CA Final Paper 1Financial Reporting Unit 27 CA. Ridhima Dubey

Transcription

1 CA Final Paper 1Financial Reporting Unit 27 CA. Ridhima Dubey

2 1 Gaining an understanding about Joint Venture 2 Accounting for Joint Venture 2

3 Forms of Joint Ventures Accounting for interest in Joint Ventures Applicability to separate and consolidated financial statements 3

4 Venturer: Party to joint venture and has control Investor: Party to joint venture and does not have control Control: Power to govern the financial and operating policies of an economic activity to obtain benefit 4

5 Two or more parties Contractual arrangement Economic motive Joint control 5

6 Existence of contractual arrangement - Mandatory Content: Activity, duration and reporting obligations of the joint venture Appointment of the board of directors or equivalent governing body and the voting rights Capital contributions by the venturer Sharing of output, income, expenses or results of the joint venture No venturer to have unilateral control. Joint Control arrangement are not signed to safeguard the interest of only one party. 6

7 Jointly Controlle d operation s Jointly controlle d assets Jointly controlled entities 7

8 Own separate business No separate legal entity All venturers create and maintain their own asset Venturer records only his own transaction A common agreement Use their own asset, meet their liability/expenses Revenue generated/income earned is shared as per the contract 8

9 No separate legal entity Common control over asset Asset used to derive benefit Meets his own expenses Expenses on jointly controlled asset is shared as per contract Records his share of asset and income along with the share of expense 9

10 Creation of a new entity Pooling of resource Entity purchases its own assets, create its own liabilities, incurs expenses, earn income Net results is shared among venturer Separate sets of books are maintained 10

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12 Interest in a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard (AS) 13, Accounting for Investments. 12

13 Proportionate consolidation method Exception Investment is held for temporary purpose/subsequent disposal in near future JV operates under severe long term restriction 13

14 Discontinue the use of proportionate consolidation method when: Joint control ceases Joint venture operates under severe long term restriction impairing ability to transfer 14

15 Discontinue the use of proportionate consolidation method when: Joint control ceases

16 Interest is more than 50% 20%> Interest <50% AS 21 AS 23 Other cases AS 13 16

17 Substance over form Disclosed as separate line item Provisions are similar to AS 21 17

18 Difference between reporting dates of JVE and venturer FS cannot be more than 6 months Accounting policies to be uniform Adjustment to asset/liability/income/expense only when legally allowed Interest of venturer < cost of investment=goodwill Interest of venturer > cost of investment=capital Reserve 18

19 Venturer transfer/sells assets to JV: Recognise profit attributed to the other venturer Recognition of full loss: Evident reduction in the NRV of current asset or impairment loss Purchase of asset from JV: share of profit is recognised only when purchased assets are disposed For Jointly controlled entity, above provisions are applicable only for Consolidated financial statement 19

20 Aggregate amount of contingent liability separately from other contingent liability: Contingent liability incurred in relation to its interests in JV and its share in each contingent liability jointly with other Its share of contingent liability for which it is contingently liable Those contingent liability arising because he is contingently liable Commitment: Capital commitment and its share thereof Other: List of all JV s and nature of interest 20

21 MCQs 21

22 Mr. A enters into a verbal discussion with Mr.B to start a company. They intend to share the profits in equal proportion. Can they follow AS 27 for purpose of accounting? YES NO NO. AS 27 mandates requirement of a written agreement 22

23 Co. A gave loan to Co. B and Co. XYZ (together referred to as Parties ). Parties entered into agreement, pursuant to the requirement of agreement Co. A will be informed of all important decisions undertaken by the other parties. Co. A does not enjoy any other benefit. Co. A is a venturer Co. A is an investor C. Co. A has no interest in the Co. XYZ D. Co. A is both venturer and an investor Option B Co. A is a investor, as the agreement is entered to safeguard the interest. 23

