash X Cash X
Cash dividends Cash X Cash X Cash X
P/L X P/L X Inv in JV X
Year-end adjustment
FV remeasurement Inv. in JV X
P/L X
Share of net income Inv. in JV X
P/L X
Share of impairment P/L x P/L X
Inv in JV X Inv in JV X

If published price quotations are available, use of the cost model is not allowed.. In
the absence of published price quotations the method to be used is deemed to be a matter
of choice.

Problem 1. JOINT OPERATIONS

On January 1, 2021, FIT CORPORATION and RIGHT, INC. establish a joint arrangement to
manufacture a product. Each company has a 50% interest in the activity and will share on
total output equally.

FIT’s initial contribution consisted of P5,000,000 cash and RIGHT’ contributed machinery
that was carried in its books at P4,750,000. The fair value of the machinery at that date
was P5,000,000. During the first year of operation both parties contributed a further
P7,500,000 each.

On December 31, 2021, the manager of the joint operations provided the following statements:

Costs incurred for the year ended December 31, 2021; the Joint operation uses actual costing
in its manufacturing operations.

Wages P4,600,000
Supplies 7,000,000
Overheads 5,500,000
Depreciation 1,400,000
P18,500,000
Cost of FG inventory 13,500,000
Work-in-Process, 12/31/21 P 5,000,000

Receipts and Payments for year ended December 31, 2021:

Receipts:
Original contributions P 5,000,000
Additional contributions 15,000,000
Total P 20,000,000

Payments:
Machinery (1/2/21) P 2,000,000
Wages 4,500,000
Supplies 7,500,000
Overheads 5,250,000
Operating expenses 500,000 19,750,000
Closing cash balance P 250,000

Assets and liabilities at December 31, 2021

Assets:
Cash P 250,000
Machinery P7,000,000
Accum Depreciation 1,400,000 5,600,000
Supplies 1,000,000
Work-in-process 5,000,000
Total assets P 11,850,000

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Liabilities:
Accrued wages P 100,000
Accounts payable 750,000
Total liabilities P 850,000

Net assets P 11,000,000

Required:
1. Prepare the journal entries in the records of FIT CORPORATION and RIGHT, INC. in relation
to the joint operation.

Problem 2 – JOINT VENTURE

On January 1, 2021, GWAPO CORPORATION signed a joint venture agreement with another venturer,
GWAPA, INC. for the production of CDs. BEAUTISOME COMPANY, is established to carry on the
business venture, with each venturer contributing P1,250,000 for equal shares in the
company’s 250,000 P10.00 par value shares. They will share profits equally.

On December 31, 2021, the financials of BEAUTISOME COMPANY follows:

COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
Revenues P500,000
Expenses 385,000
Net income P 115,000
Retained earnings, Jan 1, 2021
Cash dividend paid (38,400)
Retained earnings, Dec 31, 2021 P 76,600

BALANCE SHEET
Cash P51,600 Liabilities P725,000
Accounts receivable 400,000 Share capital 2,500,000
Inventory 625,000 Retained earnings 76,600
Plant, Property, Equipt. 2,350,000
Accum Depreciation ( 125,000) ________
Total P3,301,600 Total P 3,301,600

The financial statements of GWAPO CORPORATION, one of the venturers, for the same period
follow:

Revenues P10,800,000
Expenses 9,280,000
Profit 1,520,000
Share capital 3,000,000
Retained Earnings 920,000
Liabilities 840,000
Totals P6,280,000

Cash P 529,200
Accounts receivable 480,000
Inventory 840,000
Plant, Property, and Equipment 3,900,000
Accumulated Depreciation (700,000)
Investment in Joint Venture 1,230,800
Totals P6,280,000
Required:
1. Prepare journal entries in the books of GWAPO CORPORATION using the Equity Method.
2. Prepare the financial statements for 2021 for GWAPO CORPORATION.

Problem. 3: JOINT VENTURE – THE VENTURER IS AN SME.

1. On January 1, 2021 SME J acquired 25% of the equity of L CORPORATION for P128,000. SME
J shares in the joint control over the relevant activities of the joint venture in
relation to its operations. Transaction costs of 2% of the purchase price of the shares
were incurred by SME J.
2. On December 15, 2021 L CORPORATION declared and paid cash dividends of P18,000. .
3. For the year ended December 31, 2021, L CORPORATION recognized a profit of P60,000.
4. Published price quotations do no exist for the shares of L CORPORATION. Using appropriate
valuation techniques SME J determined the fair value of its investments in L CORPORATION
at December 31, 2021 as P140,000. Costs to sell are estimated at 5% of the fair value
of the investment. SME J does not prepare consolidated financial statements because it
does not have any subsidiary (ies).

Required:
Prepare appropriate journal entries in the books of SME J for the L CORPORATION under each
of the three (3) methods

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 Multiple Choices:
K and L join in a venture for the sale of certain merchandise. The participants agree the following:
K shall be allowed a commission of 10% on his net purchase; the participants shall be allowed
commissions of 25% on their respective sales; and K and L shall divide the profit or loss 60% and
40%, respectively. Joint operation transaction follows:
Dec. 1: K make cash purchase of P57,000.
3: L pays venture expenses of P9,000.
5: Sales are as follows: K, P48,000; L, P36,000. The participants keep their own cash receipts.
7: K return unsold merchandise and receives P15,000 cash.
15: The participants make cash settlement.

