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SFAS No. 39
Accounting for Joint Venture
CONTENTS Paragraph INTRODUCTION
01 - 08
Objective Scope Definitions
04 05 - 07 08
RECOGNITION AND MEASUREMENT The construction of the Joint Venture Assets The Operations of the Joint Venture Assets Disclosures
09 - 34 09 - 14 15 - 31 32 - 34
STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39 JOINT VENTURE ACCOUNTING 35 - 49 Recognition and Measurement Disclosures Transition Effective Date
35 - 44 45 - 47 48 49
SFAS No. 39
Page 1
SFAS No. 39
Accounting for Joint Venture
ACCOUNTING FOR JOINT VENTURE
INTRODUCTION 0.1.
A definitive characteristic of the business world is the expectation of investment in profitable, low risk enterprises. These investment hopes often exceed the capacity if a single business entity to provide funds. An entrepreneur with opportunities for investments, but does not possess sufficient funds or assets will attempt to find a partner in order to capitalize those opportunities by forming a Joint Venture (JV). A Joint Venture is based in general terms on Civil Law and specifically on Contract Law. As a result, all rights, liabilities, ownership, asset ownership arrangement, shared income-expense-output arrangements should be disclosed in the Notes of the Financial Statements. A Joint Venture involving an Indonesian accounting entity and a foreign party which is based upon an agreement between those parties, and observes the laws of each country as well as international laws, has the same disclosure consequences.
0.2.
Other entrepreneurs may possess of have access to sufficient funds, but are lacking other resources, or perhaps not prepared to take the risk alone. These can motivate the entrepreneurs into creating a JV. All JV are essentially the same, that is, an entrepreneur attempt to obtain sufficient funds and or assets to undertake the planned investment, an/or to obtain a synergy from a strategic alliance, and/or to share the risks of investment with other entrepreneurs. An entrepreneur possessing access to funds and having sufficient other resources and does not want to share the risks with other entrepreneurs perhaps will not be interested in co-operative arrangements and might feel it is better to borrow oney from a bank or seek funds in the capital markets. This, then, the major difference between a JV and other forms of funding. Essentially, in a JV, there are limitation for the entrepreneurs in capitalizing upon funds from existing financial institutions, or there are problems in obtaining resources or certain concessions, and/or there is an expectation that the investment risk be shared.
Page 2
SFAS No. 39 0.3.
Accounting for Joint Venture
There are several froms of JV. But they can be divided into two groups: • •
JV as a separate legal entity from the legal entities of the JV participants, and JV with no formation of a separate legal entity.
While the first JV can be in the form of a legal body or association, a JV without a legal entity can be in the form of Joint Operation Control (JOC) and Joint Asset Control) (JAC). The latter could also be a JV where only one of the JV participants opssesses significant control of JV assets and operations. In JOC or JAC types ofJV, each JV participants has significant control of JV operations or assets, and as a result this type of co-operation is called joint control. JVs in this Statement are limited to those were only one party possesses significant (meaningful) control of JV assets and operations. The operational structure of the JVs vary significantly and evolved in response to the need of the participants. Two popular JV forms are Build, Operate and Transfer (BOT) and Build, Transfer and Operate (BTO). These two types can be combined with Shared Product contract (SPC) or Shared Income contract (SIC) in a certain ways. Objective 0.4.
The objective of this standard is to address the accounting of the JV activities, that is,) those related to: a. recognition and measurement of accounts arising from the JV activities such as assets, liabilities, income and expenses, and b. the presentation and disclosures of the JV activity accounts.
Scope 0.5.
This Statement addresses JV activities categorized as a JV which is not a separate legal entity, where only one party has a significant control over the assets and operations. A JV which is established as a separate entity and other matters should be treated in accordance with other Statement of Financial Accounting Standards and generally accepted accounting principles. Conversely, JVs which are not established as separate legal entities, including JACs and JOCs shall be treated in accordance with SFAS No. 12 Financial Reporting on Interests in Jointly Controlled Operations and Assets.
0.6.
This standard addresses JV activities, both from the perspective off those holding assets or certain operational licenses, as well as from the perspective of investors.
