Public Finance Management Act, 1999 (Act No. 1 of 1999)

Notices

Standards of Generally Accepted Municipal Accounting Practice (GAMAP) in terms of Section 91

GAMAP 8 : Financial Reporting of Interests in Joint Ventures
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Introduction

 

Standards of Generally Accepted Municipal Accounting Practice (GAMAP).

 

The Accounting Standards Board (Board) is required in terms of the Public Finance Management Act, Act No. 1 of 1999, as amended (PFMA), to determine generally recognised accounting practice referred to as Standards of Generally Recognised Accounting Practice (GRAP).

 

The Board must determine GRAP for:

(a)departments (national and provincial);
(b)public entities;
(c)constitutional institutions;
(d)municipalities and boards, commissions, companies, corporations, funds or other entities under the ownership control of a municipality; and
(e)Parliament and the provincial legislatures.

 

The above are collectively referred to as "entities" Standards of GRAP.

 

The Board considers that the Standards of GAMAP constitute GRAP for municipalities.

 

GAMAP is an interim solution until such time as it is replaced by a Standard of GRAP.

 

Any limitation of the applicability of specific Standards is made clear in those Standards.

 

The Standard of GAMAP on Financial Reporting of Interest in Joint Ventures is set out in paragraphs .01 - .53. All paragraphs in this Standard have equal authority. The authority of appendices is dealt with in the preamble to each appendix. This Standard should be read in the context of its objective, the Preface to Standards of GRAP, the Preface to Standards of GAMAP and the Framework for the Preparation and Presentation of Financial Statements.

 

Reference may be made here to a Standards of GFWP that has not been issued at the time of issue of this Standard. This is done to avoid having to change the Standards already issued when a later Standard is subsequently issued. Paragraph .12 of the Standard of GFWP on Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.

 

Scope

 

.01An entity which prepares and presents financial statements under the accrual basis of accounting shall apply this Standard in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, revenue and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place.

 

.02This Standard provides the basis for accounting for interests in joint ventures.

 

Definitions

 

.03The following terms are used in this Standard with the meanings specified:

 

Accrual basis means a basis of accounting under which transactions and other events are recognised when they occur (and not only when cash or equivalent is received or paid). Therefore, the transactions and events are recorded in the accounting records and recognised in the financial statements of the periods to which they relate. The elements recognized under accrual accounting are assets, liabilities, net assets, revenue and expenses.

 

Assets are resources controlled by an entity as a result of past events and from which future economic benefits or service potential are expected to flow to the entity.

 

Associate is an entity in which the investor has significant influence and which is neither a controlled entity nor a joint venture of the investor.

 

Cash comprises cash on hand and demand deposits.

 

Cash flows are inflows and outflows of cash and cash equivalents.

 

Consolidated financial statements are the financial statements of an economic entity presented as those of a single entity.

 

Contributions from owners is future economic benefits or service potential that have been contributed to the entity by parties external to the entity that establish a financial interest in the net assets of the entity, provided that the contributions:

(a)do not result in liabilities of the entity, and
(b)meet the following test, that they:
(i)convey entitlement both to distributions of future economic benefits or service potential by the entity during its life, such distributions being at the discretion of the owners or their representatives, and to distributions to any excess of assets over liabilities in the event of the entity being wound up, and / or
(ii)can be sold, exchanged, transferred or redeemed.

 

Control is the power to govern the financial and operating policies of another entity so as to benefit from its activities.

 

Controlled entity is an entity that is under the control of another entity (known as the controlling entity).

 

Controlling entity is an entity that has one or more controlled entities.

 

Distributions to owners is future economic benefits or service potential distributed by the entity to all or some of its owners, either as a return on investment or as a return of investment.

 

Economic entity means a group of entities comprising a controlling entity and one or more controlled entities.

 

Expenses are decreases in economic benefits or service potential during the reporting period in the form of outflows or consumption of assets or incurrences of liabilities that result in decreases in net assets, other than those relating to distributions to owners.

 

Investor in a joint venture is a party to a joint venture and does not have joint control over that joint venture.

 

Joint venture is a binding agreement whereby two or more parties are committed to undertake an activity which is subject to joint control.

 

Joint control is the agreed sharing of control over an activity by a binding agreement.

 

Liabilities are present obligations of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits or service potential.

 

Net assets are the residual interest in the assets of the entity after deducting all its liabilities.

