ACC711: ADVANCED ACCOUNTING PRACTICE AND REPORTING II

Tutorial 8: Accounting for Associates & Joint Ventures

1. What is an associate entity?
Paragraph 2 of AASB 128 defines an associate as:
An entity, including 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.

2. Discuss the similarities and differences between the criteria used to identify subsidiaries
and that used to identify associates.
A subsidiary is identified where another entity controls that entity. Control is defined in para
2 of AASB 128.
An associate is identified where another entity has significant influence over that entity.

Control Significant influence

Power over the investee Power to participate

Exposure or rights to variable returns To participate in the financial and

From involvement in investee operating policy decisions

Ability to affect returns through power -----------------------------------------------------

No ownership interest is necessary No ownership interest is necessary

3. What is meant by “significant influence”?

Para 2 of AASB 128 states:
Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies:

Note: Power to participate

Financial and operating policy decisions

4. What factors could be used to indicate the existence of significant influence?

Note paras 6 and 7 of AASB 128:
6. If an investor holds, directly or indirectly (e.g. through subsidiaries), 20 per cent or more
of the voting power of the investee, it is presumed that the investor has significant
influence, unless it can be clearly demonstrated that this is not the case. Conversely, if the
investor holds, directly or indirectly (e.g. through subsidiaries), less than 20 per cent of
the voting power of the investee, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.

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 7. The existence of significant influence by an investor is usually evidenced in one or more
of the following ways:
(a) Representation on the board of directors or equivalent governing body of the investee;
(b) Participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) Material transactions between the investor and the investee;
(d) Interchange of managerial personnel; or
(e) Provision of essential technical information.

5. What is a joint venture?

A joint arrangement is an arrangement between two or more entities so that two or more
entities have joint control of another entity.

Where a joint arrangement exists, the arrangement must be classified as either a joint
operation or a joint venture. The classification depends on the rights and obligations of the
parties to the arrangement. Joint ventures are accounted for under AASB 128 while joint
operations are accounted for under AASB 11.

A joint venture is described as an arrangement where the investor has a right to an investment
in the investee. The investee will have the following features:
 The legal form of the investee and the contractual arrangements are such that the investor
does not have rights to the assets and obligations for the liabilities of the investee; and
 The investee has been designed to have a trade of its own and as such must directly face
the risks arising from the activities it undertakes, such as demand, credit or inventory
risks.

6. What is meant by joint control?

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 key element of joint control is the sharing of control. In other words,
there must be at least two investors who have shared control of the investee (AASB 128,
para. 3).

7. Violin Ltd acquired a 40% interest in Drum Ltd in which it invested $170,000 on 1 July
2015. Violin Ltd has signed a joint venture agreement with the other investors in Drum
Ltd providing joint control to all investors. The share capital, reserves and retained
earnings of Drum Ltd at the investment date and at 30 June 2016 were as follows:

1 July 2015 30 June 2016

Share capital $300,000 $300,000
Asset revaluation surplus — $100,000
General reserve — $15,000
Retained earnings $100,000 $109,000

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 At 1 July 2015, all the identifiable assets and liabilities of Drum Ltd were recorded at
amounts equal to their fair values.
The following is applicable to Drum Ltd for the year to 30 June 2016:
(a) Profit (after income tax expense of $11,000): $39,000
(b) Increase in reserves
 General (transferred from retained earnings): $15,000
 Asset revaluation (revaluation of freehold land and buildings at 30 June 2016):
$100,000
(c) Dividends paid to shareholders: $15,000.
Violin Ltd does not prepare consolidated financial statements.
Required
Prepare the journal entries in the records of Violin Ltd for the year ended 30 June 2016
in relation to its investment in the joint venture, Drum Ltd.
40%
Violin Ltd Drum Ltd

At July 2015:

Net fair value of identifiable assets and liabilities of Drum

Ltd = $400,000
Net fair value acquired = 40% × $400,000
= $160,000
Cost of investment = $170,000
Goodwill = $10,000

Recorded profit – Drum Ltd $39,000

Investor’s Share – 40% $15,600

Increment in Asset Revaluation Surplus (40% × $100,000) $40,000

Note: As the general reserve is created as an appropriation from Retained Earnings, then
there is no need to adjust for movements in general reserve.

