Joint Arrangements - Uno Co. (IFRS) — Journal Entries (Year 1 and Year 2)

Joint Arrangements - Uno Co. (IFRS) — Study Notes

Purpose: Determine the accounting treatment for Uno Co.’s interests in two joint arrangements under IFRS 11 (joint arrangements). Distinguish between a joint venture (investment accounted for by the equity method) and a joint operation (venturers recognize their share of assets, liabilities, revenue and expenses).

Key IFRS 11 concepts to keep in mind:

• Joint arrangements classified as either a joint venture or a joint operation based on the rights and obligations of the venturers.
• Joint venture: investor recognizes its interest using the equity method (initial recognition at cost, subsequently adjust for share of post-acquisition profits/losses and dividends).
• Joint operation: each venturer recognizes its share of jointly held assets and liabilities and its share of revenues and expenses.
• On formation with non-monetary assets, the contributor recognizes a gain or loss to the extent the fair value of the contributed asset differs from its carrying amount; the investor’s initial investment in the joint venture equals the fair value of the contributed asset.
• Shares of profits/losses and distributions affect the investor’s equity investment in the joint venture (not individual asset accounts).

Important calculations used in this scenario:

• Arrangement (a) ABC Inc.:

  • Uno, Dos, Tres have joint control. Dos and Tres contribute cash for 24% each; Uno contributes a capital asset for the remaining 52%.
  • Asset contributed by Uno:
  • Original cost: $12,000,000
  • Accumulated depreciation: $4,000,000
  • Net book value (NBV) = $12,000,000 − $4,000,000 = $8,000,000
  • Fair value (FV) of contributed asset: $10,400,000
  • Equity split in ABC: Uno 52%, Dos 24%, Tres 24% → total 100%.
  • Total fair value of ABC at formation = Uno’s 52% FV + Dos/Tres’ 24% FV each = $20,000,000 (consistent with 10.4m + 9.6m).
  • Uno’s initial investment in ABC = 52% of total ABC FV = $10,400,000.
  • Difference FV − NBV on contributed asset = $10,400,000 − $8,000,000 = $2,400,000 which is a gain recognized by Uno on transfer of the asset to the joint venture.
  • Year 2 ABC activity:
  • ABC net income in Year 2 = $1,300,000
  • Dividends paid in Year 2 = $500,000
  • Uno’s share of net income = 52% × $1,300,000 = $676,000
  • Uno’s share of dividends = 52% × $500,000 = $260,000

• Arrangement (b) Joint jet:

  • Uno, Yacht Ltd., and Fish Corp. purchase a corporate jet for $9,000,000, sharing equally (one third each).
  • Each venturer’s initial share of the jet asset = $3,000,000.
  • Useful life of jet = 25 years; residual value = $0; annual depreciation = $9,000,000 / 25 = $360,000 per venturer per year.
  • Year 2 operating expenses (excluding depreciation) for the jet = $1,200,000; Uno’s share = $1,200,000 / 3 = $400,000.
  • For joint operation, Uno will recognize (i) its share of operating expenses and (ii) depreciation on its share of the asset.
  • No mention of interest or debt; assume cash paid by Uno for its 1/3 share in Year 1.

Now, the journal entries by Uno’s books (Year 1 and Year 2) for each arrangement.

Arrangement (a): ABC Inc. (joint venture) — Year 1

• Purpose: Record Uno’s initial investment at fair value of contributed asset and recognize gain on disposal of contributed non-monetary asset. The subsequent entries in Year 2 reflect Uno’s share of ABC results under the equity method.

Year 1 entries (Uno’s books):

• To record Uno’s investment in ABC at fair value of contributed asset and recognize gain on disposal of non-monetary asset contributed
  • Dr. Investment in ABC (ABC) 10,400,000
  • Dr. Gain on contributed asset (income) 2,400,000
  • Cr. Non-monetary asset contributed (carrying amount) 8,000,000
  • Cr. ???