0.7.
With the issuance of this Statement, the term “co-operative” of “joint” in paragraph 14 of the SFAS No. 35 (1994) should be applied solely for the development of telecommunication facilities under a SPC arrangement. Page 3
SFAS No. 39
Accounting for Joint Venture
Definitions 0.8.
The following terms used in this standard are defined as follows: Joint Venture is a contract between two or more parties, where each party agrees to work together using assets and or licenses possessed , and to jointly bear the risks of that venture. Asset holder is the party holding assets or certain operational licenses used as Joint Venture objects or facilities. For example a person owning land, on which an office block will be constructed under a JV contract, or PT Jasa Marga which owns the operational license for toll roads. Investor is the party which provides funds, either in total or in part, to enable the efficient utilization of assets or concessions in a JV. This limitation differs from SFAS No. 12 becausean investor in this Statement can either possess control of JV assets and operations or not, depending on the type of the JV as stipulated in the contract. JV assets are fixed assets which are developed or used to carry out the JV activities. JV operator is a party operating the JV assets. JV managers could be the asset holders, the investors or other designated parties. Concession period is a length of time in where investors and asset holders are still bound to a shared product or chared income contract or other forms of payment stipulated in the JV contract.
RECOGNITION AND MEASUREMENT The development of the JV assets 0.9.
A Joint Venture usually commences with the asset holders meeting potential investors. The asset holders possess assets (for example, land), or certain operational licenses (for example, telecommunication services or toll road operational license), which are then handed over for development or use under a JV contract. An investor is a party which possesses funds to develop JV assets.
10.
JV Assets, like buildings and toll roads, usually require large amounts of funds to be constructed. These funds are usually provided by investor, although in several cases asset holders may also contribute in part.
11.
Assets handed over by asset holders for use under a JV contract should be recorded by the asset holders as JV assets at acquisition cost. Page 4
SFAS No. 39
Accounting for Joint Venture
12.
If an operational license with no acquisition cost is handed over for use in a JV, the asset holder should only disclose the existence of the handover.
13.
Funds invested by asset holders in a JV are recorded as participation in the JV. On the other hand, investors record funds received, representing JV participation, from asset holders as liabilities.
14.
All costs expended by the investors to develop JV assets must be capitalized in JV assets undergoing development. These accounts will be reclassified to JV assets once development is completed and the assets are ready for use.
Operations of the Joint Venture assets 15.
From the perspective of those given the authority to operate of manage JV assets, there are two methods often followed by JV participants. First, JV assets are managed by investors who fund the development until the end of the concession period. At the end of this period, investiors will transfer the JV assets and their management to asset holders. This method is usually called the Build, Operate and Transfer (BOT) method.
16.
The second method is one where the investors fund the development of JV assets until they are ready for operation. Once operation is ready to commence the assets are transferred to asset holders for management. This method is usually called the Build, Transfer, and Operate System (BTO).
17.
The first accounting issue to arise in joint activities as described under paragraphs 15 and 16 above is that of JV asset recognition. Under the first method, investors will directly manage the JV assets once development is completed. At this stage and until the end of the concession period, investors generally have significant control over the management of the JV assets. In line with asset recognition requirements, if investors are certain that there are economic benefits from the aforementioned assets and the acquisition cost can be reliably calculated, they must record there as JV assets.
18.
Under the BTO system, investors will transfer the JV assets (the development of which they are funding) to asset holders once the assets are ready for use. At this stage, asset holders usually have significant control over the management of the JV assets. Asset holders should recognize JV assets at the time investors transfer the management of the JV assets to them.
19.
The acquisition cost for JV assets developed by means of investor funds is valued at the cost of their development. In the case of these assets being transferred to asset holders, there is a possibility that the latter may not know the precise value of their development costs. In this case, asset holders can use the development costs agreed to in the JV contract, or fair value at the time the JV assets are transferred. Page 5
SFAS No. 39
Accounting for Joint Venture
20.
JV assets developed by means of investor funds should be recorded by the party managing those assets, where the managing party is one of the investors or asset holders.
21.
