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:

Answer 1

IAS 31 Interest in Joint Ventures

According to this IAS, it sets out the accounting for an entity's interest in various forms of joint ventures.

The standard permits jointly controlled entities to be accounted for using either the equity method or by proportionate consolidation.

So either the equity method or proportionate consolidation method can be used.

The equity method is an appropriate means of recognizing increases or decreases measured by generally accepted accounting principles (GAAP) in the economic resources underlying the investments.

Using equity method is preferable the reason being it reflects the accrual basis of accounting.

The share of earnings and losses are reflected according to periods to which they relate.

The equity method also best enables investors in corporate joint ventures to reflect the underlying nature of their investment in those ventures.

The equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial decisions of the investee.

It enables the investor with some resposibilties with respect ot return on investment.

It is appropriate to include in the results of operations of the investor its share of the earnings or losses of the investee.

Influence tends to be more effective as the investor's percent of ownership in the voting stock of the investee increases.

Investors have very little influence on the operations of the income of the business the reason being the investors hold very little stocks individually.