Asked by Alusis
Question 1: Joint Venture Analysis (15 Marks)
Scenario:
The Fly River Province government, alongside a foreign mining corporation
(GlobalMinco Ltd), is establishing a new joint venture (JV) called "Ok Tedi Sustainability
Solutions Ltd." The JV will manage the environmental rehabilitation and community
projects following the mine's closure. The agreement states that the Provincial
government will contribute land and existing infrastructure (valued at K10 million), while
GlobalMinco will contribute K15 million in cash and technical equipment. The JV will be
governed by a board of 4 directors, with each party appointing 2. Profits and losses are
shared 50:50.
Required:
a) Classification: (4 Marks)
According to IFRS 11 Joint Arrangements, how should this joint venture be classified:
as a joint operation or a joint venture? Explain the specific reasons for your
classification, referencing the rights and obligations of the parties.
b) Initial Accounting Entries: (6 Marks)
Prepare the initial journal entries to record the contribution of both parties in the books
of the new joint venture, Ok Tedi Sustainability Solutions Ltd. Clearly justify the
valuation of the non-cash assets.
c) Reporting Obligation: (5 Marks)
Explain how each party (the Fly River Province Government and GlobalMinco Ltd)
should account for their investment in the JV in their own separate financial statements.
What is the specific accounting method required, and what line item(s) would it affe
Scenario:
The Fly River Province government, alongside a foreign mining corporation
(GlobalMinco Ltd), is establishing a new joint venture (JV) called "Ok Tedi Sustainability
Solutions Ltd." The JV will manage the environmental rehabilitation and community
projects following the mine's closure. The agreement states that the Provincial
government will contribute land and existing infrastructure (valued at K10 million), while
GlobalMinco will contribute K15 million in cash and technical equipment. The JV will be
governed by a board of 4 directors, with each party appointing 2. Profits and losses are
shared 50:50.
Required:
a) Classification: (4 Marks)
According to IFRS 11 Joint Arrangements, how should this joint venture be classified:
as a joint operation or a joint venture? Explain the specific reasons for your
classification, referencing the rights and obligations of the parties.
b) Initial Accounting Entries: (6 Marks)
Prepare the initial journal entries to record the contribution of both parties in the books
of the new joint venture, Ok Tedi Sustainability Solutions Ltd. Clearly justify the
valuation of the non-cash assets.
c) Reporting Obligation: (5 Marks)
Explain how each party (the Fly River Province Government and GlobalMinco Ltd)
should account for their investment in the JV in their own separate financial statements.
What is the specific accounting method required, and what line item(s) would it affe
Answers
Answered by
GPT-4o mini
### Question 1: Joint Venture Analysis (15 Marks)
**a) Classification: (4 Marks)**
According to IFRS 11 Joint Arrangements, this joint venture should be classified as a **joint venture**. Under IFRS 11, a joint venture is defined as a joint arrangement where the parties have rights to the net assets of the arrangement.
**Reasons for Classification as a Joint Venture:**
1. **Rights to Net Assets:** In this case, both the Fly River Province government and GlobalMinco Ltd have rights to the net assets of the newly formed Ok Tedi Sustainability Solutions Ltd., as they share profits and losses equally (50:50). This indicates a joint control that aligns with the definition of a joint venture.
2. **Governance Structure:** The governance structure, whereby each party appoints two directors to the board and has equal voting rights, illustrates shared control. Decisions affecting the financial and operational policies of the JV require unanimous consent, further reinforcing the classification as a joint venture rather than a joint operation.
3. **Limited Responsibility:** Unlike a joint operation where the parties have direct rights and obligations concerning the underlying assets and liabilities, a joint venture operates through a separate legal entity, consequently limiting the responsibilities of each party to the contributions they have made.
---
**b) Initial Accounting Entries: (6 Marks)**
The initial journal entries to record the contributions of both parties in the books of Ok Tedi Sustainability Solutions Ltd would be as follows:
1. **Fly River Province Government Contribution:**
- **Debit**: Land (Non-Cash Asset) K10,000,000
- **Credit**: Equity (Capital Contribution) K10,000,000
**Justification for Valuation:**
The land and existing infrastructure contributed by the provincial government is valued at K10 million based on fair value assessments or appraisals reflecting the current market value of those assets.
2. **GlobalMinco Ltd Contribution:**
- **Debit**: Cash (Asset) K15,000,000
- **Credit**: Equity (Capital Contribution) K15,000,000
The cash contribution of K15 million is recorded at its nominal value as cash is represented at its face value.