24 S.NO. Particulars Response 1 All venturers are creating their own assets and maintaining them 2 There exists a separate legal entity 3 There is common control over assets 4 Venturers meets the expenses of the joint venture business from their funds Joint Controlled Operations Joint Controlled entity Joint Controlled Asset Joint Controlled Asset/ Operation 24

25 Co. A enters into an agreement with Co. B to start a yarn manufacturing business. Co. AB will come into existence pursuant to this agreement. Key content of the agreements are as under: Ratio in which share capital is held Co.A: 51%; Co.B: 49% Equal number of directors representing both shareholders 2:2 Quorum of the meeting of BOD: minimum 2, with 1 nominee director of each party Decisions of the Board only by unanimous affirmative vote of all the directors present in the meeting Profits sharing ratio would be 1:1. Which all features of a Joint Venture can be identified? Can it be classified as Joint Venture? 25

26 There exists a Contractual Arrangement There exists joint control Undertaking an economic activity Two or more parties have entered into an arrangement 1 and 3 are correct B. All the above C. 2 and 4 are correct D. 1, 2 and 4 are correct Option B. All the above; YES it can be classified as Joint Venture entity 26

27 Mr. A enters into JV with Mr.B and has contributed 33% of the total fixed asset and has share of 40% in current asset and current liabilities. Its share in net result is 50%. Which of the following statements are correct in respect of accounting for the JV? 1. Consolidation would be done using proportionate consolidation method in the CFS 2. Principles of AS 21 to used in CFS 3. In the separate FS of the Mr.A, interest in JV would be shown as Investment in accordance with AS 13 A. Only 1 is correct B. Only 2 and 3 C. All 3 are correct D. None of the above Option C all 3 are correct 27

28 Note No. (Rs.) I Equity and liabilities 1. Shareholder funds Share capital 1 1,00, Current Liabilities TOTAL 2 50,000 1,50,000 II Assets Non - current Assets Fixed Assets: Current Assets ,000 75,000 1,50,000 28

29 Notes to Accounts 1 Share Capital A B 2 Current Liabilities A B 3 Fixed Assets A B 4 Current Assets A B 33,000 67,000 1,00,000 20,000 30,000 50,000 25,000 50,000 75,000 30,000 40,000 75,000 29

30 Co. A is an oil production companies. It has entered into an agreement with other oil production company to use its the pipeline to transport its own product in return for which it bears an agreed proportion of the expenses of operating the pipeline. How would it be classified? A. Joint controlled asset B. Joint Control entity C. Investor D. Joint Control Operations Option A Co. A is sharing the asset jointly and thus it would be appropriate to classify it as Joint Control Asset 30

31 Any excess of the cost to the venturer of its interest in a jointly controlled entity over its share of net assets of the jointly controlled entity, at the date on which interest in the jointly controlled entity is acquired, is recognised as: A. Goodwill B. Capital Reserve C. Negative Goodwill D. General Reserve Option A: Excess should be recognised as Goodwill 31

32 You noticed that Co. Y was one of the venturer s in entity say entity P. Till year Co.Y s CFS has disclosed the share of JV. During the current year, Co. Y decides to discontinue the use of proportionate consolidation of JV in CFS. Under what circumstance Co. Y can discontinue the consolidation? A. Co. Y ceases to have joint control B. Co. P operates under severe long term restrictions C. Co. Y under no circumstance can discontinue consolidation D. Co. Y can discontinue as per its Company s accounting policy Option A and B are correct 32

33 Which of the following statements are correct? A. Difference between the reporting date of Venturer FS and JV FS should not be more than 6 months B. Accounting policies followed in the preparation of the FS of the venturer and joint venture entity should be uniform C. Assets can be adjusted against another liability A and B are correct 33

34 Written contract is a mandatory Careful analysis of contract to establish whether the entity is a Subsidiary Or Associate Or Joint Venture Proportionate Consolidation Method to be followed in CFS 34

35 Reporting of interest in the Joint Ventures in the FS of investor Operators of Joint Venture Disclosure Contingent liabilities Commitment Others 35

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