Investors or asset holders with the right to manage JV assets may assign the management of the asset to another party. Assigning this management function, however, does not change the rights to control the JV asset and operation.
22.
JV assets should be recorded at acquisition cost, or cost of development as described in the JV contract, or fair value, whichever is most objective or verifiable.
23.
Asset holders should record JV assets upon the transfer of the assets. Using an asset approach and cost principle for measurement of the asset, JV assets should be recorded at acquisition cost or fair value at the time of transfer. In a JV, however, this transfer transaction is not an asset acquisition transaction such as purchase or lessing. Fur a BOT JV, asset holders may not have to pay for the JV assets transferred at the end of the concession period, or pay below the fair value. Therefore, the recognition of JV assets under the BOT Method is by crediting the JV income accounts (where there is certainty regarding the economic benefits from these assets), or deferred income (where there is uncertainty regarding their economic benefits).
24.
Under the BTO method, asset holders must make payments to investors as a result of managing the JV assets which have been financed by the investors. Payment methods are always stipulated in the contracts, for example, in shared profit or shared income arrangements, or modifications of these arrangements. The difference between these arrangements and installment payment transactions, or installment sales from the standpoint of investors, or leasing, is that there is a risk that the payment will not be the same as the amount expected. It is this difference in JV payments from payments under installment purchase/sales transactions or leasing that in fact differentiates JV activities and installment selling activities or leasing. This difference in payments should be recognized and presented as additional JV income or expense.
25.
Investors record the transfer of JV assets to asset holders at the end of the concession period by reversing all accounts which have arisen in connection with the JV. Asset holders, on the other hand, record this transfer as an asset by crediting JV income if there is certainty of economic benefits from the assets, or by crediting deferred income if there is uncertainty relating to the economic benefits.
26.
If investors hand over JV assets to asset holders for use when the JV assets are complete, the transfer should be recorded as a right to share JV income or production. Receipt of cash or the rights to periodic income/production from shared income, shared production or other arrangements arising from the JV is recognized as JV income.
Page 6
SFAS No. 39
Accounting for Joint Venture
27.
for transactions described under paragraph 26, asset holders record the transfers in the JV asset accounts by crediting JV long-term liability accounts. Periodic payments to investors under the JV contract are recorded as settlement of liabilities together with interest and JV expense or income.
28.
The calculation of interest for transactions described under paragraph 26 and 27 is computed by multiplying the normal level of interest by the remaining liability from or obligation to investors. The difference between the interest expense (or interest income to investors) and the portion of the JV liability (or JV obligation to investors) from the amount paid (or received by investors) is recorded as JV income or expense.
29.
JV assets are depreciated by the party which records the assets on their balance sheet, that is, the party managing the JV. There is a high probability that the economic life of the assets may exceed the concession period accepted by investors. If the investors are also the JV managers, the maximum depreciation period allowed for JV assets will be until the end of the concession period. If the JV managers are assets holders, the depreciation period will be the economic life of the related assets, and will not be limited to the concession period.
30.
JV assets should be systematically depreciated by the JV manager over the economic life. For investors, the depreciation period should not be longer than the JV concession period.
31.
Rights to shared income or product are amortized by the investor.
Disclosures 32.
In connection with JV contracts, the following disclosures should be made: : a. the parties involved in the JV contract, b. rights and obligations of each JV participant in relation to the JV contract, and c. stipulations regarding changes to the Jv contract, if any.
33.
In connection with fixed asset disclosures, the following disclosures should be made for JV assets: : a. classification of assets comprising JV assets, b. determination of the acquisition costs of the JV assets, and c. determination of the depreciation or amortization of the JV assets
34.
In connection with shared income/product JV contracts, the following disclosures should be made: a. calculation or determination of rights to shared JV income/product, b. determination of amortization of rights to shared JV income/product, and c. calculation of (additional) JV expense or income arising from shared JV income/product payments.
Page 7
SFAS No. 39
Accounting for Joint Venture
STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39 JOINT VENTURE ACCOUNTING Statement of Financial Accounting Standard No. 39 consists of paragraphs 35-47. This statement should be read in the context of paragraphs 1-34. RECOGNITION AND MEASUREMENT Development of Joint Venture Assets 35.
