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C:\Fakepath\Ias 31 Joint Ventures

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Presentation on International Financial Reporting Standards (IFRS) to be implemented in the US by 2015. Topic of interest is joint ventures.

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C:\Fakepath\Ias 31 Joint Ventures

  1. 1. IAS 31: Interests in Joint Ventures Brett Scharg International Accounting 520 March 9, 2010
  2. 2. Joint Venture Definition – US GAAP <ul><li>Corporate joint venture refers to a corporation owned and operated by a small group of businesses as a separate and specific business…The purpose of a corporate joint venture frequently is to share risks and rewards in developing a new market, product or technology…A minority public ownership, however, does not preclude a corporation from being a corporate joint venture” – Opinion No. 18 paragraph 2d </li></ul>
  3. 3. Treatment Under US GAAP <ul><li>Investment recorded at historical cost (cash basis) </li></ul><ul><li>APB Opinion No. 18 requires joint ventures to be reported as equity investments </li></ul><ul><ul><li>Report as subsidiary if ownership exceeds 50% </li></ul></ul><ul><li>Record share of losses in excess of investment </li></ul><ul><li>Notes to financial statements include names of individuals owning more than 20% stock </li></ul>
  4. 4. GAAP Example 500 200 500 NI (1,750) (300) (1,600) Total expenses (450) (100) (400) Other expenses (1,300) (200) (1,200) COGS 2,250 500 2,100 Total revenue 100 Income from Shield 2,250 500 2,000 Sales Proportionate Consolidated Shield Unincorp. Equity Method - Price Corp
  5. 5. Joint Venture Definition - IFRS <ul><li>Contractual agreement </li></ul><ul><ul><li>Duration and reporting obligations </li></ul></ul><ul><ul><li>Agreement of Board of Directors </li></ul></ul><ul><ul><li>Ensures no single venture can control the entity </li></ul></ul><ul><ul><ul><li>If one entity can usurp power, report as subsidiary and not joint venture </li></ul></ul></ul><ul><li>Involves two or more parties </li></ul><ul><li>Parties undertake economic activity subject to joint control </li></ul>
  6. 6. Types of Joint Ventures <ul><li>Jointly controlled operation </li></ul><ul><ul><li>Venture uses own assets, incurs own expenses and liabilities </li></ul></ul><ul><ul><li>Each venture provides expertise to manufacture product </li></ul></ul><ul><ul><ul><li>Different parties carry out different responsibilities </li></ul></ul></ul><ul><li>Jointly controlled assets </li></ul><ul><ul><li>Recognizes income from sale of output </li></ul></ul><ul><ul><li>Oil, gas, mineral extraction industry </li></ul></ul><ul><ul><ul><li>Each company shares in ownership of assets, economic benefit of extracting oil </li></ul></ul></ul><ul><li>Jointly controlled entities </li></ul><ul><ul><li>Establishiment of corporation or partnership where each entity has interest </li></ul></ul><ul><ul><li>Contributions recognized in financial statements as investment </li></ul></ul><ul><ul><ul><li>U.S. business establishes operation in foreign country with foreign government </li></ul></ul></ul><ul><ul><li>Maintains own accounting records </li></ul></ul><ul><ul><li>Each entity contributes cash or resources </li></ul></ul>
  7. 7. Proportional Consolidation <ul><li>Venture combines share of assets, liabilities, income & expenses line by line in financial statements </li></ul><ul><ul><li>Similar to procedures of consolidations of investments </li></ul></ul><ul><ul><li>i.e. proportion of its share of inventory recorded line-by-line </li></ul></ul><ul><ul><li>Method discontinued once entity lacks control over joint venture </li></ul></ul><ul><ul><li>Separate financial statements </li></ul></ul>
  8. 8. Equity Method <ul><li>Percentage of company owned </li></ul><ul><ul><li>Not recommended by IASB because reflects significant influence rather than joint control </li></ul></ul><ul><ul><li>i.e. Pepsi Corporation has a 50% ownership of Pepsi Bottling. Pepsi Bottling reports $500 million in Net Income for 2005. Therefore, Pepsi Corporation reports $250 million NI from subsidiary Pepsi Bottling </li></ul></ul><ul><ul><li>Method discontinued once entity lacks control over joint venture </li></ul></ul><ul><li>Investment recorded at cost </li></ul>
  9. 9. To Whom is Standard NOT Applicable? <ul><li>Mutual Funds </li></ul><ul><li>Venture Capitalists </li></ul><ul><li>Insurance Funds </li></ul><ul><li>Investments in the above financial securities should be valued at fair market value </li></ul>
  10. 10. Intercompany Transactions (1) <ul><li>Gains on sales of assets not to be recognized until asset sold to third party </li></ul><ul><li>Losses on sales of assets to be recognized immediately </li></ul><ul><ul><li>Conservatism </li></ul></ul>
  11. 11. Disclosures <ul><li>Must disclose any contingent liabilities incurred in relation of joint venture </li></ul><ul><li>Disclose portion of liabilities in which company is liable </li></ul><ul><li>Any other liabilities incurred as a result of venture being connected to separate company’s liabilities </li></ul><ul><li>The following commitments are listed separately: </li></ul><ul><ul><li>Capital commitments incurred with other ventures </li></ul></ul><ul><ul><li>Share of capital commitments themselves </li></ul></ul><ul><li>Also include current assets, current liabilities, LT liabilities, income, expenses </li></ul><ul><li>Method used to recognize interests </li></ul>
  12. 12. GAAP vs. IFRS <ul><li>Does not define joint venture </li></ul><ul><li>Does not require contractual arrangement </li></ul><ul><li>Intercompany gains & losses recorded </li></ul><ul><li>Offers definition of joint venture </li></ul><ul><li>Requires contractual arrangements </li></ul><ul><li>Losses recorded </li></ul><ul><li>Gains not recorded until sold to outside party </li></ul><ul><li>Details </li></ul>
  13. 13. Why Did IASB Adopt Different Standards? <ul><li>Conservatism </li></ul><ul><ul><li>Intercompany transactions </li></ul></ul><ul><li>Transparency </li></ul><ul><ul><li>Liabilities in subsidiaries must be disclosed </li></ul></ul>
  14. 14. Questions