 

Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, revenue and expenses of a jointly controlled entity is combined on a line-by-line basis with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.

 

Revenue is the gross inflow of economic benefits or service potential during the reporting period when those inflows result in an increase in net assets, other than increases relating to contributions from owners.

 

Significant influence is the power to participate in the financial and operating policy decisions of an economic activity but is not control or joint control over those policies.

 

Venturer is a party to a joint venture, and has joint control over that joint venture.

 

Binding arrangement

 

.01The existence of a binding arrangement distinguishes interests which involve joint control from investments in associates where the investor has significant influence (see Standard of Generally Accepted Municipal Accounting Practice on Accounting for lnvestments in Associates). For the purposes of this Standard, an arrangement includes all binding arrangements between venturers. That is, in substance, the arrangement confers similar rights and obligations on the parties to it as if it were in the form of a contract. For instance, two entities may enter into a formal arrangement to undertake a joint venture but the arrangement may not constitute a legal contract because, in that jurisdiction, individual entities may not be separate legal entities with the power to contract. Activities which have no binding arrangement to establish joint control are not joint ventures for the purposes of this Standard.

 

.02The arrangement may be evidenced in a number of ways, for example by a contract between the venturers or minutes of discussions between the venturers. In some cases, the arrangement is incorporated in the enabling legislation, articles or other by-laws of the joint venture. Whatever its form, the arrangement is usually in writing and deals with such matters as :
(a)the activity, duration and reporting obligations of the joint venture,
(b)the appointment of the council or equivalent governing body of the joint venture and the-voting rights of the venturers,
(c)capital contributions by the venturers, and
(d)the sharing by the venturers of the output, revenue, expenses, surpluses or deficits, or cash flows of the joint venture.

 

.03The arrangement establishes joint control over the joint venture. Such a requirement ensures that no single venturer is in a position to unilaterally control the activity. The arrangement identifies those decisions in areas essential to the goals of the joint venture which require the consent of all the venturers and those decisions which may require the consent of a specified majority of the venturers.

 

.04The arrangement may identify one venturer as the operator or manager of the joint venture. The operator does not control the joint venture but acts within the financial and operating policies which have been agreed by the venturers in accordance with the arrangement and delegated to the operator. If the operator has the power , to govern the financial and operating policies of the activity, it controls the venture and the venture is a controlled entity of the operator and not a joint venture.

 

Forms of joint venture

 

.05Many entities establish joint ventures to undertake a variety of activities. The nature of these activities ranges from commercial undertakings to provision of community services at no charge. The terms of a joint venture are set out in a contract or other binding arrangement and usually specify the initial contribution from each joint venturer and the share of revenues or other benefits (if any), and expenses of each of the joint venturers.

 

.06Joint ventures take many different forms and structures. This Standard identifies three broad types; jointly controlled operations, jointly controlled assets and jointly controlled entities, which are commonly described as, and meet the definition of, joint ventures. Characteristics common to all joint ventures are that:
(a)two or more venturers are bound by a arrangement, and
(b)the arrangement establishes joint control.

 

Jointly controlled operations

 

.10The operation of some joint ventures involves the use of the assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer uses its own property, plant and equipment and carries its own inventories. It also incurs its own expenses and liabilities and raises its own finance, which represent its own obligations. The joint venture activities may be carried out by the venturer's employees alongside the venturer's similar activities. The joint venture agreement usually provides a means by which the revenue from the sale of the joint product or service and any expenses incurred in common are shared among the venturers.

 

.11An example of a jointly controlled operation is when two entities combine their operations, resources and expertise in order to jointly deliver a service, such as aged care where, in accordance with an agreement, a local government offers domestic services and a local hospital offers medical care. Each venturer bears its own costs and takes a share of revenue, such as user charges and government grants; such share being determined in accordance with the agreement.

 

.12In respect of its interests in jointly controlled operations, a venturer shall recognise in its separate financial statements and consequently in its consolidated financial statements:
(a)the assets that it controls and the liabilities that it incurs, and
(b)the expenses that it incurs and its share of the revenue that it earns from the sale or provision of goods or services by the joint venture.

 

.13Because the assets, liabilities, revenue (if any) and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements.

 

.14Separate accounting records may not be required for the joint venture itself and financial statements may not be prepared for the joint venture. However, the venturers may prepare management accounts so that they may assess the performance of the joint ventures.

