This standard set out principles and procedures for accounting of interests in joint venture and reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors regardless of the structures or forms under which the joint venture activities take place. The standard deals with three broad types of joint ventures – jointly controlled operations, jointly controlled assets and jointly controlled entities. The requirements relating to accounting for joint ventures in consolidated financial statements according to proportionate consolidation method, as contained in AS 27, apply only when consolidated financial statements are prepared by venturer.
This Statement should be applied in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place.
The provisions of this AS need to be referred to for consolidated financial statement only when CFS is prepared and presented by the venturer.
Terms used in AS-27
A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control. From the above definition it is concluded that the essential conditions for any business relation to qualify as joint venture are:
- Two or more parties coming together: Parties can be an individual or any form of business organization say, BOI, AOP, Company, firm.
- Venturers undertake some economic activity: Economic activity means activities with the profit-making motive. Joint venture is separate from the regular identity of the venturers, it may be in the form of independent and separate legal organization other than regular concern of the venturer engaged in the economic activity.
- Venturers have joint control on the economic activity: The operating and financial decisions are influenced by the venturers and they also share the results of the economic activity.
- There exists a contractual agreement: The relationship between venturers is governed by the contractual agreement. This agreement can be in the form of written and signed agreement or as minutes of venturer meeting or in any other written form.
- Joint control is the contractually agreed sharing of control over an economic activity.
- Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.
- A venturer is a party to a joint venture and has joint control over that joint venture.
An investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.