In the world of increasing complex group and ownership structures, it's imperative that accountants understand and identify different types of investments and business relationships. Two common types of business relationships that companies engage in are associates and joint ventures. These structures allow businesses to collaborate while maintaining distinct financial and operational frameworks.

In her session, Accounting for Associates and Joint Ventures, Lindsay Webber provides clarity on the complex accounting issues surrounding associates and joint ventures.

Defining Associates and Joint Ventures

Associates

An associate is an entity in which an investor holds significant influence, typically defined as ownership of 20% to 50% of voting rights. This level of influence means the investor has the power to participate in financial and operating policy decisions but does not have control over the entity. Unlike subsidiaries, associates financial results are not consolidated into the parent company’s statements.

Associates can take different forms, including:

• Incorporated companies
• Unincorporated businesses
• Partnerships

Significant influence is often assumed at the 20% ownership threshold, but it can exist even at lower ownership levels if the investor can demonstrate a strong participation in decision-making.

Joint Ventures (JVs)

A joint venture is a contractual agreement between two or more parties to undertake a specific business activity. The defining characteristic of a joint venture is joint control, meaning that all parties must unanimously agree on strategic, financial, and operational decisions.

Joint ventures can take several forms:

• Jointly Controlled Operations – Partners contribute resources to a shared operation without establishing a separate entity.
• Jointly Controlled Assets – Partners jointly own and use specific assets, sharing costs and revenues.
• Jointly Controlled Entities – A separate legal entity is formed to carry out the joint venture's business activities. This is the most common type in practice.

Unlike associates, joint ventures require a formal contract to establish the terms of collaboration and decision-making processes.

Key Differences Between Associates and Joint Ventures

Accounting Treatment of Associates and Joint Ventures

For jointly controlled assets and operations, each investor records its share of assets, liabilities, revenues, and expenses in its financial statements rather than using the equity method. Where the joint venture is a separate entity, it is accounted for as below.

The accounting treatment for associates and joint ventures depends on whether the investment is being accounted for in stand-alone financial statements or consolidated financial statements. These are dealt with separately below.

Accounting Treatment in Stand-Alone Financial Statements

In stand-alone accounts, there is an accounting policy choice to account for an associate or joint venture using either:

• The cost model;
• At fair value with changes recognised in Other Comprehensive Income; or
• At fair value with changes recognised in profit or loss.

Accounting Treatment in Consolidated Financial Statements

In consolidated financial statements, accounting for both associates and joint ventures follows the equity method under International Financial Reporting Standards (IFRS 102). This means:

• The investor records its initial investment at cost.
• The investor adjusts the investment in the balance sheet for its share of the investee’s profits or losses.
• Dividends received from the associate or joint venture reduce the carrying amount of the investment.

Disclosure Requirements

Companies with associates or joint ventures must disclose relevant information in their financial statements, including:

• The nature of the relationship.
• The method of accounting used.
• The share of profits or losses.
• Details of any significant restrictions on the ability to transfer funds between entities.

Associates and joint ventures provide businesses with strategic opportunities for collaboration and expansion. While both involve partnerships, they differ in level of control, decision-making processes, and legal structures. Understanding these differences is essential for accurate financial reporting and effective business management.

For the full session, please click here. In this course, Lindsay Webber covers the following topics:

• What are Associates and JVs?
• Recognition and measurement in stand-alone financial statements
• Recognition and measurement in consolidated financial statements.
• Practical examples
• Disclosure requirements

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.