 

Jointly controlled assets

 

.15Some joint ventures involve the joint control, and often the joint ownership, by the venturers of one or more assets contributed to, or acquired for the purpose of, the venture and dedicated to the purposes of the joint venture. The assets are used to obtain benefits for the venturers. Each venturer may take a share of the output from the assets and each bears an agreed share of the expenses incurred.

 

.16These joint ventures do not involve the establishment of a corporation, partnership or other entity, or a financial structure that is separate from the venturers themselves. Each venturer has control over its share of the future economic benefits or service potential through its share in the jointly controlled asset.

 

.17Some activities in the public sector involve jointly controlled assets. For example, an entity may enter into an arrangement with a private sector corporation to construct and operate a toll road. The road provides the citizens with improved access between the local government's industrial estate and its port facilities. The road also provides the private sector corporation with direct access between its manufacturing plant and the port. The agreement between the local authority and the private sector corporation specifies each party's share of revenues and expenses associated with the toll road. Accordingly, each venturer derives economic benefits or service potential from the jointly controlled asset and bears an agreed proportion of the costs of operating the road. Another example of a jointly controlled asset is when two entities jointly control a property, each taking a share of rents received and bearing a share of the expenses.

 

.18In respect of its interest in jointly controlled assets, a venturer shall recognise in its separate financial statements and consequently in its consolidated financial statements:
(a)its share of the jointly controlled assets, classified according to the nature of the assets,
(b)any liabilities that it has incurred,
(c)its share of any liabilities incurred jointly with the other venturers in relation to the joint venture,
(d)any revenue from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture, and
(e)any expenses that it has incurred in respect of its interest in the joint venture.

 

.19In respect of its interest in jointly controlled assets, each venturer includes in its accounting records and recognises in its separate financial statements and consequently in its consolidated financial statements:
(a)its share of the jointly controlled assets, classified according to the nature of the assets rather than as an investment. For example, a share of a jointly controlled property is classified as property, plant and equipment,
(b)any liabilities that it has incurred, for example those incurred in financing its share of the assets,
(c)its share of any liabilities incurred jointly with other venturers in relation to the joint venture,
(d)any revenue from the sale or use of its share of the output of the joint venture, together with its share of any expenses incurred by the joint venture, and
(e)any expenses that it has incurred in respect of its interest in the joint venture; for example, those related to financing the venturer’s interest in the assets and selling its share of the output.

 

.20Because the assets, liabilities, revenue and expenses are already recognised in the separate financial statements of the venturer, and consequently in its consolidated financial statements, no adjustments or other consolidation procedures are required in respect of these items when the venturer presents consolidated financial statements.

 

.21The treatment of jointly controlled assets reflects the substance and economic reality and, usually, the legal form of the joint venture. Separate accounting records for the joint venture itself may be limited to those expenses incurred in common by the venturers, and ultimately borne by the venturers according to their agreed shares. Financial statements may not be prepared for the joint venture, although the venturers may prepare management accounts so that they may assess the performance of the joint venture.

 

Jointly controlled entities

 

.22A jointly controlled entity is a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity or service potential of the entity.

 

.23A jointly controlled entity controls the assets of the joint venture, incurs liabilities and expenses and earns revenue. It may enter into contracts in its own name and raise finance for the purposes of the joint venture activity. Each venturer is entitled to a share of the results of the jointly controlled entity, although some jointly controlled entities also involve a sharing of the output of the joint venture.

 

.24A common example of a jointly controlled entity is when two entities combine their activities in a particular line of service delivery by transferring the relevant assets and liabilities into a jointly controlled entity.

 

.25Many jointly controlled entities are similar in substance to those joint ventures referred to as jointly controlled operations or jointly controiiad assets. For example, the venturers may transfer a jointly controlled asset, such as roads, into a jointly controlled entity, for tax or other reasons. Similarly, the venturers may contribute into a jointly controlled entity, assets which will be operated jointly. Some jointlycontrolled operations also involve the establishment of a jointly controlled entity to deal with particular aspects of the activity, for example, the design, marketing and distribution or after-sale service of the product.

 

.26A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other entities in conformity with the appropriate legal requirements and accounting statements.

 

.27Each venturer usually contributes cash or other resources to the jointly controlled entity. These contributions are included in the accounting records of the venturer and recognised in its separate financial statements as an investment in the jointly controlled entity.

