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Investments in Joint Ventures

SME Par.IFRS SMEU.S. GAAP
Scope of this section
15.1 This section applies to accounting for joint ventures in consolidated financial statements and in the financial statements of an investor that is not a parent but that has a venturer’s interest in one or more joint ventures. Paragraph 9.26 establishes the requirements for accounting for a venturer’s interest in a joint venture in separate financial statements.  
Joint ventures defined
15.2 Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Unlike IFRS SMEs, U.S. GAAP does not specifically require unanimous consent in meeting the definition of a corporate joint venture.
15.3 A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointl controlled assets, or jointly controlled entities. Unlike IFRS SMEs, U.S. GAAP does not define joint ventures (other than corporate joint ventures).

Unlike IFRS SMEs, U.S. GAAP does not specifically require a contractual arrangement in meeting the definition of a corporate joint venture.
Jointly controlled operations
15.4 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. Unlike IFRS SMEs, U.S. GAAP does not define jointly controlled operations.  However, the term has a similar meaning in practice.
15.5 In respect of its interests in jointly controlled operations, a venturer shall recognise in its financial statements:
  1. the assets that it controls and the liabilities that it incurs, and
  2. 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.
 Unlike IFRS SMEs, US GAAP has no guidance on accounting for jointly controlled operations.  However, like IFRS SMEs, in practice the investor includes in its financial statements the assets that it controls and the liabilities and expenses that it incurs in the course of pursuing the joint operation, plus its share of the income from the operation if the operation is not conducted within an entity.
Jointly controlled assets
15.6 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. Unlike IFRS SMEs, U.S. GAAP does not define jointly controlled assets (other than undivided interests in real estate).  However, the term has a similar meaning in practice.
15.7 In respect of its interest in a jointly controlled asset, a venturer shall recognise in its financial statements:
  1. its share of the jointly controlled assets, classified according to the nature of the assets;
  2. any liabilities that it has incurred;
  3. its share of any liabilities incurred jointly with the other venturers in relation to the joint venture;
  4. 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
  5. any expenses that it has incurred in respect of its interest in the joint  venture.
 Unlike IFRS SMEs, the equity method is applied to jointly controlled assets only if the arrangement is carried out as a legal entity.  Proportionate consolidation is not allowed except for investments in unincorporated entities when specialized industry practices apply.  If the arrangement is carried on without a legal entity, the investor continues to account for its owned assets.
Jointly controlled entities
15.8 A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest.  The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. U.S. GAAP does not define a jointly controlled entity other than a corporate joint venture.  However, in practice it is understood as a joint venture activity carried on through a separate entity.
 Measurement—accounting policy election
15.9 A venturer shall account for all of its interests in jointly controlled entities using one of the following:
  1. the cost model in paragraph 15.10.
  2. the equity method in paragraph 15.13.
  3. the fair value model in paragraph 15.14.
 Unlike IFRS SMEs, prior to determining the accounting model, an entity first assesses whether the entity is a variable interest entity (VIE).  (See Section 9.)  If the joint venture is a VIE, the VIE accounting model is applied.

If the joint venture is not a VIE, venturers apply the equity method to recognize the investment in a jointly controlled entity.  An exception is that, also unlike IFRS SMEs, unincorporated entities may be accounted for using proportionate consolidation when specialized industry practices permit that.  The cost model is not used for jointly controlled entities.

Like IFRS SMEs, U.S. GAAP allows investors to elect to account for investments that would otherwise be accounted for under the equity method at fair value.  Unlike IFRS SMEs, when the fair value option is elected, it must be applied to all of the investor’s financial interests in the same entity (equity and debt, including guarantees) that are eligible items. 
 Cost model
15.10 A venturer shall measure its investments in jointly controlled entities, other than those for which there is a published price quotation (see paragraph 15.12) at cost less any accumulated impairment losses recognised in accordance with Section 27 Impairment of Assets. Not applicable.  See 15.9.
15.11 The investor shall recognise distributions received from the investment as income without regard to whether the distributions are from accumulated profits of the jointly controlled entity arising before or after the date of acquisition. Not applicable.  See 15.9.
15.12 A venturer shall measure its investments in jointly controlled entities for which there is a published price quotation using the fair value model (see paragraph 15.14). Unlike IFRS SMEs, there is no requirement to use a fair value model for investments in jointly controlled entities for which there is a published price quotation.
 Equity method
15.13 A venturer shall measure its investments in jointly controlled entities by the equity method using the procedures in paragraph 14.8 (substituting ‘joint control’ where that paragraph refers to ‘significant influence’). See Section 14.8 for differences in the application of the equity method.
 Fair value model
15.14 When an investment in a jointly controlled entity is recognised initially, a venturer shall measure it at transaction price. Transaction price excludes transaction costs. Same.
15.15 At each reporting date, a venturer shall measure its investments in jointly controlled entities at fair value, with changes in fair value recognised in profit or loss, using the fair valuation guidance in paragraphs 11.27–11.32. A venturer using the fair value model shall use the cost model for any investment in a jointly controlled entity for which it is impracticable to measure fair value reliably without undue cost or effort. The U.S. GAAP fair value option is irrevocable, and there is no fall-back position in the event “it is impracticable” to measure fair value reliably.
Transactions between a venturer and a joint venture
15.16 When a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognise only that portion of the gain or loss that is attributable to the interests of the other venturers. The venturer shall recognise the full amount of any loss when the contribution or sale provides evidence of an impairment loss. Same.
15.17 When a venturer purchases assets from a joint venture, the venturer shall not recognise its share of the profits of the joint venture from the transaction until it resells the assets to an independent party. A venturer shall recognise its share of the losses resulting from these transactions in the same way as profits except that losses shall be recognised immediately when they represent an impairment loss. Same.
If investor does not have joint control
15.18 An investor in a joint venture that does not have joint control shall account for that investment in accordance with Section 11 or, if it has significant influence in the joint venture, in accordance with Section 14 Investments in Associates.  
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