Assets transferred by asset holders for use under a JV contract should be recorded by asset holders as JV assets at acquisition cost.
36.
Funds invested by asset holders in a JV are recorded as participation in the JV. On the other hand, investors record these funds received, representing JV participation, from asset holders as liabilities
Operation of Joint Venture Assets 37.
JV assets developed by means of investor funds should be recorded by the party managing the assets, where the managing party is one of the investors or asset holders.
38.
JV assets should be recorded at acquisition cost, or cost of development as described in the JV contract, or fair value, whichever is most objective or verifiable.
39.
Investors record the transfer of JV assets to asset holders at the end of the concession period by reversing all accounts which have arisen in connection with the JV. Asset holders, on the other hand, record this transfer as an asset by crediting deferred income if there is uncertainty relating to the economic benefits.
40.
IF investors hand over JV assets to asset holders for use when the JV assets are complete, the transfer should be recorded as a right to share JV income or production. Receipt of cash or rights to periodic income/production from shared income, shared production or other arrangements arising from the JV is recognized as JV income.
41.
Fir transactions described under paragraph 40, asset holders record the transfers in the JV asset accounts by crediting long term liability accounts. Periodic payments to investors under the JV contract are recorded as settlement of liabilities together with interest and JV expense or income.
42.
The calculation of interest for transactions described under paragraphs 40 and 41 is computed by multiplying the normal level of interest by the remaining liability from or obligation to investors. The difference between interest expense ( or interest income to investors) and the portion of the JV liability (or JV obligation to
Page 8
SFAS No. 39
Accounting for Joint Venture
investors) from the amount paid (or received by investors) is recorded as JV income or expense. 43.
JV asset should be systematically depreciated by the JV manager over the economic life. For investors, the depreciation period should not be longer than the JV concession period.
44.
Rights to shared income or product are amortized by the investor.
Disclosures 45.
In connection with JV contracts, the following disclosures should be made: a. parties involved in the JV. b. rights and obligations of each JV participant in relation with JV contract, and c. stipulations regarding changes to the JV contract, if any.
46.
In connection with fixed asset disclosures, the following disclosures should be made for JV assets: a. classification of assets comprising JV assets b. determination of the acquisition costs of JV assets, and c. determination of the depreciation or amortization of JV assets.
47.
In connection with shared income/product JV contracts, the following disclosures should be made: : a. Calculation or determination of rights to shared JV income/product, b. Determination of amortization of rights to shared JV income/product, and c. Calculation of (additional) JV expense or income arising from shared income/product payments.
Transition 48.
If the application of this Statement results in changes in accounting policies, then the changes should be reported prospectively.
Effective Date 49.
This Statement is effective for financial statements covering periods beginning on or after January 1, 1998. Earlier application is encouraged
Page 9
SFAS No. 39
Accounting for Joint Venture
JOINT OPERATION AGREEMENT
Attachment 1
commencement
Incorporation of JV (with legal entity)
Yes
general SFAS and specific industry
No.
Yes Do some parties have control ?
A
THE ASSET OWNER
B
SFAS 12
C
Attachment 2
Page 10
SFAS No. 39
Accounting for Joint Venture
A
Transfer of asset ?
No
Jointly controlled operation SFAS 12
Yes
Ultimate assets of BOT 25
Yes JV asset
the fund is being held?
participation in JV BOT? No BTO : JV asset and long term liabilities 25
payment of long term liabilities 27
INVESTOR
Attachment
3
B
Page 11
SFAS No. 39
Accounting for Joint Venture
Final transfer of Assets to JV Manager
BOT 25/39
BTO : 26, 48 emergence of Rights Sacrifice of Assets
Receipt of Benefit From Asset Holders 27, 28, 41, 42
MANAGEMENT
Attachment 4
C
Page 12
SFAS No. 39
Accounting for Joint Venture
Is asset received from the investor?