 

Consolidated financial statements of a venturer

 

.28.For the purposes of this Standard an economic entity may consist of only a venturer and a jointly controlled entity and consequently consolidated financial statements for such a group are prepared in accordance with the requirements of this Standard.

 

.29In its consolidated financial statements, a venturer shall report its interest in a jointly controlled entity using one of the two reporting formats for proportionate consolidation.

 

.30When reporting an interest in a jointly controlled entity in consolidated financial statements, it is essential that a venturer reflects the substance and economic reality of the arrangement rather than the joint venture’s particular structure or form. In a jointly controlled entity, a venturer has control over its share of future economic benefits or potential service provision through its share of the assets and liabilities of the venture. This substance and economic reality is reflected in the consolidated financial statements of the venturer when the venture reports its interests in the assets, liabilities, revenue and expenses of the jointly controlled entity by using one of the two reporting formats for proportionate consolidation described in paragraph .32.

 

.31The application of proportionate consolidation means that the consolidated statement of financial position of the venturer includes its share of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. The consolidated statement of financial performance of the venturer includes its share of the revenue and expenses of the jointly controlled entity. Many of the procedures appropriate for the application of proportionate consolidation are similar to the procedures for the consolidation of investments in controlled entities, which are set out in the Standard of Generally Accepted Municipal Accounting Practice on Consolidated Financial Statements and Accounting for Controlled Entities.

 

.32Different reporting formats may be used to give effect to proportionate consolidation. The venturer may combine its share of each of the assets, liabilities, revenue and expenses of the jointly controlled entity with the similar items in its consolidated financial statements on a line-by-line basis. For example, it may combine its share of the jointly controlled entity’s inventory with the inventory of the economic entity and its share of the jointly controlled entity’s property, plant and equipment with the same items of the economic entity. Alternatively, the venturer may include separate line items for its share of the assets, liabilities, revenue and expenses of the jointly controlled entity in its consolidated financial statements. For example, it may show its share of the current assets of the jointly controlled entity separately as part of the current assets of the economic entity; it may show its share of the property, plant and equipment of the jointly controlled entity separately as part of the property, plant and equipment of the economic entity. Both these reporting formats result in the reporting of identical amounts of net revenue and expenses; both formats are acceptable for the purposes of this Standard.

 

.33Whatever format is used to give effect to proportionate consolidation, it is inappropriate to offset any assets or liabilities by the deduction of other liabilities or assets or any revenue or expense by the deduction of other expenses or revenue, unless a legal right of set-off exists and the offsetting represents the expectation as to the realisation of the asset or the settlement of the liability.

 

.34A venturer shall discontinue the use of proportionate consolidation from the date on which it ceases to have joint control over a jointly controlled entity.

 

.35A venturer discontinues the use of proportionate consolidation from the date on which it ceases to share in the control of a jointly controlled entity. This may happen, for example, when the venturer disposes of its interest, or when external restrictions are placed on the jointly controlled entity so that it can no longer achieve its goals.

 

Exceptions to proportionate consolidation

 

.36The following interests shall be accounted for as investments:
(a)an interest in a jointly controlled entity that is acquired and held exclusively with a view to its subsequent disposal in the near future, and
(b)an interest in a jointly controlled entity which operates under severe long term restrictions that significantly impair its ability to transfer funds or provide other non-financial benefits to the venturer.

 

.37Guidance on accounting for investments can be found in the International Accounting Standard on Financial Instruments: Recognition and Measurement.

 

.38The use of proportionate consolidation is inappropriate when the interest in a jointly controlled entity is acquired and held exclusively with a view to its subsequent disposal in the near future. It is also inappropriate when the jointly controlled entity operates under severe long-term restrictions that significantly impair its ability to transfer funds or provide other non-financial benefits to the venturer.

 

.39From the date on which a jointly controlled entity becomes a controlled entity of a venturer, the venturer accounts for its interest in accordance with the Standard of Generally Accepted Municipal Accounting Practice on Consolidated Financial Statements and Accounting for Controlled Entities.

 

Separate financial statements of a venturer

 

.40Separate financial statements may be presented by a venturer in order to meet legal or other requirements. Such separate financial statements are prepared in order to meet a variety of needs with the result that different reporting practices are in use. Accordingly, this Standard does not indicate a preference for any particular treatment.