Note: IFRS 11 requires the investor to recognize the investment in the joint venture at the fair value of the consideration transferred (here, the fair value of the asset contributed = 10,400,000) and to recognize a gain on disposal of the asset if its fair value exceeds its carrying amount (FV 10,400,000 vs NBV 8,000,000; gain 2,400,000). The exact balancing entries must remove the asset from Uno’s books (carrying amount 8,000,000) and reflect the gain. The final effect is: Investment in ABC 10,400,000 is recognized; Uno’s asset (capital asset) is derecognized and a 2,400,000 gain is recorded; the remaining 8,000,000 NBV is removed from Uno’s books with appropriate credit/debit to derecognition accounts. The detailed DR/CR sequence can be shown as two linked steps in a formal solution, but the essential net effect is as described.

Year 1 entries (simplified presentation):

• Dr. Investment in ABC 10,400,000
• Dr. Gain on disposal of non-monetary asset 2,400,000
• Cr. Capital asset contributed (carrying amount) 8,000,000
• Cr. Non-monetary asset contributed 12,000,000

Note: The four accounts (carrying amount, accumulated depreciation, etc.) can be aggregated into a single derecognition of asset and the recognition of investment at fair value; the main ideas are shown above. The key outcomes are: investment recognized at 10.4m; gain on contributed asset of 2.4m; asset derecognized from Uno’s books with NBV 8m removed. For exam purposes, you should present the entry as two linked steps: (i) derecognize the asset and record the gain; (ii) recognize the investment at fair value.

Year 2 entries (Uno’s books):

• To recognize Uno’s share of ABC’s net income under the equity method:
  • Dr. Investment in ABC 676,000
  • Cr. Equity in earnings of ABC 676,000
• To recognize Uno’s share of ABC’s dividends (reduces the investment per equity method):
  • Dr. Cash 260,000
  • Cr. Investment in ABC 260,000

Arrangement (b): Joint jet — Year 1

• Nature: Joint operation; Uno’s share of assets and liabilities, and its share of revenues and expenses are recognized.

Year 1 entries (Uno’s books):

• To recognize Uno’s share of the jet asset (one-third of the cost):
  • Dr. Jet (jointly held asset) 3,000,000
  • Cr. Cash 3,000,000

Year 2 entries (Uno’s books):

• To recognize Uno’s depreciation on its share of the jet asset: 360,000
  • Dr. Depreciation expense 360,000
  • Cr. Accumulated depreciation 360,000
• To recognize Uno’s share of operating expenses (excluding depreciation): 400,000
  • Dr. Jet operating expenses 400,000
  • Cr. Cash 400,000

Notes and clarifications:

• In arrangement (a), Uno’s initial investment in ABC is measured at fair value of its contributed asset (10.4m). The difference between FV and NBV of the asset (10.4m vs 8.0m) is recognized as a gain on disposal of the asset by Uno. The other two venturers contribute cash for their shares and ABC’s total equity is 20.0m to allocate 52/24/24.
• In arrangement (b), since the jet is a joint operation, Uno recognizes its share of the asset (1/3 of $9,000,000 = $3,000,000) on formation. Year 2 depreciation on Uno’s share is $360,000 (per-year depreciation for the jet) and Uno’s share of operating expenses (excluding depreciation) is $400,000.
• If you separate the entries by year and arrangement, you will have a coherent set of journal entries reflecting the IFRS 11 treatment.

Formulas used:

• Uno’s share in ABC (Year 2 net income) = 0.52 imes 1{,}300{,}000 = 676{,}000
• Uno’s share in ABC (Year 2 dividends) = 0.52 imes 500{,}000 = 260{,}000
• Uno’s share of jet asset (Year 1) = rac{1}{3} imes 9{,}000{,}000 = 3{,}000{,}000
• Jet annual depreciation = rac{9{,}000{,}000}{25} = 360{,}000
• Uno’s share of jet operating expenses (Year 2) = rac{1}{3} imes 1{,}200{,}000 = 400{,}000

Summary of outputs you should be able to present on the exam:

• For arrangement (a) ABC Inc.: Uno’s formation accounting, recognition of the investment at FV of contributed asset, and the gain on disposal of the non-monetary asset; Year 2 equity method entries for share of income and dividends.
• For arrangement (b) Joint jet: Year 1 joint operation recognition of Uno’s share of the asset; Year 2 depreciation and operating expense entries representing Uno’s share.