|
Query No. 29
Subject:
Accounting and reporting of interest in jointly controlled entity. 1
A. Facts of the Case
1. A company, which is a Government of India enterprise, having
a 3 MMTPA refinery, desires to purchase natural gas from M/s. XYZ Limited and has already entered into an agreement with it for the supply of natural gas for a period of 15 years for its use in the refinery, with a provision to further extend the term of the agreement by another 5 years by mutual consent.
2. The company has entered into an agreement with another company, ABC Ltd., a State Government enterprise, on 27th June,
2005. According to the querist, there was an advantage available
in entering into this agreement with ABC Ltd., having a network of gas pipeline and presently, operating in the business of gas transportation in the State and other near-by areas. Under the agreement, ABC Ltd. agreed to set up gas transportation system
to transport gas from XYZ Ltd.’s off-take point to the company’s refinery for the use of the company in its refinery as per the terms and conditions of the agreement. The tenure of this agreement was initially meant for 15 years from the date of commencement
of gas transportation and renewal for a further period of 5 years
on terms and conditions mutually agreed to.
3. The above agreement with ABC Ltd. was entered into to construct a gas transportation system with 2.00 MMSCMD of gas
(1.00 MMSCMD for the company and other 1.00 MMSCMD for the consumers other than the company). The transmission charges
etc. were also calculated based on the revenue to be generated
from 2.00 MMSCMD of gas. Consequent upon signing of the memorandum of understanding (MOU) as referred to above, it was spelt out by XYZ Ltd., that it would not be able to supply 2.00
MMSCMD of gas and instead settle for 1.00 MMSCMD of gas as committed to the company. Accordingly, in a meeting held on 23/
06/06, it was decided to reconfigure the project as follows:
(i) The pipeline diameter will be changed to be adequate to transport 1.00 MMSCMD of gas to the company.
(ii) Instead of 6 compressors initially planned, ABC Ltd. will install only 3 compressors in the system.
(iii) Provision will be made in the pipeline for augmentation of capacity in future to transport additional quantity of gas in case it is available.
(iv) The project cost will be reworked with the new configuration and the company’s transmission charges will be revised based on the parameters of the agreement and finalised on mutually agreed terms.
(v) Necessary changes shall be made to the agreement already signed on 27/6/05.
4. In view of the above developments and considering that the pipelines would only be for the dedicated use of the company, it was felt that an unincorporated joint venture (JV) would be formed
to carry out the project. Salient features of the JV are as under:
(i) The company shall be co-investor in the JV on 1:1 basis with ABC Ltd. as the partner/co-venturer.
(ii) The JV unit will have the status of unincorporated jointly controlled entity.
(iii) The estimated cost of the project is Rs. 320 crore and the same will be shared by the two venturers on an agreed debt/equity basis.
B. Query
5. Having regard to the above facts and probability of the company entering into an agreement with ABC Ltd. to be partner/
co-venturer in a JV under special purpose vehicle (S.P.V.) arrangement, the querist has sought the opinion of the Expert Advisory Committee with regard to accounting in the separate financial statements of the company on the following matters, in the context of the requirements of Accounting Standard (AS) 27
‘Financial Reporting of Interests in Joint Ventures’, issued by the
Institute of Chartered Accountants of India:
(i) Treatment in the books of account of contribution by the company towards JV equity, and the borrowings and liability taken by the company for funding the JV.
(ii) Basis of recognition of share of jointly controlled assets in the books of account of the company during the project period as well as after commissioning.
(iii) Basis of recognition of share of any liability incurred jointly with other venturers in relation to the JV.
(iv) Basis of recognition of any income from the sale or use of its share of the output of the JV, together with its share of any expenses incurred by the JV or by the company in respect of the JV.
(v) Availment of benefit on account of excise benefit on capital procurements of the JV, cenvatable service tax and modality of billing of TC charges.
(vi) Requirement of maintaining separate records for the JV
or S.P.V.
