About AS 27 of ICAI: Financial Reporting of Interests in Joint Ventures

Accounting Standard (AS) 27 of ICAI sets rules for how companies record and report their interests in joint ventures. It explains how venturers and investors should treat assets, liabilities, income and expenses that come from joint venture arrangements. The Standard applies to both separate and consolidated financial statements when they fall under the Companies (Accounting Standards) Rules.

What AS 27 Means by a Joint Venture

AS 27 defines a joint venture as a contractual arrangement between two or more parties. These parties share control over an economic activity. The Standard also uses several related terms:

• Joint control: Parties share control through an agreement.
• Control: Power to direct financial and operating policies.
• Venturer: A party that has joint control.
• Investor: A party that participates but does not hold joint control.

These definitions guide whether a company uses special accounting rules under AS 27.

The Three Forms of Joint Ventures

AS 27 groups joint ventures into three common forms. Each form has its own accounting approach, but all are based on shared control .

1. Jointly Controlled Operations

In this form, venturers use their own resources. They keep their own assets, expenses, and liabilities. They also record their own revenue. They may work together on tasks such as production or marketing, but the joint venture does not create a separate legal entity.

A typical example is when two companies combine their skills to manufacture a product together.

2. Jointly Controlled Assets

Here, the venturers share control, often also ownership, of specific assets. Each venturer:

• records its share of the asset,
• records any liabilities it incurs,
• records its share of joint liabilities,
• records its share of income from the asset, and
• records expenses related to its share.

Examples include shared pipelines or shared rental properties.

3. Jointly Controlled Entities

In this form, the venturers set up a separate company, partnership, or other entity. The entity runs the joint venture’s business, owns assets, incurs liabilities, and creates its own financial statements. Both venturers share control through a contractual agreement.

Accounting in Separate Financial Statements

Jointly Controlled Operations

Venturers record the assets they control and the liabilities they incur. They also record their own expenses and their share of income. Since these amounts appear directly in the venturer’s books, no further adjustments are needed.

Jointly Controlled Assets

Venturers include their share of the asset and related liabilities in their own accounting records. They also record income from the joint output and any related expenses. As with operations, no extra consolidation steps are needed.

Jointly Controlled Entities

Venturers must account for their interest as an investment under AS 13 when preparing separate financial statements.

Accounting in Consolidated Financial Statements

A key rule in AS 27 is the use of proportionate consolidation for jointly controlled entities. Under this method, venturers include their share of the entity’s:

• assets,
• liabilities,
• income,
• expenses,

as separate line items in the consolidated financial statements.

When Proportionate Consolidation Does Not Apply

Venturers do not use proportionate consolidation when:

1. They acquire an interest only to sell it soon. “Near future” usually means within twelve months unless there are valid reasons for a longer period.
2. Long-term restrictions make it hard for the joint venture to transfer funds to the venturer.

In these cases, venturers treat the interest as an investment under AS 13.

Other Important Rules for Consolidation

• If the cost of the investment exceeds the venturer’s share of net assets, the difference is recorded as goodwill.
• If the cost is lower, the difference becomes a capital reserve.
• Reporting dates should match. If they do not, the gap may not exceed six months, and adjustments must be made for significant events.
• Venturers should apply consistent accounting policies wherever possible.

Recognising Gains and Losses from Transactions

Transactions between a venturer and the joint venture need careful treatment.

When a Venturer Sells Assets to the Joint Venture

The venturer recognises only the part of the gain or loss that relates to the other venturers. If the sale shows that the asset has a lower value (for example, due to impairment), the venturer must record the full loss.

When a Venturer Buys Assets from the Joint Venture

The venturer delays its share of the joint venture’s profit until it sells the asset to an outside party. Losses are recorded right away if they show that the asset’s value has fallen.

How Investors without Joint Control Report their Interest

Investors who do not have joint control must use the rules of:

• AS 13 (investments),
• AS 21 (subsidiaries), or
• AS 23 (associates),

depending on the type of influence they have.

Disclosure Requirements under AS 27

AS 27 sets clear disclosure duties for venturers in both separate and consolidated financial statements.

1. Contingent Liabilities

Venturers must disclose:

• contingent liabilities they incur due to joint ventures,
• their share of joint contingent liabilities,
• liabilities arising because they may need to cover another venturer’s obligations.

2. Capital Commitments

Venturers must disclose:

• their own capital commitments for joint ventures,
• their share of joint capital commitments.

3. List of Joint Ventures

Venturers should also disclose:

• names of significant joint ventures,
• description of interests,
• ownership share,
• country of incorporation.

In separate financial statements, venturers must also show the aggregated assets, liabilities, income, and expenses linked to jointly controlled entities .

Conclusion

AS 27 provides clear rules for reporting interests in joint ventures. By distinguishing between three forms of joint ventures and setting a structured method for consolidation, the Standard supports more transparent financial reporting. Understanding these rules helps companies give a true and fair view of how their joint ventures perform.