through a separate vehicle, then the classification is

JOINT ARRANGEMENT easy: it is a clear joint operation.

• The objective of PFRS 11 Joint Arrangements is to ✓ Structured through a separate vehicle

establish principles for financial reporting by
entities that have an interest in arrangements that When the joint arrangement is structured through
are controlled jointly.
separate vehicle, then it can be either joint venture
or joint operation.
To meet this objective, PFRS 11:
▪ For making your conclusion, you should
• Defines joint control; examine further:
• Requires determining the type of joint
arrangement; and ✓ The legal form of joint arrangement;
• Account for the interest in a joint arrangement ✓ The terms of the contractual arrangement;
based on the type. and
✓ Other facts and circumstances when
relevant.
PFRS 11 defines joint control as the contractually agreed
sharing of control of an arrangement, which exists only
when decisions about the relevant activities require the Accounting for Interest in Joint Venture
unanimous consent of the parties sharing control.
• PFRS 11 requires accounting for the investment in a
joint venture using the equity method according to
PAS 28 Investments in Associates and Joint Ventures.
There are three (3) basic elements of joint control:

✓ Contractual arrangement - often in writing in the Accounting for Interest in Joint Operation
form of contract or some documented decisions of
the parties involved. • When an investor classifies its investment as a joint
operation, then you should recognize in the financial
✓ Sharing of control - his condition or element is met statements:
when all parties, or group of parties, considered
collectively, are able to direct the relevant decisions • Its assets, including its share of any assets in
of the arrangement. accordance with the contractual agreement.

✓ Unanimous consent - it means that every party of • Its liabilities, including its share of any liabilities
the joint arrangement must agree with (or at least incurred in accordance with the contractual
does not object to) the decision and no one can agreement.
block it.
• Its revenue from the sale of its share of the
output arising from the joint operation.
There are two (2) types of joint arrangements:

✓ Joint venture: In a joint venture, the parties having • Its share of the revenue from the sale of the output by
joint control have rights to the net assets of the the joint operation.
arrangement. These parties are called “joint
venturers”. • Its expenses, including its share of any expenses
incurred in accordance with the contractual
✓ Joint operation: In a joint operation, the parties agreement.
having joint control have rights to the assets and
obligations for the liabilities relating to the
arrangement. These parties are called “joint Accounting for SMEs
operators”.
• Jointly controlled operations

When assessing the rights and obligations from the joint ✓ The venturer should recognize assets that it
arrangements, it’s very important to look at how the joint controls and liabilities it incurs as well as its share
arrangement is structured, mainly whether the of income earned and expenses that are
incurred.
arrangement is structured through separate vehicle or
not.
• Jointly controlled assets
✓ Separate vehicle is a separately identifiable financial
structure, including separate legal entities (e.g., ✓ The venture should recognize its share of the
company) or some entities recognized by a statute assets and liabilities it incurs as well as income it
(not necessarily having legal personality). earns and expenses that are incurred.

✓ NOT structured through a separate vehicle • Jointly controlled entities

When a joint arrangement is NOT structured
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There is an option for the venture to use:

✓ Fair value model

✓ Cost model
✓ Equity method

FVPL Cost Equity

method method
Initial Fair Historical Historical cost
measurement value cost or FVNAA,
higher
Transaction Expensed Capitalizable Capitalizable
cost
Subsequent Fair Cost less Book value
measurement value impairment under equity
method less
impairment
Gain or loss Yes in None None
on changes in P/L
fair value
Dividend Yes Yes None
income from (Deduction
investee from
investment
account)
Share in net None None Yes
income (loss),
OCI of
investee
Impairment None Yes, if book Yes, if book
loss value > value >
recoverable recoverable
amount amount

- - End - -

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JOINT ARRANGEMENT

THEORY

1. It is characterized by a contractual arraignment whereby two or more parties have joint control of
the arrangement
a. Joint arrangement c. Joint venture
b. Joint operation d. Jointly controlled asset

2. It is contractually agreed sharing of control of an arrangement which exists only when decisions
about relevant activities required unanimous consent of the parties sharing control
a. Control c. Joint control
b. Significant influence d. Solidary control

3. It is a type of joint arrangement whereby the parties that have joint control of the arrangement
have right to the total assets and obligations for the total liabilities relating to the arrangement
a. Joint venture c. Joint operation
b. Jointly controlled asset d. Joint business

4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement
have rights to the net assets of the arrangement
a. Joint venture c. Joint operation
b. Jointly controlled asset d. Joint business

