Last update 21/08/2019
A method of accounting whereby a venturer’s share of each of the assets, liabilities, revenue and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.
Joint venture accounting (JV)
A joint venture (JV) is a contractual arrangement whereby two or more parties (the venturers) agree to share control over an economic activity. The parties do not merge.
Joint ventures may take many different forms and structures:
- Jointly controlled operations
- Jointly controlled assets
- Jointly controlled entities
A method of accounting whereby a venturer’s share of each of the assets, liabilities, revenue and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.
A venturer should recognize its interest in a jointly controlled entity using either:
- Proportionate consolidation, OR
- Equity accounting
Proportional Consolidation Method of Joint Venture Accounting
Joint ventures are accounted for using equity accounting (same as associates), but also occasionally using proportional consolidation. An illustration of proportional consolidation is presented here.
The example below is an illustration of how a 50% joint venture would be proportionally consolidated into the group accounts. The joint venture is brought into the group accounts on a proportionate line by line basis between sales and net income.
|
CU’000 |
The One Inc. Joint venture |
Proportionate share 50% |
Second Plc. Venturer |
Consolidated Second Plc. |
|
A |
B = 50% of A |
C |
C + B |
|
|
Sales |
8,000 |
4,000 |
15,000 |
19,000 |
|
Cost of sales |
3,200 |
1,600 |
6,000 |
7,600 |
|
Gross margin |
4,800 |
2,400 |
9,000 |
11,400 |
|
Operating expenses |
640 |
320 |
1,200 |
1,520 |
|
Operating profit |
4,160 |
2,080 |
7,800 |
9,880 |
|
Interest |
1,664 |
832 |
1,560 |
2,392 |
|
Profit before tax |
2,496 |
1,248 |
6,240 |
7,488 |
|
Tax |
-646 |
-323 |
-1,640 |
-1,963 |
|
Net income |
2,310 |
1,155 |
3,200 |
4,355 |
Proportionate consolidation
Proportionate consolidation
Proportionate consolidation Proportionate consolidation Proportionate consolidation Proportionate consolidation Proportionate consolidation
A method of accounting whereby a venturer’s share of each of the assets, liabilities, revenue and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.