No
BOT method: investors are the managers
Asset recorded by manager 20/37
acquisition cost 22/38
Page 13
Accounting for Joint Venture
CONTENTS Paragraph INTRODUCTION
01 - 08
Objective Scope Definitions
04 05 - 07 08
RECOGNITION AND MEASUREMENT The construction of the Joint Venture Assets The Operations of the Joint Venture Assets Disclosures
09 - 34 09 - 14 15 - 31 32 - 34
STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39 JOINT VENTURE ACCOUNTING 35 - 49 Recognition and Measurement Disclosures Transition Effective Date
35 - 44 45 - 47 48 49
SFAS No. 39
Page 1
SFAS No. 39
Accounting for Joint Venture
ACCOUNTING FOR JOINT VENTURE
INTRODUCTION 0.1.
A definitive characteristic of the business world is the expectation of investment in profitable, low risk enterprises. These investment hopes often exceed the capacity if a single business entity to provide funds. An entrepreneur with opportunities for investments, but does not possess sufficient funds or assets will attempt to find a partner in order to capitalize those opportunities by forming a Joint Venture (JV). A Joint Venture is based in general terms on Civil Law and specifically on Contract Law. As a result, all rights, liabilities, ownership, asset ownership arrangement, shared income-expense-output arrangements should be disclosed in the Notes of the Financial Statements. A Joint Venture involving an Indonesian accounting entity and a foreign party which is based upon an agreement between those parties, and observes the laws of each country as well as international laws, has the same disclosure consequences.
0.2.
Other entrepreneurs may possess of have access to sufficient funds, but are lacking other resources, or perhaps not prepared to take the risk alone. These can motivate the entrepreneurs into creating a JV. All JV are essentially the same, that is, an entrepreneur attempt to obtain sufficient funds and or assets to undertake the planned investment, an/or to obtain a synergy from a strategic alliance, and/or to share the risks of investment with other entrepreneurs. An entrepreneur possessing access to funds and having sufficient other resources and does not want to share the risks with other entrepreneurs perhaps will not be interested in co-operative arrangements and might feel it is better to borrow oney from a bank or seek funds in the capital markets. This, then, the major difference between a JV and other forms of funding. Essentially, in a JV, there are limitation for the entrepreneurs in capitalizing upon funds from existing financial institutions, or there are problems in obtaining resources or certain concessions, and/or there is an expectation that the investment risk be shared.
Page 2
SFAS No. 39 0.3.
Accounting for Joint Venture
There are several froms of JV. But they can be divided into two groups: • •
JV as a separate legal entity from the legal entities of the JV participants, and JV with no formation of a separate legal entity.
While the first JV can be in the form of a legal body or association, a JV without a legal entity can be in the form of Joint Operation Control (JOC) and Joint Asset Control) (JAC). The latter could also be a JV where only one of the JV participants opssesses significant control of JV assets and operations. In JOC or JAC types ofJV, each JV participants has significant control of JV operations or assets, and as a result this type of co-operation is called joint control. JVs in this Statement are limited to those were only one party possesses significant (meaningful) control of JV assets and operations. The operational structure of the JVs vary significantly and evolved in response to the need of the participants. Two popular JV forms are Build, Operate and Transfer (BOT) and Build, Transfer and Operate (BTO). These two types can be combined with Shared Product contract (SPC) or Shared Income contract (SIC) in a certain ways. Objective 0.4.
The objective of this standard is to address the accounting of the JV activities, that is,) those related to: a. recognition and measurement of accounts arising from the JV activities such as assets, liabilities, income and expenses, and b. the presentation and disclosures of the JV activity accounts.
Scope 0.5.
This Statement addresses JV activities categorized as a JV which is not a separate legal entity, where only one party has a significant control over the assets and operations. A JV which is established as a separate entity and other matters should be treated in accordance with other Statement of Financial Accounting Standards and generally accepted accounting principles. Conversely, JVs which are not established as separate legal entities, including JACs and JOCs shall be treated in accordance with SFAS No. 12 Financial Reporting on Interests in Jointly Controlled Operations and Assets.
0.6.
This standard addresses JV activities, both from the perspective off those holding assets or certain operational licenses, as well as from the perspective of investors.