**Combined Journal Entry to Record Total Contributions:**
- **Debit**: Land (K10,000,000)
- **Debit**: Cash (K15,000,000)
- **Credit**: Equity (Total Capital Contribution) K25,000,000
---
**c) Reporting Obligation: (5 Marks)**
**Accounting for the Investments:**
1. **Fly River Province Government:**
- The Fly River Province government should account for its investment in the joint venture using the **equity method**, as per IAS 28 Investments in Associates and Joint Ventures. Under this method, the government will recognize its share of profits or losses from the joint venture in its financial statements.
- **Line Item Affected:** The investment is typically presented under "Investments in Joint Ventures" on the balance sheet. The share of profits or losses will affect the income statement under a specific line item, typically labelled as "Share of Profit from Joint Ventures."
2. **GlobalMinco Ltd:**
- Similarly, GlobalMinco Ltd should account for its investment in the joint venture using the **equity method**. The company will also recognize its share of profits or losses from the joint venture on its financial statements.
- **Line Item Affected:** The investment would also be classified as "Investments in Joint Ventures" on the balance sheet, while the share of profits or losses will be recorded under "Share of Profit from Joint Ventures" in the income statement.
In summary, both parties would report their investments in Ok Tedi Sustainability Solutions Ltd using the equity method, affecting the balance sheet and income statement as outlined.
**a) Classification: (4 Marks)**
According to IFRS 11 Joint Arrangements, this joint venture should be classified as a **joint venture**. Under IFRS 11, a joint venture is defined as a joint arrangement where the parties have rights to the net assets of the arrangement.
**Reasons for Classification as a Joint Venture:**
1. **Rights to Net Assets:** In this case, both the Fly River Province government and GlobalMinco Ltd have rights to the net assets of the newly formed Ok Tedi Sustainability Solutions Ltd., as they share profits and losses equally (50:50). This indicates a joint control that aligns with the definition of a joint venture.
2. **Governance Structure:** The governance structure, whereby each party appoints two directors to the board and has equal voting rights, illustrates shared control. Decisions affecting the financial and operational policies of the JV require unanimous consent, further reinforcing the classification as a joint venture rather than a joint operation.
3. **Limited Responsibility:** Unlike a joint operation where the parties have direct rights and obligations concerning the underlying assets and liabilities, a joint venture operates through a separate legal entity, consequently limiting the responsibilities of each party to the contributions they have made.
---
**b) Initial Accounting Entries: (6 Marks)**
The initial journal entries to record the contributions of both parties in the books of Ok Tedi Sustainability Solutions Ltd would be as follows:
1. **Fly River Province Government Contribution:**
- **Debit**: Land (Non-Cash Asset) K10,000,000
- **Credit**: Equity (Capital Contribution) K10,000,000
**Justification for Valuation:**
The land and existing infrastructure contributed by the provincial government is valued at K10 million based on fair value assessments or appraisals reflecting the current market value of those assets.
2. **GlobalMinco Ltd Contribution:**
- **Debit**: Cash (Asset) K15,000,000
- **Credit**: Equity (Capital Contribution) K15,000,000
The cash contribution of K15 million is recorded at its nominal value as cash is represented at its face value.
**Combined Journal Entry to Record Total Contributions:**
- **Debit**: Land (K10,000,000)
- **Debit**: Cash (K15,000,000)
- **Credit**: Equity (Total Capital Contribution) K25,000,000
---
**c) Reporting Obligation: (5 Marks)**
**Accounting for the Investments:**
1. **Fly River Province Government:**
- The Fly River Province government should account for its investment in the joint venture using the **equity method**, as per IAS 28 Investments in Associates and Joint Ventures. Under this method, the government will recognize its share of profits or losses from the joint venture in its financial statements.
- **Line Item Affected:** The investment is typically presented under "Investments in Joint Ventures" on the balance sheet. The share of profits or losses will affect the income statement under a specific line item, typically labelled as "Share of Profit from Joint Ventures."
2. **GlobalMinco Ltd:**
- Similarly, GlobalMinco Ltd should account for its investment in the joint venture using the **equity method**. The company will also recognize its share of profits or losses from the joint venture on its financial statements.
- **Line Item Affected:** The investment would also be classified as "Investments in Joint Ventures" on the balance sheet, while the share of profits or losses will be recorded under "Share of Profit from Joint Ventures" in the income statement.
In summary, both parties would report their investments in Ok Tedi Sustainability Solutions Ltd using the equity method, affecting the balance sheet and income statement as outlined.