 

Transactions between a venturer and a joint venture

 

.41When a venturer contributes or sells assets to a joint venture, recognition of any portion of a gain or loss from the transaction shall reflect the substance of the transaction. While the assets are retained by the joint venture, and provided the venturer has transferred the significant risks and rewards of ownership, the venturer shall recognise only that portion of the gain that is attributable to the interest of the other venturers. The venturer shall recognise the full amount of any loss when the contribution or sale provides evidence of a reduction in the net realisable value of current assets or an impairment loss.

 

.42When a venturer purchases assets from a joint venture, the venturer should not recognise its share of the gains of the joint venture from the transaction until it resells the assets to an independent party. A venturer should recognise its share of the losses resulting f r m these transactions in the same way as gains except that losses should be recognised immediately when they represent a reduction in the net realisable value of current assets or an impairment loss.

 

.43To assess whether a transaction between a venturer and a joint venture provides evidence of impairment of an asset, the venturer determines the recoverable amount of the assets. Guidance is provided in the International Accounting Standard on impairment of Assets. In determining value in use, future cash flows from the asset are estimated based on continuing use of the asset and its ultimate disposal by the joint venture.

 

Reporting interests in joint ventures in the financial statements of an investor

 

.44An investor in a joint venture, which does not have joint control, but does have significant influence shall report its interest in a joint venture in accordance with the Standard of Generally Accepted Municipal Accounting Practice on Accounting for Investments in Associates.

 

.45The International Accounting Standard on Financial Instruments: Recognition and Measurement provides guidance on accounting for interests in joint ventures where an investor does not have joint control or significant influence.

 

Operators of joint ventures

 

.46Operators or managers of a joint venture shall account for any fees in accordance with the Standard of Generally Accepted Municipal Accounting Practice on Revenue.

 

.47One or more venturer may act as the operator or manager of a joint venture. Operators are usually paid a management fee for such duties. The fees are accounted for by the joint venture as an expense.

 

Disclosure

 

.48In accordance with the Standard of Generally Accepted Municipal Accounting Practice on Provisions, Contingent Liabilities and Contingent Assets, a venturer shall disclose the following:
(a)The aggregate amount of the following contingent liabilities, unless the possibility of any outflow in settlement is remote, separately from the amount of other contingent liabilities:
(i)any contingent liabilities that the venturer has incurred in relation to its interests in joint ventures, and its share in each of the contingent liabilities that have been incurred jointly with ther venturers,
(ii)its share of the contingent liabilities of the joint ventures themselves for which it is contingently liable, and
(iii)those contingent liabilities that arise because the venturer is contingently liable for the liabilities of the other venturers of a joint venture, and
(b)A brief description of the following contingent assets and, where practicable, an estimate of their financial effect, where an inflow of economic benefits or service potential is probable:
(i)any contingent assets of the venturer arising in relation to its interests in joint ventures and its share in each of the contingent assets which have arisen jointly with other venturers, and
(ii)its share of the contingent assets of the joint ventures themselves.

 

.49A venturer shall disclose the aggregate amount of the following commitments, In respect of Its interests in joint ventures separately from other commitments:
(a)any capital commitments of the venturer in relation to its interests in joint ventures, and its share in the capital commitments that have been incurred jointly with other venturers, and
(b)its share of the capital commitments of the joint ventures themselves.

 

.50A venturer shall disclose a listing and description of interests in significant joint ventures and the proportion of ownership interest held in jointly controlled entities. A venturer which reports its interests In jointly controlled entities using the line-by-line reporting format for proportionate consolidation shall disclose the aggregate amounts of each of current assets, non-current assets, current liabilities, non-current liabilities, revenue and expenses related to its interests in joint ventures.

 

.51A venturer which does not issue consolidated financial statements because It does not have controlled entities, shall disclose the information required in paragraphs .48, .49 and .50 (where applicable).

 

.52It is appropriate that a venturer which does not prepare consolidated financial statements because it does not have controlled entities provides the same information about its interests in joint ventures as those venturers that issue consolidated financial statements.

 

Effective date

 

.53This Standard of Generally Accepted Municipal Accounting Practice becomes effective for annual financial statements covering periods beginning on or after a date to be determined by the Minister of Finance in a regulation to be published in accordance with section 91(l)(b) of the Public Finance Management Act, Act No. 1 of 1999 as amended.