0.7.
With the issuance of this Statement, the term “co-operative” of “joint” in paragraph 14 of the SFAS No. 35 (1994) should be applied solely for the development of telecommunication facilities under a SPC arrangement. Page 3
SFAS No. 39
Accounting for Joint Venture
Definitions 0.8.
The following terms used in this standard are defined as follows: Joint Venture is a contract between two or more parties, where each party agrees to work together using assets and or licenses possessed , and to jointly bear the risks of that venture. Asset holder is the party holding assets or certain operational licenses used as Joint Venture objects or facilities. For example a person owning land, on which an office block will be constructed under a JV contract, or PT Jasa Marga which owns the operational license for toll roads. Investor is the party which provides funds, either in total or in part, to enable the efficient utilization of assets or concessions in a JV. This limitation differs from SFAS No. 12 becausean investor in this Statement can either possess control of JV assets and operations or not, depending on the type of the JV as stipulated in the contract. JV assets are fixed assets which are developed or used to carry out the JV activities. JV operator is a party operating the JV assets. JV managers could be the asset holders, the investors or other designated parties. Concession period is a length of time in where investors and asset holders are still bound to a shared product or chared income contract or other forms of payment stipulated in the JV contract.
RECOGNITION AND MEASUREMENT The development of the JV assets 0.9.
A Joint Venture usually commences with the asset holders meeting potential investors. The asset holders possess assets (for example, land), or certain operational licenses (for example, telecommunication services or toll road operational license), which are then handed over for development or use under a JV contract. An investor is a party which possesses funds to develop JV assets.
10.
JV Assets, like buildings and toll roads, usually require large amounts of funds to be constructed. These funds are usually provided by investor, although in several cases asset holders may also contribute in part.
11.
Assets handed over by asset holders for use under a JV contract should be recorded by the asset holders as JV assets at acquisition cost. Page 4
SFAS No. 39
Accounting for Joint Venture
12.
If an operational license with no acquisition cost is handed over for use in a JV, the asset holder should only disclose the existence of the handover.
13.
Funds invested by asset holders in a JV are recorded as participation in the JV. On the other hand, investors record funds received, representing JV participation, from asset holders as liabilities.
14.
All costs expended by the investors to develop JV assets must be capitalized in JV assets undergoing development. These accounts will be reclassified to JV assets once development is completed and the assets are ready for use.
Operations of the Joint Venture assets 15.
From the perspective of those given the authority to operate of manage JV assets, there are two methods often followed by JV participants. First, JV assets are managed by investors who fund the development until the end of the concession period. At the end of this period, investiors will transfer the JV assets and their management to asset holders. This method is usually called the Build, Operate and Transfer (BOT) method.
16.
The second method is one where the investors fund the development of JV assets until they are ready for operation. Once operation is ready to commence the assets are transferred to asset holders for management. This method is usually called the Build, Transfer, and Operate System (BTO).
17.
The first accounting issue to arise in joint activities as described under paragraphs 15 and 16 above is that of JV asset recognition. Under the first method, investors will directly manage the JV assets once development is completed. At this stage and until the end of the concession period, investors generally have significant control over the management of the JV assets. In line with asset recognition requirements, if investors are certain that there are economic benefits from the aforementioned assets and the acquisition cost can be reliably calculated, they must record there as JV assets.
18.
Under the BTO system, investors will transfer the JV assets (the development of which they are funding) to asset holders once the assets are ready for use. At this stage, asset holders usually have significant control over the management of the JV assets. Asset holders should recognize JV assets at the time investors transfer the management of the JV assets to them.
19.
The acquisition cost for JV assets developed by means of investor funds is valued at the cost of their development. In the case of these assets being transferred to asset holders, there is a possibility that the latter may not know the precise value of their development costs. In this case, asset holders can use the development costs agreed to in the JV contract, or fair value at the time the JV assets are transferred. Page 5
SFAS No. 39
Accounting for Joint Venture
20.
JV assets developed by means of investor funds should be recorded by the party managing those assets, where the managing party is one of the investors or asset holders.
21.
