CR Common Practices - Company Reporting · CR Common Practices Accounting for Joint Ventures ... by IAS 31 “Interests in joint ventures”. Under this standard a joint venture is

CR Common PracticesAccounting for Joint Ventures

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Published on 21 July 2011. For more information, please email [email protected]

Introduction

Under International Financial Reporting Standards (IFRS), accounting for joint ventures is governed by IAS 31 “Interests in joint ventures”. Under this standard a joint venture is defined as a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. For such investments there is a choice of accounting method: equity accounting; and proportionate consolidation with two presentational formats existing for the latter (para 34). The existence of a choice of methods is currently an area of contention as a result of the proposed convergence of IFRS and US GAAP. Although both methods are allowed under IFRS, proportionate consolidation is the recommended approach with equity accounting termed as an allowed alternative (para 40). In contrast, under US GAAP the equity method is the favoured approach. The IASB in May 2011 issued IAS 28 “Investments in associates and joint ventures” that will supersede IAS 31 being effective for annual periods beginning on or after 1 January 2013 although earlier application is permitted. This new standard states that an entity with joint control of an investee shall account for its investment in a joint venture using the equity method (para 16).

This report considers recent corporate reporting of joint ventures by a sample drawn from 24 large, listed European companies, supplemented by Company Reporting data and comment. All companies report under IFRS, following European Union requirements. We highlight the accounting methods employed by the companies in our sample. We also comment on company joint venture disclosure practice.

Key observations include the following. Only 37% of companies with evidence of joint ventures disclose the use of proportionate consolidation as recommended by IFRS. None disclose joint venture amounts on the face of the primary financial statements. A further 58% disclose that the equity method is used. Others, despite having evidence of joint ventures, do not disclose a policy. UK companies generally include a separate joint venture policy while others generally disclose joint venture policies as part of a basis of consolidation statement. Those companies disclosing any information in the notes generally give full disclosure of descriptive, profit and loss and balance sheet joint venture information as required. Financial information is most often given in aggregate showing the ventures’ share. A number of UK companies adopting equity accounting disclose a table showing movements in joint venture investments.

Companies under examination

Our initial sample consists of 24 listed European company accounts, which feature in the Standard & Poor’s Europe 350 dataset with period ends from 30 June 2010 and which had reported by early February 2011. The sample contains a spread of industry classes. The companies of which the accounts have been analysed are as follows:

Company Period end Auditors Country Industry class

Associated British Foods 18 September 2010 KPMG UK Food products BHP Billiton 30 June 2010 KPMG UK General mining British Sky Broadcasting 30 June 2010 Deloitte UK Broadcasting &

entertainment





Compass 30 September 2010 Deloitte UK Restaurants & barsDaily Mail & General Trust

03 October 2010 Deloitte UK Publishing

Diageo 30 June 2010 KPMG UK Distillers & vintnersHays 30 June 2010 Deloitte UK Business training &

employment agencies Imperial Tobacco 30 September 2010 PricewaterhouseCoopers UK Tobacco Infineon Technologies 30 September 2010 KPMG Germany SemiconductorsKone 31 December 2010 PricewaterhouseCoopers Finland Industrial machineryLonmin 30 September 2010 KPMG UK Platinum & precious

metals Mediobanca 30 June 2010 Ernst & Young Italy Banks Novartis 31 December 2010 PricewaterhouseCoopers Switzerland PharmaceuticalsNovozymes 31 December 2010 PricewaterhouseCoopers Denmark Biotechnology Pernod Ricard 30 June 2010 Mazars & Deloitte France Distillers & vintnersPorsche 31 July 2010 Ernst & Young Germany Automobiles Roche 31 December 2010 KPMG Switzerland PharmaceuticalsSage 30 September 2010 PricewaterhouseCoopers UK Software SGS 31 December 2010 Deloitte Switzerland Business support

services Siemens 30 September 2010 Ernst & Young Germany Electronic equipmentSmiths 31 July 2010 PricewaterhouseCoopers UK Diversified industrialsSodexo 31 August 2010 PricewaterhouseCoopers &

KPMG France Restaurants & bars

ThyssenKrupp 30 September 2010 KPMG Germany Iron & steel Wolseley 31 July 2010 PricewaterhouseCoopers UK Industrial suppliers

Analysis:

Accounting Method and Policy disclosure

From the information presented in the table below, it quickly becomes apparent that there is no consensus in the treatment of joint ventures. 37% of the companies in our sample, with evidence of joint ventures, utilise the proportionate consolidation method whereas 58% employ equity accounting instead. The remainder fail to disclose a policy. So, in effect there is a significant number of companies which choose to ignore the IASB recommended method instead adopting the allowed alternative treatment which is favoured under US GAAP.

