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Forms of Joint Venture Joint ventures take many different forms and structures. This Standard identifies three broad types - jointly controlled operations, jointly controlled assets and jointly controlled entities - which are commonly described as, and meet the definition of joint ventures. The following characteristics are common to all joint ventures: two or more venturers are bound by a contractual arrangement; and the contractual arrangement establishes joint control.
Contractual Arrangement The existence of a contractual arrangement distinguishes interests which involve joint control from investments in associates in which the investor has significant influence (see FRS 1282004, Investments in Associates). Activities that have no contractual arrangement to establish joint control are not joint ventures for the purposes of this Standard. The contractual arrangement may be evidenced in a number of ways, for example, by a contract between the venturers or minutes of discussions between the venturers. In some cases, the arrangement is incorporated in the articles or other by-laws of the joint venture. Whatever its form, the contractual arrangement is usually in writing and deals with such matters as: the activity, duration and reporting obligations of the joint venture; the appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers; capital contributions by the venturers; and the sharing by the venturers of the output, income, expenses or results of the joint venture.
The contractual arrangement establishes joint control over the joint venture. As noted in paragraph 4, such an arrangement ensures that no single venturer is in a position to control unilaterally the activity. The arrangement identifies those decisions in areas essential to the goals of the joint venture which require the consent of all the venturers and those decisions which may require the consent of a specified majority of the venturers. The contractual arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies which have been agreed upon by the venturers in accordance with the contractual arrangement and delegated to the operator. If the operator has the power to govern the financial and operating policies of the economic activity, it controls the venture and the venture is a subsidiary of the operator and not a joint venture.
Jointly Controlled Operations The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer's employees alongside the venturer's similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product and any expenses incurred in common are shared among the venturers. An example of a jointly controlled operation is when two or more venturers combine their operations, resources and expertise in order to manufacture, market and distribute jointly a particular product, such as an aircraft. Different parts of the manufacturing process are carried out by each of the venturers. Each venturer bears its own costs and takes a share of the revenue from the sale of the aircraft, such share being determined in accordance with the contractual arrangement. In respect of its interests in jointly controlled operations, a venturer should recognise in its separate financial statements and consequently in its consolidated financial statements: the assets that it controls and the liabilities that it incurs; and the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture.
Because the assets, liabilities, income and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements. Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture. However, the venturers may prepare management accounts so that they may assess the performance of the joint venture.
Jointly Controlled Assets Some joint ventures involve the joint control and often the joint ownership by the venturers of one or more assets contributed to or acquired for the purpose of the joint venture and dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. In meeting the requirements of paragraph 20, a question may arise as to how to describe the asset in the balance sheet of the venturer as it might be argued that the joint ownership of an asset does not technically meet the definition of an asset on the basis that control is absent. However, there is a distinction between the property/asset and the reporting venturer's rights in it. The reporting venturer's asset is its contractual joint ownership rights which it can determine how to use, for example, it may decide to sell, hold, or pledge them as collateral. In the case of a liability, regardless of whether it is financing joint venture assets, the treatment of a joint liability will be dependent upon whether the liability is the primary responsibility of the venturer. If the liability is the primary responsibility of a separate joint venture enterprise, it should be reported as such. Should the reporting venturer be secondarily liable for the balance (e.g as a guarantor for default), it should appropriately account for and disclose this guarantee. Where the contractual agreement means that the venturer is jointly and severally liable, it would be expected that the venturer would include in its balance sheet the portion for which it has primary responsibility. The portion for which it is secondarily liable should be accounted as a guarantee (contingent liability). These joint ventures do not involve the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer has control over its share of future economic benefits through its share in the jointly controlled asset. Many activities in the oil, gas and mineral extraction industries involve jointly controlled assets. For example, a number of oil production companies may jointly control and operate an oil pipeline. Each venturer uses the pipeline to transport its own product in return for which it bears an agreed proportion of the expenses of operating the pipeline. Another example of a jointly controlled asset is when two enterprises jointly control a property, each taking a share of the rents received and bearing a share of the expenses. In respect of its interest in jointly controlled assets, a venturer should recognise in its separate financial statements and consequently in its consolidated financial statements: its share of the jointly controlled assets, classified according to the nature of the assets; any liabilities which it has incurred; its share of any liabilities incurred jointly with the other venturers in relation to the joint venture; any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and any expenses which it has incurred in respect of its interest in the joint venture.
In respect of its interest in jointly controlled assets, each venturer includes in its accounting records and recognises in its separate financial statements and consequently in its consolidated financial statements: its share of the jointly controlled assets, classified according to the nature of the assets rather than as an investment. For example, a share of a jointly controlled oil pipeline is classified as property, plant and equipment; any liabilities which it has incurred, for example, those incurred in financing its share of the assets; its share of any liabilities incurred jointly with other venturers in relation to the joint venture; any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture; and any expenses which it has incurred in respect of its interest in the joint venture, for example, those related to financing the venturer's interest in the assets and selling its share of the output.
Because the assets, liabilities, income and expenses are already recognised in the separate financial statements of the venturer and consequently, in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements.
The treatment of jointly controlled assets reflects the substance and economic reality and, usually, the legal form of the joint venture. Therefore, in the case of matters such as an undivided interest in a jointly controlled asset, i.e. an interest in which two or more parties jointly own property in which there is unity of possession, but separate and distinct titles, it should be accounted for as a jointly controlled asset regardless of whether it takes an unincorporated or incorporated form. Separate accounting records for the joint venture itself may be limited to those expenses incurred in common by the venturers and ultimately borne by the venturers according to their agreed shares. Financial statements may not be prepared for the joint venture, although the venturers may prepare management accounts so that they may assess the performance of the joint venture.
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