Joint operation or joint venture? What do accounting services in Dubai know about join control? Can chartered accountants account for joint arrangements? In this article, we shall take dive into investments in joint arrangements which can either be a joint operation or joint venture.
The standard IFRS 11 Joint Arrangements covers these investments. Note, however, the IFRS was introduced only recently. 2011 to be precise, and it became effective from January 1st, 2013. The new standard replaces the older guidelines in IAS 31 interests. Therefore, standards SIC-13 and IAS 31 are no longer viable.
The Role of IFRS 11
The main goal of IFRS 11 is to reinforce principles for financial reporting by accounting and financial services in Dubai that are interested in arrangements that are jointly controlled.
To fulfill this mandate, IFRS 11:
- Explains the meaning of join control.
- Demands the type of joint arrangement.
- Recognize the interest in a joint arrangement according to the type.
What Join Control Is and How Dubai Chartered Accountants Can Detect It
According to IFRS 11, join control is contractually agreed sharing of control of a contract existing when decisions regarding important activities need unanimous support of those sharing control. Here are 2 crucial elements of joint control:
1. Contractual Arrangement
Remember, the contractual arrangement should always be presented in writing in the form of an agreement or documented records of those involved. Often, laws or other statutory approach is enough to make a contractual arrangement.
2. Sharing of Control
This element or condition is fulfilled when all groups as unison can direct important decisions of the contract. Precisely, one group cannot solely make decisions.
Here is a simple example for your reference:
Suppose there are three Dubai entities. The bigger company controls 50 percent of shares, the other two companies each have 25 percent each. According to the contract, 75% must agree to make crucial decisions.
While Dubai and UAE entities with a majority share can block or veto decisions made by the minor parties, they still do not have total control, since to make a vital decision, you need the support of either a regular or medium entity.
In this instance, there is collective control. Nonetheless, Dubai audit services must evaluate whether regular, medium and large entities need to make decisions unanimously. This also should be presented in the contract as follows:
This means that each part of the joint contract should agree with the decision with no objection. In our example, if the agreement says there needs to be 75% of voting power for a decision to be effective, then no unanimous consent is recognized. This is because it only requires two entities for an agreement to be valid.
Classification of Joint Arrangement
If an investor is interested in a joint contract, then they must classify this arrangement appropriately and hire professional accounting services in Dubai to execute the right accounting method.
Two types of joint arrangements exist:
1. Joint Venture
A joint venture allows the parties with joint control to benefit from the arrangement’s net assets. Participants in a joint venture are called joint venturers.
2. Joint Operation
Parties having joint control of the operation are entitled to the assets and liable for liabilities associated with it. This type of partnership is called a joint operation.
Joint Ventures And Joint Operations: How To Tell The Difference
Because joint arrangements are accounted for differently, it is important to classify them correctly. A joint arrangement is classified according to the rights and obligations that arise from it. If the joint arrangement is structured through a separate entity or not, how the joint arrangement is structured is very important when assessing the rights and obligations resulting from the joint arrangement. In finance, some entities in Dubai and UAE have separate legal identities such as companies, while others are recognized by statutes. However, they need not be legal persons.
NOT Structured Through A Separate Vehicle
Joint arrangements without separate vehicles are easy to classify: they are clearly joint operations.
Structured Through A Separate Entity
Joint arrangements that are structured through separate vehicles can either be joint ventures or joint operations.
You should examine further to make your conclusion:
- A joint agreement’s legal form;
- Terms of the contract; and
- Facts and circumstances are relevant to the case.
Here is an example:
Suppose entities Regular and Medium invest their funds in the separate legal entity, RMJoint. Regular and Medium have 50% share each.
The joint venture or the joint operation? It can either be a joint venture or joint operation since Regular and Medium are separate vehicles (RMJoint).
How are Medium and Regular liable for RMJoint?
The involvement of Regular and Medium in joint ventures is dictated by the fact that RMJoint is separated from its owners. This means that its assets and liabilities are owned by RMJoint.
However, if the contract states that Regular and Medium both have interests in the assets of RMJoint and are jointly liable for its liabilities in proportion to their respective interests, then it would be a joint operation. It seems to me that once parties create a separate legal entity and share joint control, it usually becomes a joint venture.
How Accounting and Financial Services Can Account For Joint Arrangements
Accounting for interests in joint arrangements is set out in two ways in IFRS 11, depending on the type of arrangement:
Taking Into Account Interest In Joint Ventures
According to IFRS 11, investments in joint ventures must be accounted for using the equity method of IAS 28 Investments in Associates and Joint Ventures.
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