Company Accounting method Policy disclosure location

Proportionate Consolidation

Equity Accounting

Basis of Consolidation

Separate JV Policy

No Disclosure No Evidence

Associated British Foods

X X

BHP Billiton X X British Sky Broadcasting

X X

Compass X X Daily Mail and General Trust

X X

Diageo X X Hays XImperial X X





Tobacco Infineon Technologies

X X

Kone XLonmin X X Mediobanca X X Novartis X X Novozymes X X Pernod Ricard X Porsche X X Roche X X Sage XSGS X X Siemens X X Smiths XSodexo X X ThyssenKrupp X X Wolseley X

For those companies in our sample with evidence of joint ventures, all but Pernod Ricard identify the accounting method adopted. Despite not identifying a policy, Pernod Ricard has evidence of joint ventures as, in a discussion of a legal dispute within its financial statements, it refers to a joint venture company in which it has a shareholding. There is also reference to a second joint venture in the management report section of its annual report.

The companies which disclose this information do so in the accounting policies section. However, the clarity and extent of the information presented differs from company to company. In general, two disclosure formats exist, with 50% of companies identifying the method followed within a basis of consolidation paragraph. The remainder provide a separate joint ventures policy statement. The latter seems to be more popular among UK Companies. Particularly detailed disclosure is made by BHP Billiton which is the only company in our sample to have a joint venture that is not in the form of a jointly controlled entity but instead jointly controlled assets. (see Illustrative Extract 1)

Proportionate Consolidation - Company Disclosures

When applying proportionate consolidation two possible reporting formats exist: a venturer may combine its share of each of the assets, liabilities, income and expenses of the jointly controlled entity with the similar items, line by line in its financial statements or, alternatively, it may include separate line items (para 34). Of the companies in our sample that disclose the use of a proportionate consolidation approach, all have opted for a line by line presentation format with no separate joint venture asset, liability, income and expense amounts being identified on the face of the primary financial statements. With the exception of SGS and Roche, however, separate information of this type is given in a note to the accounts as required by IAS 31 (para 56). Each company, including Novozymes, separately identifies in aggregate its share of joint venture asset and liability amounts split into current and non-current categories (see Illustrative Extract 2). Each company also discloses, where relevant, its share of revenue and post tax profit.





Under the aforementioned paragraph of the standard, share of joint venture expenses in aggregate should be disclosed. Imperial Tobacco fails to give any such expense information with Diageo disclosing only operating costs. Compass discloses a single expense figure without identifying its nature, however, BHP Billiton adopts the most transparent presentation disclosing separate figures for operating costs, finance costs and income tax expense (see Illustrative Extract 3).

Again under the aforementioned paragraph, companies should disclose a listing and description of interests in significant joint ventures and the proportion of ownership interest held in jointly controlled entities. With the exception of SGS and Roche, each company names its joint ventures and indicates its share of voting rights. Further common disclosures are the principal activities of individual joint ventures and countries of incorporation. In addition to country of incorporation Diageo discloses country of operation. BHP Billiton also identifies separate reporting dates for each joint venture (see Illustrative Extracts 4 and 5).

While companies commonly disclose narrative information for separate joint ventures, Imperial Tobacco is the only company using proportionate consolidation in our sample to go a stage further by disclosing separate income statement and balance sheet information with regard to its joint ventures. While all other companies using proportionate consolidation present net figures for joint ventures, Imperial Tobacco identifies individual figures for two joint ventures involved in the supply of Cuban cigars with a total presented for others. (see Illustrative Extract 6).

