Welcome to IFRS is easy's flash term for the week
Understanding the difference between Joint operations and Joint ventures
Have you ever heard a word in accounting before and you feel you know the literal meaning of it but deep down you wonder what the accounting implication could be? This is me before learning about these two terms.
I used to have them confused especially when I hear other terms used within the same standard such as joint arrangements or joint control. Ah! IFRS can formulate terms ehn.
So what led to these two terms and what is the essence? How is it different from accounting for an investment in a subsidiary, an associate, or an ordinary investment?
Our university undergraduate accounting knowledge simplifies the above as follows:
- Ordinary investment - indicates an investment of less than 20% in an entity
- Investment in associate - indicates an investment of 20% but less than 50%
- Investment in joint venture - indicates an investment of 50%
- Investment in a subsidiary - indicates 50% and above
We will be focusing on that aspect of joint ownership.
You see, the above hard and fast rule does not work most of the time in practice and we will see why this is so, shortly.
Any time it seems as though two or more investors are coming together to pool funds for a certain activity, there are two major assessments that are to be made.
1. Does a joint arrangement exist at all?
2. If yes, how should the joint arrangement be classified?
Does a joint arrangement exist at all?
You know the drill. We have to first define a joint arrangement in line with what the applicable accounting standard says. Here we go! With respect to IFRS 11:
A joint arrangement is a contractual arrangement that gives two or more parties joint control of the arrangement.
- Selling and purchasing of goods or services
- Managing financial assets
- Selecting, acquiring or disposing of assets
- Researching and developing new products or processes
- Determining a funding structure or obtaining funding.
How should the joint arrangement be classified?
A joint arrangement can be classified into either of these two depending on some factors that we will describe shortly:
1. Joint operation
2. Joint venture
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.
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.