5. What is the classification of the joint arrangement when the assets and liabilities relating to the
arrangement are held by a separate vehicle or when the arrangement is established with a
separate vehicle?
a. It shall be classified as joint venture
b. It shall be classified as joint operation
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the legal form of the
separate vehicle, terms of the contractual arrangement or other relevant facts and
circumstances

6. Under PFRS 11, how shall the joint venturer account for its Investment in Joint Venture?
a. Equity method c. Fair value method under IFRS 9
b. Cost method d. Proportionate consolidation

7. Under PFRS 11, how shall the joint operator account for its interest in a joint operation?
a. The joint operator shall account for its interest under Equity Method
b. The joint operator shall account for its interest under Cost Method
c. The joint operator shall account for its interest using proportionate consolidation
d. The joint operator shall account for its interest by recognizing its assets, liabilities,
revenues, expenses and shares in the jointly controlled assets, jointly incurred liabilities,
jointly earned revenue and jointly incurred expenses in accordance with the contractual
agreement
PROBLEMS

1. On January 1, 2020, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C
which has its fiscal and operational autonomy. The contractual agreement of the incorporating
entities provided that the decisions on relevant activities of Entity C will require the unanimous
consent of both parties, Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of Entity C. The financial statements of Entity C provided the following data for its two-
year operation:
Net income (loss) Dividends declared
2020 200,000 100,000
2021 (2,000,000) -
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Question 1: What is the balance of Investment in Entity C to be reported by Entity A in its Statement
of Financial Position on December 31, 2021?
a. P1,080,000 c. P240,000
b. P1,040,000 d. P200,000

Question 2: What is the balance of Investment in Entity C to be reported by Entity B in its Statement
of Financial Position on December 31, 2021?
a. P1,500,000 c. P360,000
b. P1,620,000 d. P900,000

2. On January 1, 2020, Honelyn Inc. invested P2M cash in a joint venture for 50% interest. For the
years ended December 31, 2020, 2021 and 2022, the joint venture reported the following net
incomes and dividend distributions:
Year Net Income/(Net Loss) Dividend Distribution
2020 P1,000,000 P300,000
2021 (P6,000,000) -
2022 P7,000,000 P500,000

Question 1: What is the share in net loss or investment loss to be reported by the company for the
year ended December 31, 2021?
a. P3,000,000 c. P2,350,000
b. P2,500,000 d. P2,000,000

Question 2: What is the book value of Investment in Joint Venture to be reported by the company
as of December 31, 2022?
a. P1,600,000 c. P1,250,000
b. P2,600,000 d. P1,450,000

3. Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the

incorporating entities as component for their final products of cellular phones and tablets. The
contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of
60:40. At the end of first operation of Entity C, the financial statements provided the following
data:

Inventory 1,000,000 Accounts payable 2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

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The contractual agreement of Entity A and Entity B also provided for the following concerning the
assets and liabilities of Entity C:
● Entity A owns the land and incurs the loan payable of Entity C.
● Entity B owns the building and incurs the note payable of Entity C.
● The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of
their capital interest in Entity C.
● The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of
P1,000,000 and P2,000,000, respectively. As of the end of the first year, Entity A and Entity
B were able to resell 30% and 60% of the inventory coming from Entity C to third persons.

Question 1: What is the amount of total assets to be reported by Entity A concerning its interest
in Entity C?
a. P5,400,000 c. P3,600,000
b. P3,000,000 d. P5,000,000

Question 2: What is the amount of total liabilities to be reported by Entity B concerning its interest
in Entity C?
a. P1,800,000 c. P2,800,000
b. P2,200,000 d. P2,400,000

Question 3: What is the amount of sales revenue to be reported by Entity A concerning its interest
in Entity C?
a. P2,300,000 c. P3,000,000
b. P2,100,000 d. P2,500,000

4. On January 1, 2021, Dancia Inc., a small and medium enterprise (SME), invested P500,000 cash in
a joint venture for 50% interest. For the year ended December 31, 2021, the joint venture reported
net income of P200,000 and distributed cash dividend in the amount of P60,000. As of December
31, 2021, the fair value of the investment in joint venture is P600,000 and the estimated cost of
disposal is 10% of fair value. The value in use of the investment is estimated at P550,000.

Question 1: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects equity method?
a. P550,000 c. P570,000
b. P540,000 d. P600,000

Question 2: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects cost method?
a. P550,000 c. P570,000
b. P540,000 d. P500,000

Question 3: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects fair value method?
a. P550,000 c. P570,000
b. P600,000 d. P500,000

- - End - -
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