Forms of Joint Ventures

Joint ventures may take many forms and structures, this Statement identifies them in three broad types – Jointly Controlled Operations (JCO), Jointly Controlled Assets (JCA) and Jointly Controlled Entities (JCE). Any structure which satisfies the following characteristics can be classified as joint ventures: (a) Two or more venturers are bound by a contractual arrangement and (b) The contractual arrangement establishes joint control.

Jointly Controlled Operations (JCO)

Under this set up, venturers do not create a separate entity for their joint venture business but they use their own resources for the purpose. They raise any funds required for joint venture on their own, they incur any expenses and sales are also realised individually. They use same set of fixed and employees for joint venture business and their own business. Since there is no separate legal entity and venturers don’t recognize the transactions separately, they do not maintain a separate set of books for joint venture. All the transactions of joint venture are recorded in their books only. Following are the key features of JCO:

• Each venturer has his own separate business.
• There is no separate entity for joint venture business.
• All venturers are creating their own assets and maintain them.
• Each venturer record only his own transactions without any separately set of books maintained for the joint venture business.
• There is a common agreement between all of them.
• Venturers use their assets for the joint venture business.
• Venturers met the liabilities created by them for the joint venture business.
• Venturers met the expenses of the joint venture business from their funds.
• Any revenue generated or income earned from the joint venture is shared by the venturers as per the contract.

Since the jointly controlled operation is not purchasing assets or raising finance in its own right, the assets and liabilities used in the activities of the joint venture are those of the ventures. As such, they are accounted for in the financial statements of the venture to which they belong. The only accounting issue that arises is that the output from the project is to be shared among the venturers and, therefore, there must be some mechanism for specifying the allocation of the proceeds and the sharing of any joint expenses.

Mr. X (dealer in tiles and marbles), Mr. Y (dealer in various building materials) and Mr. Z

(Promoter) enters into a joint venture business, where any contract for construction received will be completed jointly, say, Mr. X will supply all tiles and marbles, Mr. Y will supply other materials from his godown and Mr. Z will look after the completion of construction. As per the contractual agreement, they will share any profit/loss in a predetermined ratio. None of them are using separate staff or other resources for the joint venture business and neither do they maintain a separate account. Everything is recorded in their personal business only. Venturer doesn’t maintain a separate set of books but they record only their own transactions of the joint venture business in their books. Any transaction of joint venture recorded separately is only for internal reporting purpose. Once all transactions recorded in venturer financial statement, they don’t need to be adjusted for in consolidated financial adjustment.

Separate legal entity is not created in this form of joint venture but venturer owns the assets jointly, which are used by them for the purpose of generating economic benefit to each of them. They take up any expenses and liabilities related to the joint assets as per the contract.

One can conclude the following points:

• There is no separate legal identity.
• There is a common control over the joint assets.
• Venturers use this asset to derive some economic benefit to themselves.
• Each venturer incurs separate expenses for their transactions.
• Expenses on jointly held assets are shared by the venturers as per the contract.
• In their financial statement, venturer shows only their share of the asset and total income earned by them along with total expenses incurred by them.
• Because the assets, liabilities, income and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements.
• Financial statements may not be prepared for the joint venture, although the venturers may prepare accounts for internal management reporting purposes so that they may assess the performance of the joint venture.

For example, ABC Ltd., BP Ltd. and HP Ltd. having the same point of oil refinery and same place of customers agreed to spread a pipeline from their unit to customers place jointly. They agreed to share the expenditure on the pipeline construction and maintenance in the ratio 3:3:4 respectively and the time allotted to use the pipeline was in the ratio 4:3:3 respectively.

For the joint venture, each venturer will record his share of joint assets as per AS – 10,

Accounting for Fixed Assets, and any expenditure incurred or revenue generated will be recorded with other items similar to JCO. Following are the few differences between JCO and JCA for better understanding:

• In JCO venturers uses their own assets for joint venture business but in JCA they jointly owns the assets to be used in joint venture.
• JCO is an agreement to joint carry on the operations to earn income whereas, JCA is an agreement to jointly construct and maintain an asset to generate revenue to each venturer.
• Under JCO all expenses and revenues are shared at an agreed ratio, in JCA only expenses on joint assets are shared at the agreed ratio.

Jointly Controlled Entities (JCE)

This is the format where venturer creates a new entity for their joint venture business. All the venturers pool their resources under new banner and this entity purchases its own assets, create its own liabilities, expenses are incurred by the entity itself and sales are also made by this entity. The net result of the entity is shared by the venturers in the ratio agreed upon in the contractual agreement. This contractual agreement also determines the joint control of the venturer.

Being a separate entity, separate set of books is maintained for the joint venture and in the individual books of venturers the investment in joint venture is recorded as investment (AS 13). Joint venture can be a foreign company operating in India through an Indian concern say Gremo Insurance of Germany contributes 49% of the assets in joint venture in India with Indo Bank Ltd. of India. They agreed to share the net results in 1:1 ratio. The main objective of the joint venture is to exploits the technical expertise of Gremo Insurance and Goodwill of Indo Bank Ltd. It can also be two or more local concerns opening an organization or firm or company contributing their assets to this new joint venture concern and share the profits of the operation in the agreed ratio.