AS 27 Financial Reporting of Interests in Joint Ventures

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1 CA. B. Ganesh

2 AS 21 Consolidated Financial Statements AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 27 Financial Reporting of Interests in Joint Ventures Case studies

3 An Intro.

4 Preparation and presentation of Consolidated Financial Statements for a group of enterprises under the control of a parent. Accounting for investment in subsidiaries in the separate financial statement of a parent.

5 Directly or indirectly through subsidiary, owns more than 50% of the voting power. OR Has power to control the composition of Board of Directors of another company.

6 It is that part of the net results of operations and of the net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiary(ies), by the parent. In other words, it is that portion of results and net assets which are not owned by the Holding Company

7 Consolidated Balance Sheet Consolidated Statement of Profit and Loss Consolidated Cash Flow Statement (in case parent company presents the same) Notes thereon.

8 The CFS prepared in the same format as that of Separate Financial Statements, i.e, Revised Schedule VI.

9 The Holding Company shall consolidate the financial statements of all the subsidiaries, domestic or foreign other than : When the shares are held in subsidiary company for disposal in near future. Where there are long term restrictions on fund transfer from subsidiary to parent Company.

10 All assets, liabilities, income and expenses should be consolidated on line by line basis The cost to the parent of its investment in each subsidiary and the parent s portion of equity of each subsidiary, at the date on which investment in each subsidiary is made, should be eliminated. Any excess of the cost to the parent of its investment in a subsidiary over the parent s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, should be described as goodwill to be recognised as an asset in the consolidated financial statements Cost to parent > Parent s portion of Equity = Goodwill

11 When the cost to the parent of its investment in a subsidiary is less than the parent s portion of equity of the subsidiary, at the date on which investment in the subsidiary is made, the difference should be treated as a capital reserve in the consolidated financial statements Cost to parent < Parent s portion of Equity = Capital Reserve Minority interests in the net income of consolidated subsidiaries for the reporting period should be identified and adjusted against the income of the group in order to arrive at the net income attributable to the owners of the parent; and Minority interests in the net assets of consolidated subsidiaries should be identified and presented in the consolidated balance sheet separately from liabilities and the equity of the parent s shareholders.

12 a list of all subsidiaries including the name, country of incorporation or residence, proportion of ownership interest and, if different, proportion of voting power held

13 The nature of the relationship between the parent and a subsidiary, if the parent does not own, directly or indirectly through subsidiaries, more than one-half of the voting power of the subsidiary The effect of the acquisition and disposal of subsidiaries on the financial position at the reporting date, the results for the reporting period and on the corresponding amounts for the preceding period; and The names of the subsidiary(ies) of which reporting date(s) is/are different from that of the parent and the difference in reporting dates.

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15 AS- 23 shall be applied in accounting for investments in associates in the preparation and presentation of consolidated financial statements by an investor. It does not deal with accounting for investments in associates in the preparation and presentation of separate financial statements by an investor

16 An associate is an enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor Significant influence is the power to participate in the financial and/ or operating policy decisions of the investee but not control over those policies. Control The ownership, directly or indirectly through subsidiary(ies), of more than one-half of the voting power of an enterprise; or control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

17 The equity method is a method of accounting whereby the investment is initially recorded at cost, identifying any goodwill/capital reserve arising at the time of acquisition. The carrying amount of the investment is adjusted thereafter for the post acquisition change in the investor s share of net assets of the investee. The consolidated statement of profit and loss reflects the investor s share of the results of operations of the investee. Equity is the residual interest in the assets of an enterprise after deducting all its liabilities.

18 Significant Influence Significant influence may be gained by share ownership, statute or agreement. if an investor holds, directly or indirectly through subsidiary(ies), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated that this is not the case Power to participate in financial and/or operating policy decisions Vis a vis Power to govern the financial and/or operating policies

19 Significant Influence (contd.) Existence of significant influence is evidenced by one or more of: Representation on the board of directors or corresponding governing body of the investee; participation in policy making processes; material transactions between the investor and the investee; interchange of managerial personnel; or provision of essential technical information.

20 Same reporting date for financial statements used in consolidation; or If date of reporting differs, most recent available financial statements of the associate are used consistency Adjustments made for the effects of any significant events or transactions between the investor and associate

21 Prepare CFS using uniform accounting policies for the similar transactions and events in similar circumstances. If associate uses different accounting policies, make appropriate adjustments to the Associate's Financial Statement If it is impracticable to do so, disclose the fact of difference in accounting policies

22 Investment in associates to be listed and described as to the proportion of ownership interest and, in case of difference, the proportion of voting power held Investments classified as long-term investments The investor's share of the profits or losses of such investments, disclosed separately in the CFS The investor's share of any extraordinary or prior period items separately disclosed. The name(s) of the associate(s) of which reporting date(s) is/are different Difference in accounting policies, along with a brief description shall be disclosed.

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24 Accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place. The requirements relating to accounting for joint ventures in CFS, contained in this Standard, are applicable only where CFS are prepared and presented by the venturer.

25 A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity. Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.

26 A venturer is a party to a joint venture and has joint control over that joint venture. An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture. Proportionate consolidation is a method of accounting and reporting whereby a venturer's share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer's financial statements.

27 Types of Joint Ventures: jointly controlled operations, Jointly controlled assets and jointly controlled entities Common Characteristics of all Joint Ventures two or more venturers are bound by a contractual arrangement; and the contractual arrangement establishes joint control.

28 Existence of some arrangement or understanding Usually a written document, may be in form of minutes or agreement Commonly, in case of companies, provisions in articles of association Providing for joint control While one person may be the operator, but single person does not have control over the entity The contractual arrangement is in writing and deals with the following: the activity, duration and reporting obligations of the joint venture the appointment of the board of directors or equivalent governing body of the joint venture and the voting rights of the venturers capital contributions by the venturers and the sharing by the venturers of the output, income, expenses or results of the joint venture.

29 It 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 own assets and incur own expenses and raises own finances. A venturer should recognise in its separate financial statements and consequently in its CFS: the assets that it controls and the liabilities that it incurs; and the expenses that it incurs and its share of the income that it earns from the joint venture.

30 No adjustments or other consolidation procedures are required in respect of these items when the venturer presents CFS. Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture.

31 It involves 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. These JV s do not involve the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer has control over its share of future economic benefits through its share in the jointly controlled asset.

32 Share of jointly controlled assets Liabilities which it had incurred Share of jointly incurred liabilities. Share of income/ expense incurred. Any expense incurred by it in the interest of JV

33 A jointly controlled entity (JCE) is a JV which 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 enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity. A JCE controls the assets of the joint venture, incurs liabilities and expenses and earns income. As it is a separate entity, financial statements of the venture shall be prepared.

34 In a JCE, a venturer has control over its share of future economic benefits through its share of the assets and liabilities of the venture. This substance and economic reality is reflected in the consolidated financial statements of the venturer when the venturer reports its interests in the assets, liabilities, income and expenses of the JCE by using proportionate consolidation. The application of proportionate consolidation means that the consolidated balance sheet of the venturer includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible.

35 The consolidated statement of profit and loss of the venturer includes its share of the income and expenses of the JCE Under proportionate consolidation, the venturer includes separate line items for its share of the assets, liabilities, income and expenses of the jointly controlled entity in its consolidated financial statements

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