Public benefits entities: Accounting for joint arrangements

In the March 2019 edition of Accounting Alert we noted that PBE IPSAS 37 Joint Arrangements (“PBE IPSAS 37”), which is in effect for Tier 1 and Tier 2 public benefit entities (“PBEs”) for annual financial reporting periods beginning on or after 1 January 2019, does three primary things:

  1. Defines what constitutes a joint arrangement
  2. Defines the two different types of joint arrangement
  3. Provides the accounting requirements for each of the two types of joint arrangement.

In the March 2019 edition of Accounting Alert we examined how to determine whether joint control exists. 

In the May 2019 edition of Accounting Alert we examined the classification of joint arrangements as either joint operations or joint ventures and noted that classification depends on the rights and obligations of the parties to the arrangement.

In the June 2019 edition of Accounting Alert we examined examples demonstrating the classification of joint arrangements as either joint operations or joint ventures. 

In this article we examine how to account for joint operations and joint ventures.  

Accounting for joint operations

As discussed in the May 2019 edition of Accounting Alert, when an entity has rights to the assets, and obligations for the liabilities, relating to a joint arrangement, that joint arrangement is a joint operation and the entity is a joint operator.

A joint operator accounts for its interest in a joint operation by recognising the following:

  • Its assets, including its share of any assets held jointly
  • Its liabilities, including its share of any liabilities incurred jointly
  • Its revenue from the sale of its share of the output arising from the joint operation
  • Its share of the revenue from the sale of the output by the joint operation
  • Its expenses, including its share of any expenses incurred jointly.

A joint operator must account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the PBE Standards applicable to the particular assets, liabilities, revenues and expenses. 

When an entity sells, or contributes assets, to a joint operation in which it is a joint operator, it is conducting the transaction with the other parties to the joint operation and consequently must recognise gains and losses resulting from the transaction only to the extent of the other parties’ interests in the joint operation.  When such transactions provide evidence of a reduction in the net realisable value of the assets to be sold or contributed to the joint operation, or of an impairment of those assets, those losses must be fully recognised by the joint operator. 

When an entity purchases assets from a joint operation in which it is a joint operator, it must not recognise its share of the associated gains and losses until it resells those assets to a third party.  When such transactions provide evidence of a reduction in the net realisable value of the assets to be purchased, or of an impairment of those assets, a joint operator must recognise its share of those losses. 

A party that participates in, but does not have joint control of, a joint operation must also account for its interest in that joint arrangement as outlined above if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. If a party that participates in, but does not have joint control of, a joint operation does not have rights to the assets, and obligations for the liabilities, relating to that joint operation, it must account for its interest in the joint operation in accordance with the PBE Standards applicable to that interest. 

Accounting for joint ventures

As discussed in the May 2019 edition of Accounting Alert, when an entity has rights to the net assets of a joint arrangement, that joint arrangement is a joint venture and the entity is a joint venturer.

A joint venturer must recognise its interest in a joint venture using the equity method.  We’ll examine the equity method of accounting in a future edition of Accounting Alert. 

A party that participates in, but does not have joint control of, a joint venture must account for its interest in the arrangement in accordance with the PBE Standards dealing with financial instruments, unless it has significant influence over the joint venture, in which case it must account for it in accordance with PBE IPSAS 36 Investments in Associates and Joint Ventures. 

 

For more on the above, please contact your local BDO representative.