The journal entries in the records of Violin Ltd for the year ended 30 June 2016 are:
1 July 2015 Investment in Drum Ltd Dr $170,000
Cash/Share capital Cr $170,000

2015– 2016 Cash Dr $6,000

Investment in Drum Ltd Cr $6,000
(Dividend from joint venture: 40% × $15,000)

30 June 2016 Investment in Drum Ltd Dr $15,600

Share of profit or loss of associates and joint
ventures (40% × $39,000) Cr $15,600

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 Investment in Drum Ltd Dr $40,000
Share of other comprehensive income of
associates and joint ventures (40% × $100,000) Cr $40,000

Share of other comprehensive income of

associates and joint ventures Dr $40,000
Asset revaluation surplus Cr $40,000

8. Piano Ltd has a 30% interest in a joint venture, Mandolin Ltd, in which it invested
$50,000 on 1 July 2014. The equity of Mandolin Ltd at the acquisition date was:

Share capital $30,000

Retained earnings $120,000

All the identifiable assets and liabilities of Mandolin Ltd were recorded at amounts
equal to their fair values. Profits and dividends for the years ended 30 June 2015 to
2017 were as follows:
Profit before tax Income tax expense Dividends paid
2015 $80,000 $30,000 $80,000
2016 $70,000 $25,000 $15,000
2017 $60,000 $20,000 $10,000

Required
A. Prepare journal entries in the records of Piano Ltd for each of the years ended 30
June 2015 to 2017 in relation to its investment in the joint venture, Mandolin Ltd.
(Assume Piano Ltd does not prepare consolidated financial statements.)
30%
Piano Ltd Mandolin Ltd

At 1 July 2014:
Net fair value of identifiable assets and liabilities of
Mandolin Ltd = $150,000
Net fair value acquired = 30% × $150,000
= $45,000
Cost of investment = $50,000
Goodwill = $5,000

1 July 2014 Investment in Mandolin Ltd Dr $50,000

Cash/Payable Cr $50,000
(Acquisition of shares in Mandolin Ltd)

2014 – 2015 Cash Dr $24,000

Investment in Mandolin Ltd Cr $24,000
(Dividend received from Mandolin Ltd: (30% × $80,000)

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30 June 2015 Investment in Mandolin Ltd Dr $15,000
Share of profit or loss of associates and joint ventures Cr $15,000
(Recognition of profit in Mandolin Ltd: (30% × $50,000)

2015 – 2016 Cash Dr $4,500

Investment in Mandolin Ltd Cr $4,500
(Dividend received: (30% × $15,000)

30 June 2016 Investment in Mandolin Ltd Dr $13,500

Share of profit or loss of associates and joint ventures Cr $13,500
(Recognition of profit in Mandolin Ltd: (30% × $45,000)

2016 – 2017 Cash Dr $3,000

Investment in Mandolin Ltd Cr $3,000
(Dividend from joint venture: (30% × $10,000)

Investment in Mandolin Ltd Dr $12,000

Share of profit or loss of associates and joint ventures Cr $12,000
(Recognition of profit in Mandolin Ltd: (30% × $40,000)

B. Prepare the consolidation worksheet entries to account for Piano Ltd’s interest in
the joint venture, Mandolin Ltd. (Assume Piano Ltd does prepare consolidated
financial statements.)
30 June 2015

Investment in Mandolin Ltd Dr $15,000

Share of profit or loss of associates and joint ventures Cr $15,000
(30% × $50,000)

Dividend revenue Dr $24,000

Investment in Mandolin Ltd (30% × $80,000) Cr $24,000

30 June 2016

Retained earnings (1/7/15) Dr $9,000

Investment in Mandolin Ltd (30% × $30,000) Cr $9,000

Investment in Mandolin Ltd Dr $13,500

Share of profit or loss of associates and joint ventures Cr $13,500
(30% × $45,000)

Dividend revenue Dr $4,500

Investment in Mandolin Ltd (30% × $15,000) Cr $4,500

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30 June 2017

Investment in Mandolin Ltd Dr $0

Retained earnings (1/7/16) Cr $0
(30% [$30,000 + ($30,000)])

Investment in Mandolin Ltd Dr $12,000

Share of profit or loss of associates and joint ventures Cr $12,000
(30% × $40,000)

Dividend revenue Dr $3,000

Investment in Mandolin Ltd (30% × $10,000) Cr $3,000

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