1. In the distribution of the net profit of the venture, the shares of K, and L are:
K L K L
a. P4,260 P3,230 c. P4,820 P3,430
b. P4,680 P3,120 d. P4,840 P4,230

2. In the final cash settlement, L would pay K the amount of:

a. P14,100 b. P14,880 c. P15,100 d. P15,890

__________________________ Joint_Operation_______________________________
2021 2021
Nov. 6 Merchandise-Peter P8,500 Nov. 20 Cash Sales-Rolan P20,400
8 Merchandise-Neil 7,000 12 Cash Sales-Rolan 4,200
10 Freight paid-Rolan 200 28 Merchandise-Neil 1,210
12 Advertising-Rolan 150
Dec. 8 Purchase-Rolan 3,500
14 Selling Expenses-Rolan 400

The venture agreement provided for the division of gains and losses among Peter, Neil and
Rolan in the ratio of 2:3:5 The venture was to close as of December 31, 2021.
3. The total gain from the joint operation amounted to:
a. P6,060 b. P12,120 c. P18,180 d. None
4. As final settlement, Peter received in cash:
a. P6,060 b. P7,608 c. P8,080 d. 9,712

Soriente, Santos, and Salazar formed a joint arrangement, Soriente has been designated as
manager of the venture, for which he is to receive a bonus of 15% of the profit after
deduction of the bonus as an expense. The net profit, after bonus, has been agreed to be
divided as follows; Soriente, 25%; Santos, 40%; and Salazar, 35%
After 5 months, the joint arrangement is terminated as of May 31, 2021. On this date, the
trial balance kept by Soriente contains the following balances:
Debit Credit
Joint Operation P9,000
Santos P500
Salazar P2,000
The venture has still some undisposed merchandise, which Soriente agreed to purchase at its
cost of P2,500. The bonus of Soriente has not yet been taken up.

5. The net profit of the joint arrangement, after bonus to Soriente is:
a. P1,500 b. P9,000 c. P10,000 d. P11,500
6. The share of Santos in the venture is:
a. P3,500 b. P3,600 c. P4,000 d. P4,600
7. The cash settlement received by Santos and Salazar is:
a. Santos –P4,000; Salazar –P3,500
b. Santos –P3,500; Salazar – P3,500
c. santos –P 4,000; Salazar –P6,500
d. Santos – P3,500; Salazar –P 5,500

On January 1, 2021, PATRIMONY Co. entered into a joint agreement classified as a joint
venture. For an investment of P2,000,000, PATRI Co. obtained 30% interest in HERITAGE Joint
Venture, Inc. During the year HERITAGE Joint Ventures, Inc. reported profit of P4,000,000
and other comprehensive income of P800,000, for a total comprehensive income of P4,800,000.
HERITAGE Joint Venture, Inc. declared dividends of P2,400,000 during the year.
8. How much is the carrying amount of the investment in venture on December 31, 2021?
a. P2,720,000 b. P2,000,000 c. P2,480,000 d. P4,160,000

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JRU CORPORATION, a joint venturer with a 50% equity in Joint Venture ABC INCORPORATED,
prepared the following draft of its combined financial statements at December 31, 2021
before the year-end adjustments under the equity method.
Revenues P10,800,000
Expenses 9,280,000
Profit 1,520,000
Ordinary shares 3,000,000
Retained earnings 920,000
Liabilities 840,000
Totals P6,280,000

Current assets P1,830,000

Plant assets 3,900,000
Accumulated Deprn (700,000)
Investment in JV 1,250,000
Totals P6,280,000
Joint venture ABC reported a net profit of P115,000 for the year ended December 31, 2021.

9. Determine the total assets that will be shown in the balance sheet of JRU CORPORATION
at December 31, 2021.
a. P5,030,000 c. P6,280,000
b. P6,337,500 d. P5,280,000

10. Determine the total stockholders’ equity that will be shown in the balance sheet of
JRU at December 31, 2021.
a. P4,190,000 c. P5,497,500
b. P5,440,000 d. P4,440,000
Items 11 thru 14 are based on the following information:
• On January 1, 2021 SME JV acquired a 35% equity of Z CORPORATION for P37,000, SME JV
shares in the joint control over the strategic financial and operating decisions of Z
CORPORATION.. Transactions costs of 5% of the purchase price of the shares were incurred
by SME JV.
• On December 31, 2021 Z CORPORATION declared and paid a dividend of P24,000. Z CORPORATION
recognized a profit of P18,000 for that year.
• Published price quotations do not exist for the shares of Z CORPORATION. Using appropriate
valuation techniques SME JV determined the fair value of its investment in Z CORPORATION
at December 31, 2021 as P49,000. Costs to sell are estimated at 9% of the fair value of
the investments. SME A does not prepare consolidated financial statements because it
does not have any subsidiary.

11. What is the profit (loss) of SME JV to be presented in the income statement for Z
CORPORATION using the fair value method?
a. PP20,400 c. P15,990
b. P18,550 d. P14,140
12. What is the profit (loss) of SME JV to be presented in the income statement for Z
CORPORATION using the cost model?
a. P(8,575) c. P 5,250
b. P 8,400 d. P (1,750)
13. What is the investment balance of SME JV at the end of the year in Z CORPORATION using
the fair value model?
a. P 52,325 c. P49,000
b. P 57,575 d. P 47,075
14. What is the investment balance of SME JV at the end of the year in Z CORPORATION using
the equity model?
a. P38,850 c. P 34,125
b. P42,525 d. P 36,750

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