C. Points considered by the Committee
6. The Committee notes from the Facts of the Case that a joint venture (JV) or a special purpose vehicle (S.P.V.) arrangement is proposed to be entered into by the company with another company.
It is also mentioned in the Facts of the Case that the JV unit will have the status of unincorporated jointly controlled entity. The
Committee further notes paragraph 1 and the definitions of the
terms ‘joint venture’ and ‘joint control’ as contained in paragraph 3
of Accounting Standard (AS) 27, ‘Financial Reporting of Interests
in Joint Ventures’, issued by the Institute of Chartered Accountants of India, which state as below:
“1. This Statement should be applied in accounting for interests in joint ventures and the reporting of joint venture assets, liabilities, income and expenses in the financial statements of venturers and investors, regardless of the structures or forms under which the joint venture activities take place.”
“A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity, which is subject to joint control.
Joint control is the contractually agreed sharing of control over an economic activity.”
7. On the basis of the above, the Committee is of the view that irrespective of the form in which the joint venture activity is entered into by the company, i.e., irrespective of the fact whether it is termed as a JV or an S.P.V. arrangement, if the above-mentioned conditions are met, the provisions of AS 27 would be applicable for determining the accounting treatment for interests of the company in the entity. Further, since in the present case, the J.V. activity shall be carried on as an unincorporated jointly controlled entity and there is a joint control over that entity, in the view of the Committee, the provisions related to ‘jointly controlled entities’ as contained in AS 27 would be applicable as against jointly controlled operations and jointly controlled assets. In this context, the Committee also notes paragraph 22 of AS 27, which states as follows:
“22. A jointly controlled entity is a joint venture which 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 enterprises, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.”
8. The Committee further notes that the querist has raised the
query only in respect of accounting and reporting of financial interest
in the jointly controlled entity in the separate financial statements
of the company. Accordingly, the opinion of the Committee is only on this aspect. In this context, the Committee notes the provisions related to ‘separate financial statements’ as contained in paragraphs
27 and 28 of AS 27 reproduced as below:
“27. In a venturer’s separate financial statements, interest in a jointly controlled entity should be accounted for as an investment in accordance with Accounting Standard
(AS) 13, Accounting for Investments.
28. Each venturer usually contributes cash or other resources to the jointly controlled entity. These contributions are included
in the accounting records of the venturer and are recognised
in its separate financial statements as an investment in the jointly controlled entity.”
9. On the basis of the above, the Committee is of the view that the contribution made by the company towards the JV equity should be accounted for as an investment in accordance with Accounting Standard (AS) 13, ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India. Further, since this investment is intended to be held by the company for more than one year, it should be accounted for as ‘long-term investment’ in the books of the company. This investment should be carried in the financial statements at cost in accordance with paragraph 32
of AS 13 which sates as follows:
“32. Investments classified as long term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually.”
10. The Committee is also of the view that borrowings made and
the liabilities assumed by the company for funding the JV, presumably by contributing to the equity of the JV will appear as
the borrowings and liabilities of the company. However, if the
company undertakes to repay the borrowings and liabilities of the JV, the same should be considered as a part of investment and treated as suggested in paragraphs 8 and 9 above.
11. The Committee notes that the querist has also raised an issue with respect to the use or sale of the output of the JV entity
by the company in question in paragraph 5(iv) above. The Committee is of the view that such transactions constitute the transaction of sale by the JV to the venturer (i.e., the company in question) and, therefore, should be accounted for accordingly in the books of both the venturer and the JV. In this context, the Committee notes paragraph 45 of AS 27 reproduced below:
“45. In the separate financial statements of the venturer, the full amount of gain or loss on the transactions taking place between the venturer and the jointly controlled entity is recognised. However, while preparing the consolidated financial statements, the venturer’s share of the unrealised gain or loss
is eliminated. Unrealised losses are not eliminated, if and to the extent they represent a reduction in the net realisable value of current assets or an impairment loss. The venturer,
in effect, recognises, in consolidated financial statements, only that portion of gain or loss which is attributable to the interests of other venturers.”