In addition, Imperial Tobacco separately identifies the amount of goodwill and indefinite lived intangibles allocated to its Cuban cigar joint ventures. These joint ventures are considered to be a group of cash-generating units for intangible asset impairment tests. (see Illustrative Extract 7).

Other information disclosed includes information linked to contingent liabilities, commitments and related party transactions. BHP Billiton and Compass both disclose joint venture contingent liabilities and commitment amounts. In both cases contingent liability information is included within a separate joint venture note to the accounts. BHP Billiton includes commitment amounts within such a note, whereas Compass includes commitments linked to joint ventures in a contingent liabilities note. Novozymes states explicitly that it has no material contingent liabilities in relation to its joint ventures (see Illustrative Extract 8).

Each of the companies to disclose transactions with joint ventures do so in a separate note. Imperial Tobacco discloses information in a note which is dedicated to transactions with joint ventures and associates, whereas BHP Billiton and Compass disclose such information as part of a related party transactions note. In a statement which marks it out from the other companies, Diageo outlines that due to the nature of proportional consolidation applied transactions between it and joint ventures are eliminated on consolidation and therefore are not disclosed (see Illustrative Extracts 9 and 10).





Equity Accounting – Company Disclosures

As discussed above, equity accounting is an allowed alternative treatment that can be applied instead of proportionate consolidation. When adopting this method a joint venture is accounted for in a similar fashion to an associated undertaking as outlined in IAS 28. Under this standard, investments accounted for using the equity method shall be classified as non-current assets. The investor’s share of the profit or loss and the carrying amount of such investments shall be separately disclosed (para 38). Of the companies in our sample to disclose the use of the equity method two general presentational formats are followed. Companies either specifically identifying the existence of joint ventures on the face of the primary financial statements or alternatively refer only to equity method investments thus failing to highlight the existence of joint ventures which are effectively combined with associated undertakings. Of our sample companies, Daily Mail and General Trust, British Sky Broadcasting and Associated British Foods all separately identify the existence of joint ventures on the face of the primary financial statements. Daily Mail and General Trust, however, follows a more transparent presentation than the others as on the face of its statement of financial position investments in joint ventures (£20.4 million) are disclosed separately from interests held in associated undertakings (£12.7 million) whereas the other two companies only give aggregate figures for joint ventures and associates (see Illustrative Extract 11). In line with the standard, each of these companies presents separate joint venture information in the notes to the accounts.

For the remaining companies that refer to equity method investments, associates and joint ventures are combined on the face of the primary financial statements under such a heading. The companies to follow such a practice are Siemens, Porsche, Thyssenkrupp, Infineon Technologies, Mediobanca and Lonmin. Again in line with the standard, each of these companies gives separate joint venture information in the notes to the accounts.

Companies which depart from these two groupings are Novartis and Sodexo. Despite identifying that the equity method is used, neither gives additional joint venture information in the notes to the accounts.

A disclosure in the notes to the accounts which appears to be peculiar to the UK companies which have adopted equity accounting is a table showing joint venture movements. Associated British Foods, British Sky Broadcasting, Daily Mail and General Trust and Lonmin all present such a table with common items included being capital contributions, share of profits, dividends received and acquisitions. Daily Mail and General Trust also includes a write-down to the carrying value of its investment. British Sky Broadcasting shows joint venture and associate movements in aggregate. The tables presented by Associated British Foods and Lonmin also show a separate column for joint venture goodwill (see Illustrative Extract 12: Associated British Foods).





Other disclosures are similar to those presented by companies employing proportionate consolidation. Those companies using equity accounting commonly disclose a breakdown of assets and liabilities split into current and non-current with revenue and profit also being disclosed. The provision of such information is in line with IAS 28 which states that summarised financial information, including the aggregated amounts of assets, liabilities, revenues and profit or loss should be disclosed (para 37b). There is, however, divergence of practice among the equity method companies as Siemens, Daily Mail and General Trust and Infineon Technologies take information directly from joint venture financial statements without adjusting for the share of the investments held. In doing so, Siemens and Infineon Technologies show information for separate joint ventures whereas Daily Mail and General Trust aggregates its disclosures at segment level (see Illustrative Extracts 13, 14 and 15).

