Accounting Standard (AS) 27: Financial Reporting of Interest in Joint Venture
AS-27 is applicable for accounting in joint venture interest and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturer and investors, regardless of the structure or forms under which the joint venture activities take place.
The statement provides for display and disclosure requirement for accounting for the investment in the stand-alone and consolidated financial statements of the venturer.
A joint venture is a contractual arrangement between two or more parties undertaking an economic activity, subject to joint control (control is the power to govern the financial and operating policies of an economic activity to obtain benefit from it).
The arrangement may be:
(a) Jointly controlled operations
(b) Jointly controlled asset
(c) Jointly controlled entities
In the event an enterprise by a contractual arrangement establishes joint control over an entity which is a subsidiary of that enterprise within the meaning of AS-21(CFS), it will be treated as joint venture as per AS-27.
Joint control requires all the venturers to jointly agree on key decisions, else decision cannot be taken, as such even a minority holder (owner) may enjoy joint control.
Contractual arrangement is normally made in writing touching upon:
(a) The activity, duration and reporting obligation
(b) The appointment of the board of director/governing body and the respective voting rights/capital contribution/sharing by ventures of the output, income, expenses or results of the joint venture.
Contractual arrangement and joint control together makes an activity a joint venture, (investment in Associates in which the investor has significant influence is covered by AS-23)
Some joint ventures involve use of own fixed assets and other resources on its own and obligation of its own.
For its interest in jointly controlled operations, a venturer should recognize in its separate financial statements and consequently in its CFS,
(a) the assets that it controls and the liabilities it incurs
(b) the expense it incurs and the share of income earned from the joint venture.
As the above are already recognized in stand-alone financial statements of the venturer and consequently in the CFS, there us no requirement for adjustment or other consolidation procedure, when the venturer present the CFS. Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture.
Some joint ventures involve joint control; by means of joint ownership by the venturers of one or more assets contributed/acquired for the purpose of joint venture – the asset are used to obtain economic benefit for the venturers, agreeing to share the output from the assets and sharing of expenses incurred.
In respect of jointly controlled assets, each venturer recognize in its separate financial statement and consequently in its CFS:
(a) Share of the jointly controlled assets under distinct head of each asset and not as an investment
(b) Any liability incurred (e.g. financing its share of the assets)
(c) Share of joint liability in respect of the venturer
(d) Any income from sale or use of its share of the output in the joint venture and share of expenses.
(e) Expense is incurred in respect of its in the joint ventures e.g. financing the venturer’s interests in the asset and selling its share of output The treatment of jointly controlled assets, recognizes the substance and economic reality (legal from of the joint venture) separate financial statements may not be prepared for the joint venture itself.
A jointly controlled entity involves the establishment of a corporation, partnership or lither entity in which each venturer has an interest as per contractual arrangement:
(a) in a separate/stand alone financial statement of each venturer, the interest in a jointly controlled entity should be accounted for as an investment as per AS -13 only the resources contributed, forms a part of the investment and the share’ of joint venture result is treated in the income statement of the venturers.
(b) proportionate consolidation for joint venture is applied in case where the preparation and presenting a CFS is required, reflecting the substance and economic reality of the arrangement in the CFS. Many of the procedure in this regard are similar to AS-21 and require to be followed for treatment and disclosure.
Joint venture interest in the financial statements, of an investor is treated appropriately in terms of AS-13, AS-21 or AS-23 in CFS but for separate financial statements is should be accounted for as per AS-13.
Disclosure under AS-27:
In separate and CFS in respect of:
(a) Aggregate amount of contingent liabilities unless the probability of loss is remote separately from other contingent liabilities in relation to:
1. Its interest in joint venture and its share in each of the contingent liabilities incurred jointly
2. Its share of the contingent liability of the joint ventures themselves for which it is contingently liable.
3. Those liabilities which arise because of the venturer is contingently liable for the liability of other venturers.
(b) Aggregate of commitments in respect of joint venture separately from other commitments in respect of:
1. Capital commitment of its own and shares in the capital commitment incurred jointly with other ventures in relation to the joint venture.
2. Share of capital commitment of the joint ventures themselves
(c) A list of all joint ventures and description of interest in significant joint venture and for jointly controlled entities the properties of ownership interest name of the country of incorporation/residence.