1. Chapter 8 Interests In Joint Ventures

2. © 2008 Clarence Byrd Inc. 2 Joint Venture Defined  Paragraph 3055.03(c) A joint venture is an economic activity resulting from a contractual arrangement whereby two or more venturers jointly control the economic activity.

3. © 2008 Clarence Byrd Inc. 3 Other Terminology  Paragraph 3055.03(b)  Paragraph 3055.03(b) Joint control of an economic activity is the contractually agreed sharing of the continuing power to determine its strategic operating, investing and financing policies.

4. © 2008 Clarence Byrd Inc. 4 Forms of Organization  Jointly Controlled Operations  Uses assets or other resources of individual venturers  Does not involve the formation of a separate enterprise

5. © 2008 Clarence Byrd Inc. 5 Forms of Organization  Jointly Controlled Assets  Joint ownership or control of one or more assets  Does not involve the formation of a separate enterprise

6. © 2008 Clarence Byrd Inc. 6 Forms of Organization  Jointly Controlled Enterprise  Involves separate corporation or partnership  The separate enterprise owns or controls the assets

7. © 2008 Clarence Byrd Inc. 7 Classification Example A Owns 60%B Owns 20%C Owns 15%D Owns 5% Joint Venture

8. © 2008 Clarence Byrd Inc. 8 Classification Example  If No Agreement  A classifies as subsidiary  B classifies as significantly influenced (probably)  C and D classify as available for sale or held for trading

9. © 2008 Clarence Byrd Inc. 9 Classification Example Agreement A and D do not participate in management. B and C have joint control B and C would classify as joint venture A and D would classify as available for sale or held for trading

10. © 2008 Clarence Byrd Inc. 10 Accounting Methods  Paragraph 3055.17 Interests in joint ventures should be recognized in the financial statements of the venturer using the proportionate consolidation method. (January, 1995)

11. © 2008 Clarence Byrd Inc. 11 Accounting Methods  IAS No. 31 allows the use of either proportionate consolidation or the equity method

12. © 2008 Clarence Byrd Inc. 12 Accounting Methods The Future Proportionate Consolidation will be eliminated, with the equity method required

13. © 2008 Clarence Byrd Inc. 13 Losses On Non-Monetary Capital Contributions  Paragraph 3055.26 When a venturer transfers assets to a joint venture and receives in exchange an interest in the joint venture, any loss that occurs should be charged to income at the time of the transfer to the extent of the interests of the other non-related venturers. When such a transaction provides evidence of a decline that is other than temporary in the carrying amount of the relevant assets, the venturer should recognize this decline by writing down that portion of the assets retained through its interest in the joint venture. (January, 1995)

14. © 2008 Clarence Byrd Inc. 14 Losses On Non-Monetary Capital Contributions A venturer has land with a current fair market value of $450,000 and an original cost of $600,000. The venturer transfers this land to a joint venture in return for a 1/3 interest in the enterprise.

15. © 2008 Clarence Byrd Inc. 15 Losses On Non-Monetary Capital Contributions  Minimum loss of $100,000 [(2/3)($600,000 - $450,000)] must be recognized and charged to income  If transfer provides evidence of non- temporary decline in value, would recognize and charge to income the remaining $50,000

16. © 2008 Clarence Byrd Inc. 16 Gains On Non-Monetary Capital Contributions  Paragraph 3055.27  Paragraph 3055.27 When a venturer transfers assets to a joint venture and receives in exchange an interest in the joint venture, any gain that occurs should be recognized in the financial statements of the venturer only to the extent of the interests of the other non-related venturers, and accounted for in accordance with paragraphs 3055.28 and 3055.29. (January, 1995)

17. © 2008 Clarence Byrd Inc. 17 Gains On Non-Monetary Capital Contributions A venturer has land with a current fair market value of $700,000 and an original cost of $500,000. The venturer transfers this land to a joint venture in return for a 40 percent interest in the enterprise.

18. © 2008 Clarence Byrd Inc. 18 Gains On Non-Monetary Capital Contributions  Can recognize gain of $120,000 [(60%)($700,000 - $500,000)]  Would not be included in income unless the contributor received some cash

19. © 2008 Clarence Byrd Inc. 19 Gains On Non-Monetary Capital Contributions Required Journal Entry Investment In Joint Venture$620,000 Deferred Gain$120,000 Land500,000 Note: None of the recognized gain is taken into income

20. © 2008 Clarence Byrd Inc. 20 Gains On Non-Monetary Capital Contributions  Gains can only be taken into income to the extent that the venturer receives cash or other assets that do not represent an equity interest in the venture  Income inclusion based on the ratio of the cash received to the fair value of the asset

21. © 2008 Clarence Byrd Inc. 21 Gains On Non-Monetary Capital Contributions  If cash paid to contributor involves bank financing:  Venturer’s share of financing removed from consideration received  Reduces the amount of gain that can be included in income

22. © 2008 Clarence Byrd Inc. 22 Gains On Non-Monetary Capital Contributions Let’s Look @ Exercise 8-4 pg 377 Exercise 8-6 pg 380

23. © 2008 Clarence Byrd Inc. 23 Intercompany Transactions  If investee is a joint venture and investor is arm’s length with other venturers  Only the investor’s share of expenses, revenues, and profits is eliminated An investee sells merchandise to an investor for $40,000. As the merchandise cost $25,000 there is a profit of $15,000.

24. © 2008 Clarence Byrd Inc. 24 Downstream Transactions  Paragraph 3055.36 When a venturer sells assets to a joint venture in the normal course of operations and a gain or loss occurs, the venturer should recognize the gain or loss in income to the extent of the interests of the other non-related venturers. When such a transaction provides evidence of a reduction in the net realizable value, or a decline in the value, of the relevant assets, the venturer should recognize the full amount of any loss in income.

25. © 2008 Clarence Byrd Inc. 25 Upstream Transactions  Paragraph 3055.37 When a venturer purchases assets from a joint venture in the normal course of operations, the venturer should not recognize its share of the profit or loss of the joint venture on the transaction until the assets are sold to a third party. However, when the transaction provides evidence of a reduction in the net realizable value, or a decline in the value of the relevant assets, the venturer should recognize its share of the loss in income immediately.

26. © 2008 Clarence Byrd Inc. 26 Small Examples Lets look at 8-7 on pg 384 8- 8 on pg 387

27. Homework  Chapter 8 - Problems 1, 3, 5  Read Chapter 9 and 10  Omit discussion on hedging from pg 418 to end of Chapter 9 © 2008 Clarence Byrd Inc. 27