In addition, Daily Mail and General Trust presents a table showing its share of the results of joint ventures. Separate information is presented in relation to: share of profit from operations: amortisation of intangibles; interest payable; and tax as well as impairment recognised to the carrying value of joint ventures (see Illustrative Extract 16). Under IAS 31, only aggregate amounts of each of current assets, long-term assets, current liabilities, long-term liabilities, income and expenses related to interests in joint ventures need be disclosed (para 56).

For Mediobanca, it is unclear whether amounts shown for a joint venture are total amounts or its share. Associated British Foods, British Sky Broadcasting, Lonmin, Porsche, and Thyssenkrupp specifically state that amounts disclosed represent their share of joint ventures (see Illustrative Extract 17 as an example).

As noted above, under IAS 31 companies should disclose aggregate expense amounts for joint ventures. However, neither ThyssenKrupp, Siemens nor Infineon Technologies do so. In line with the standard, Lonmin presents an aggregate expenses figure which it states includes tax whereas Associated British Foods and British Sky Broadcasting go further by disclosing tax separate from other expenses (see Illustrative Extract 18).

Again, in common with the companies employing proportionate consolidation, equity method companies are required to disclose narrative information about their joint ventures such as name, description of interests and share of voting rights (para 56). Additional information commonly given is country of incorporation and principal activities. However, some companies such as Associated British Foods give a composite list of joint ventures and associates without clearly distinguishing one from the other (see Illustrative Extract 19)





Other pieces of disclosure which equity method companies give in common with those using proportionate consolidation are contingent liabilities, commitments and related party transactions. Daily Mail and General Trust identifies both its joint venture contingent liabilities and commitments in its joint venture note. In contrast, ThyssenKrupp identifies joint venture contingent liabilities in a contingencies and commitments note. Siemens does likewise giving particularly detailed information in relation to guarantees given in relation to a joint venture established with IBM to provide IT solutions and services to the German army. These guarantees are also referenced in a related parties transactions note. Siemens is not the only company to make reference to joint venture related party transactions. Associated British Foods disclose amounts owed to and due form joint ventures in aggregate with those for associates in a tabular format. British Sky Broadcasting does likewise but it explains the nature of the transactions (the fact that it entered into forward exchange contracts on behalf of a joint venture). Lonmin discloses amounts due to and due from a specific joint venture in a table. Fuller disclosure of joint venture related party transactions in aggregate is given by Porsche and ThyssenKrupp with each identifying the value of supplies and services both rendered and received along with receivables and liabilities (see Illustrative Extract 20).

Stand out companies

Daily Mail and General Trust is worthy of praise as it separately identifies its investment in joint ventures on the face of its balance sheet giving also clear disclosure of its policy and detailed information in its notes to the accounts. A second company that is worthy of note for clarity of disclosure in its accounting policies note and notes to the accounts is BHP Billiton.

Pernod Ricard could improve its disclosures as despite there being evidence of joint ventures it does not disclose the policy used or many other joint venture disclosures that are required. There is also room for improvement in the case of SGS, Roche, Novartis and Sodexo each of which disclose a policy but no further information.

Summary - Conclusion Our principal conclusions are that:

• A majority of companies employ the allowed alternative treatment (equity method) rather than the recommended treatment (proportionate consolidation)

• All companies employing proportionate consolidation adopt a line by line format. • UK companies generally include a separate joint venture policy while others generally

disclose joint venture policies as part of a basis of consolidation statement. • Those companies disclosing any information in the notes generally give full disclosure of

descriptive, profit and loss and balance sheet information as required. • Financial information is most often given in aggregate showing a venture’s share.





Appended Extracts

Extract 1: BHP Billiton

Extract 2: Novozymes


o





Extract 4: Diageo


o





Extract 6: Imperial Tobacco

o






o








o





Extract 11: Daily Mail and General Trust

Extract 12: Associated British Foods

o





Extract 13: Siemens

o





Extract 14: Infineon Technologies

o






o






o





Extract 17: ThyssenKrupp

Extract 18: British Sky Broadcasting

o





Extract 19: Associated British Foods

o





Extract 20: Porsche

o

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CR Common Practices - Company Reporting · CR Common Practices Accounting for Joint Ventures ... by IAS 31 “Interests in joint ventures”. Under this standard a joint venture is