Question

Use the Codification to determine the accounting treatment for the following. Two companies engage in a joint venture. Is consolidation required for a joint venture? If so, what factors must exist for consolidation? If consolidation is not required, what is the required accounting treatment for a joint venture? Support your response with a specific reference to the appropriate section of the Codification: Reference example: ASC 954-320-55

Answer 1

Breif :-

As per question given above describe two companies are separate legal entity & engage in joint venture as define under ASC 323 AND 810 below.

ASC 810 : JOINT VENTURE:

1) The arragment must be organized between separate legal entity.

2) The entity must be under joint control of venture.

3) The venture must be able to exercise joint control of the entity through their equity investment.

As describe under ASC 323-10-20, purpose of the entity must to share risk & reward.

Point 1:

As define under 810-10-15-3, it's is determine whether reporting entity is under Variable Interest Entity then consolidation would be apply according to that subsection. But reporting entity under investment, then it should first constitute whether controlling financial interest. And that controlling financial interest as majoirty voting interest directly/indirectly more than 50%. Thus this condition are not fullied, then it not required to report consolidated report.

Point 2 :-

But in ASC 810-10-15-17, there are exception stated where it would directly liable to report consolidation.

1. The reporting are related party or both are participated in design or redesign of legal entity.(execption to independent franchisee)

2. The legal entity is desgined so that substantially all or its activites either evolve or conducted on behalf of related party.

3. The reporting parties & related parties hold more than 50% share,debt or other form suborinate financial support to legal entity based on anylsis of fair value of interest.

4. The activites of legal entites are related securitization or other form of asset backing finacing or single lease arrangement.

Point 3 :-

Evaluating whether an entity is a joint venture requires a consideration of whether the entity should be consolidated by one of its venturers.

There are two primary consolidation models under US GAAP:

(1) the Variable Interest Model, and (2) the Voting Model (both are contained in ASC 810).

The Variable Interest Model applies to an entity in which the equity does not have characteristics of a controlling financial interest. An entity that is not a variable interest entity is often referred to as a voting interest entity.

The evaluation of whether an entity should be consolidated always should begin by considering the Variable Interest Model. This model is designed to enable an enterprise to determine whether an entity should be evaluated for consolidation based on variable interests or voting interests. The Variable Interest Model applies to all legal entities, including corporations, partnerships, limited liability companies and trusts.

The Voting Model applies only if an entity is not within the scope of the Variable Interest Model or is determined not to be a variable interest entity. Certain joint ventures may meet the business scope exception to the Variable Interest Model.

However, since not all entities that may be joint ventures will meet the business scope exception, the Variable Interest Model may need to be applied to determine whether the entity is a variable interest entity and whether the entity should be consolidated by any of its variable interest holders. A variable interest entity can still be a joint venture that would not be consolidated by its variable interest holders under the Variable Interest Model.

Point 5 :-

As per 810-10-45-14

If the investor-venturer owns an undivided interest in each asset and is proportionately liable for its share of each liability, the provisions of paragraph 323-10-45-1 may not apply in some industries

Specifically, a proportionate gross financial statement presentation is not appropriate for an investment in an unincorporated legal entity accounted for by the equity method of accounting unless the investee is in either the construction industry or an extractive industry.

An investor applying proportionate consolidation to account for its undivided interest in each asset, its proportionate share of each liability and its share of the revenues and expenses of an investee would need to apply typical consolidation procedure. For example, it would need to evaluate intercompany balances and transactions to ensure they are properly eliminated, in the same manner that it would for consolidated entities.