Investors or asset holders with the right to manage JV assets may assign the management of the asset to another party. Assigning this management function, however, does not change the rights to control the JV asset and operation.
22.
JV assets should be recorded at acquisition cost, or cost of development as described in the JV contract, or fair value, whichever is most objective or verifiable.
23.
Asset holders should record JV assets upon the transfer of the assets. Using an asset approach and cost principle for measurement of the asset, JV assets should be recorded at acquisition cost or fair value at the time of transfer. In a JV, however, this transfer transaction is not an asset acquisition transaction such as purchase or lessing. Fur a BOT JV, asset holders may not have to pay for the JV assets transferred at the end of the concession period, or pay below the fair value. Therefore, the recognition of JV assets under the BOT Method is by crediting the JV income accounts (where there is certainty regarding the economic benefits from these assets), or deferred income (where there is uncertainty regarding their economic benefits).
24.
Under the BTO method, asset holders must make payments to investors as a result of managing the JV assets which have been financed by the investors. Payment methods are always stipulated in the contracts, for example, in shared profit or shared income arrangements, or modifications of these arrangements. The difference between these arrangements and installment payment transactions, or installment sales from the standpoint of investors, or leasing, is that there is a risk that the payment will not be the same as the amount expected. It is this difference in JV payments from payments under installment purchase/sales transactions or leasing that in fact differentiates JV activities and installment selling activities or leasing. This difference in payments should be recognized and presented as additional JV income or expense.
25.
Investors record the transfer of JV assets to asset holders at the end of the concession period by reversing all accounts which have arisen in connection with the JV. Asset holders, on the other hand, record this transfer as an asset by crediting JV income if there is certainty of economic benefits from the assets, or by crediting deferred income if there is uncertainty relating to the economic benefits.
26.
If investors hand over JV assets to asset holders for use when the JV assets are complete, the transfer should be recorded as a right to share JV income or production. Receipt of cash or the rights to periodic income/production from shared income, shared production or other arrangements arising from the JV is recognized as JV income.
Page 6
SFAS No. 39
Accounting for Joint Venture
27.
for transactions described under paragraph 26, asset holders record the transfers in the JV asset accounts by crediting JV long-term liability accounts. Periodic payments to investors under the JV contract are recorded as settlement of liabilities together with interest and JV expense or income.
28.
The calculation of interest for transactions described under paragraph 26 and 27 is computed by multiplying the normal level of interest by the remaining liability from or obligation to investors. The difference between the interest expense (or interest income to investors) and the portion of the JV liability (or JV obligation to investors) from the amount paid (or received by investors) is recorded as JV income or expense.
29.
JV assets are depreciated by the party which records the assets on their balance sheet, that is, the party managing the JV. There is a high probability that the economic life of the assets may exceed the concession period accepted by investors. If the investors are also the JV managers, the maximum depreciation period allowed for JV assets will be until the end of the concession period. If the JV managers are assets holders, the depreciation period will be the economic life of the related assets, and will not be limited to the concession period.
30.
JV assets should be systematically depreciated by the JV manager over the economic life. For investors, the depreciation period should not be longer than the JV concession period.
31.
Rights to shared income or product are amortized by the investor.
Disclosures 32.
In connection with JV contracts, the following disclosures should be made: : a. the parties involved in the JV contract, b. rights and obligations of each JV participant in relation to the JV contract, and c. stipulations regarding changes to the Jv contract, if any.
33.
In connection with fixed asset disclosures, the following disclosures should be made for JV assets: : a. classification of assets comprising JV assets, b. determination of the acquisition costs of the JV assets, and c. determination of the depreciation or amortization of the JV assets
34.
In connection with shared income/product JV contracts, the following disclosures should be made: a. calculation or determination of rights to shared JV income/product, b. determination of amortization of rights to shared JV income/product, and c. calculation of (additional) JV expense or income arising from shared JV income/product payments.
Page 7
SFAS No. 39
Accounting for Joint Venture
STATEMENT OF THE FINANCIAL ACCOUNTING STANDARD No. 39 JOINT VENTURE ACCOUNTING Statement of Financial Accounting Standard No. 39 consists of paragraphs 35-47. This statement should be read in the context of paragraphs 1-34. RECOGNITION AND MEASUREMENT Development of Joint Venture Assets 35.
