Page 18 - MCS August Day 2 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

TASK 2 – INVESTMENT OPPORTUNITY AND LEASE OF ASSETS

MEMORANDUM

From: Financial Manager
To: Endo Karsa, Finance Director
Date: Thursday
Subject: Potential investment in Venture Co and lease of assets

Potential Investment in Venture Co by Montel

Joint arrangements – IFRS 11 Joint Arrangements (IFRS 11) defines a joint arrangement as an
arrangement over which two or more parties have joint control. Joint control is established by
having a contractual agreement between two or more parties so that there will be unanimous
decision‐making in relation to the joint arrangement. Although the principle of a joint
arrangement is joint control, there is no maximum number of parties permitted in a joint
arrangement. In practical terms it is likely to be a relatively small number. This is because, with a
larger number of parties to a joint arrangement, it becomes more difficult to achieve joint control.

There are two forms of joint arrangement as follows:

Joint operation ‐ A joint operation exists when joint operation parties have joint control of the
assets and liabilities arising from the joint arrangement. In effect, the parties to the joint
operation have rights to the assets and obligations for the liabilities relating to the arrangement.

The two or more parties in a joint operation should agree their respective responsibilities and
obligations for the joint activity. In effect, each joint operation party records the transactions it
enters into on behalf of the joint arrangement, and there is periodic ‘settling up’ of any amounts
due to/from the joint operation parties. Normally, there would be a current account balance
outstanding between joint operation parties in the financial statements of each party.

As no separate entity is established, any transactions entered into by a joint operation party are
accounted for in accordance with the relevant IAS/IFRS. For example, if one party purchased
property, plant and equipment in relation to the joint operation, it would be accounted for in
accordance with IAS 16.

Joint venture ‐ A joint venture is characterised by the setting up of a separate entity under joint
control, and each party has an interest in the net assets of that separate entity, based upon their
respective shareholding in that entity. Each of the parties in a joint venture would expect to have
approximately equal shareholdings in the joint venture entity, although they need not be
identical. An interest in a joint venture is equity accounted in the consolidated financial
statements in the same manner as for an interest in an associate.

Any transactions relating to the joint venture would be recorded by the joint venture entity and
accounted for in accordance with the relevant IAS/IFRS. A joint venture party will receive a return
on its shareholding in the joint entity in the form of a dividend. A joint arrangement would be
classified as a non‐current asset investment in Montel’s financial statements.

102 KAPLAN PUBLISHING