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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Oil Industry accounting: joint venture accounting - IFRS - summary of the nature of relationships and accounting treatment


Arrangement: Jointly controlled operations

Nature of relationship

The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer’s employees alongside the venturer’s similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product & any expenses incurred in common are shared among the venturers (Para 13, IAS 31).

Treatment in investor’s individual accounts

Each venturer recognises:

  • the assets that it controls and the liabilities that it incurs; and
  • the expenses that it incurs and its share of the income that it earns from the sale of goods or services by the joint venture (Para 15 IAS 31).

Arrangement: Jointly controlled assets

Nature of relationship

Some joint ventures involve the joint control, and often the joint ownership, by the venturers of one or more assets for the sole purpose of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred. (Para 19, IAS 31).

Treatment in investor’s individual accounts

In respect of its interest in jointly controlled assets, each venturer includes in its accounting records and recognises in its financial statements:

  • its share of the jointly controlled assets, classified according to the nature of the assets rather than as an investment. For example, a share of a jointly controlled oil pipeline is classified as property, plant and equipment.
  • any liabilities that it has incurred, for example those incurred in financing its share of the assets.
  • its share of any liabilities incurred jointly with other venturers in relation to the joint venture.
  • any income from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture.
  • any expenses that it has incurred in respect of its interest in the joint venture, for example those related to financing the venturer’s interest in the assets and selling its share of the output (Para 22, IAS 31).

Arrangement: Jointly controlled entities

Nature of relationship

A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity (Para 24, IAS 31).

A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns income (Para 25, IAS31).

Treatment in investor’s individual accounts

Each venturer recognises its interest in a jointly controlled entity using proportionate consolidation, such that the share of each of the assets, liabilities, income and expenses is combined line by line with similar items. (The entity may use one of two reporting formats as set out in IAS 31).

The venturer is permitted to use the equity method as an alternative to proportionate consolidation, such that the initial interest in the entity is recorded at cost and adjusted thereafter for changes in the venturer’s share of net assets. The share of profit or loss is included in the profit and loss account.

Whilst IAS 31 permits the use of the equity method, it does not recommend it.