Assets transferred by asset holders for use under a JV contract should be recorded by asset holders as JV assets at acquisition cost.
36.
Funds invested by asset holders in a JV are recorded as participation in the JV. On the other hand, investors record these funds received, representing JV participation, from asset holders as liabilities
Operation of Joint Venture Assets 37.
JV assets developed by means of investor funds should be recorded by the party managing the assets, where the managing party is one of the investors or asset holders.
38.
JV assets should be recorded at acquisition cost, or cost of development as described in the JV contract, or fair value, whichever is most objective or verifiable.
39.
Investors record the transfer of JV assets to asset holders at the end of the concession period by reversing all accounts which have arisen in connection with the JV. Asset holders, on the other hand, record this transfer as an asset by crediting deferred income if there is uncertainty relating to the economic benefits.
40.
IF investors hand over JV assets to asset holders for use when the JV assets are complete, the transfer should be recorded as a right to share JV income or production. Receipt of cash or rights to periodic income/production from shared income, shared production or other arrangements arising from the JV is recognized as JV income.
41.
Fir transactions described under paragraph 40, asset holders record the transfers in the JV asset accounts by crediting long term liability accounts. Periodic payments to investors under the JV contract are recorded as settlement of liabilities together with interest and JV expense or income.
42.
The calculation of interest for transactions described under paragraphs 40 and 41 is computed by multiplying the normal level of interest by the remaining liability from or obligation to investors. The difference between interest expense ( or interest income to investors) and the portion of the JV liability (or JV obligation to
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SFAS No. 39
Accounting for Joint Venture
investors) from the amount paid (or received by investors) is recorded as JV income or expense. 43.
JV asset should be systematically depreciated by the JV manager over the economic life. For investors, the depreciation period should not be longer than the JV concession period.
44.
Rights to shared income or product are amortized by the investor.
Disclosures 45.
In connection with JV contracts, the following disclosures should be made: a. parties involved in the JV. b. rights and obligations of each JV participant in relation with JV contract, and c. stipulations regarding changes to the JV contract, if any.
46.
In connection with fixed asset disclosures, the following disclosures should be made for JV assets: a. classification of assets comprising JV assets b. determination of the acquisition costs of JV assets, and c. determination of the depreciation or amortization of JV assets.
47.
In connection with shared income/product JV contracts, the following disclosures should be made: : a. Calculation or determination of rights to shared JV income/product, b. Determination of amortization of rights to shared JV income/product, and c. Calculation of (additional) JV expense or income arising from shared income/product payments.
Transition 48.
If the application of this Statement results in changes in accounting policies, then the changes should be reported prospectively.
Effective Date 49.
This Statement is effective for financial statements covering periods beginning on or after January 1, 1998. Earlier application is encouraged
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SFAS No. 39
Accounting for Joint Venture
JOINT OPERATION AGREEMENT
Attachment 1
commencement
Incorporation of JV (with legal entity)
Yes
general SFAS and specific industry
No.
Yes Do some parties have control ?
A
THE ASSET OWNER
B
SFAS 12
C
Attachment 2
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SFAS No. 39
Accounting for Joint Venture
A
Transfer of asset ?
No
Jointly controlled operation SFAS 12
Yes
Ultimate assets of BOT 25
Yes JV asset
the fund is being held?
participation in JV BOT? No BTO : JV asset and long term liabilities 25
payment of long term liabilities 27
INVESTOR
Attachment
3
B
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SFAS No. 39
Accounting for Joint Venture
Final transfer of Assets to JV Manager
BOT 25/39
BTO : 26, 48 emergence of Rights Sacrifice of Assets
Receipt of Benefit From Asset Holders 27, 28, 41, 42
MANAGEMENT
Attachment 4
C
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SFAS No. 39
Accounting for Joint Venture
Is asset received from the investor?
No
BOT method: investors are the managers
Asset recorded by manager 20/37
acquisition cost 22/38
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