Accordingly, if any of the output of jointly controlled entity is purchased or used by the venturer, it should be recognised in the separate financial statements of the venturer in its full respect, as
if the transaction has taken place with an independent party.
12. With regard to the maintenance of separate records for the joint venture, the Committee notes that paragraph 26 of AS 27 provides as below:
“26. A jointly controlled entity maintains its own accounting records and prepares and presents financial statements in the same way as other enterprises in conformity with the requirements applicable to that jointly controlled entity.”
Accordingly, the Committee is of the view that the JV should
maintain separate books of account in accordance with the laws applicable to the entity.
13. As far as recognition of the share of the company in the assets, liabilities, income and expenditure of the jointly controlled entity in the separate financial statements of the company is concerned, the Committee is of the view that a jointly controlled entity has a separate identity different from that of its venturers and accordingly, the assets, liabilities, income and expenditure of the jointly controlled entity should be recognised in its own books
of account rather than in the separate financial statements of the
venturers. However, the venturer should disclose in its notes to accounts, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interest in the jointly controlled entities, as required by paragraph 54 of AS 27 reproduced below
and should also disclose other information as required by paragraphs 51, 52, and 53 of AS 27.
“54. A venturer should disclose, in its separate financial statements, the aggregate amounts of each of the assets, liabilities, income and expenses related to its interests in the jointly controlled entities.”
14. With respect to recognition of share in the assets of jointly controlled entity during the project period and after commissioning,
in the separate financial statements of the company as raised by
the querist in paragraph 5(ii) above, the Committee is of the view that there will be no difference in the accounting treatment as suggested in the above paragraph.
15. Regarding the issue raised by the querist in paragraph 5(v) above, with respect to the availment of benefit on account of excise benefit on capital procurements of the JV, cenvatable service tax and modality of billing of TC charges, the Committee notes that it involves pure interpretation of the concerned laws. In view
of Rule 2 of the Advisory Service Rules of the Committee, the
Committee does not answer issues that involve pure interpretation
of the legal enactments. Accordingly, this issue is not answered by the Committee.
D. Opinion
16. On the basis of the above, the Committee is of the following opinion in respect of the issues raised in paragraph 5 above:
(i) The contribution made by the company towards the JV
equity should be accounted for as an investment in the
separate financial statements of the company as suggested in paragraphs 8 and 9 above. The borrowings made and the liabilities assumed by the company for funding the JV, presumably by contributing to the equity of the JV should appear as the borrowings and liabilities of the company. However, if the company undertakes to repay the borrowings and liabilities of the JV, the same should be considered as a part of investment and treated as suggested in paragraph 10 above.
(ii) The company should not account for such a share in the assets of JV in its separate financial statements, only a disclosure is required as discussed in paragraph 13 above. Further, the recognition principles will remain the same for both, during the project period as well as after commissioning, as discussed in paragraph 14 above.
(iii) Any share in the liabilities of the jointly controlled entity should not be recognised in the separate financial statements of the company, however, a disclosure in respect thereof is required in the notes to accounts as discussed in paragraph 13 above.
(iv) Any expense incurred by the company on behalf of the jointly controlled entity should be accounted for as an investment as per the requirements of AS 13. As far as any transaction of sale and purchase between the company and jointly controlled entity is concerned, it should be recognised as a normal sale or purchase
transaction as discussed in paragraph 11 above. However, any share in the income earned or expenses incurred by the jointly controlled entity should not be recognised by the company but only disclosed as per
the requirements of AS 27, as discussed in paragraph
13 above.
(v) This issue has not been answered by the Committee as discussed in paragraph 15 above.
(vi) The jointly controlled entity should maintain its own records and books of account as mentioned in paragraph
12 above.
1Opinion finalised by the Committee on 17.1.2007
|