Joint Ventures

Accounting Snack: Joint Ventures: 💡(Great) ideas need (big) money.

🧀 (Not) a cheese. Software for Volkswagen electric cars. Online pharmacy. Wealth management of a large bank in Japan. The future of mankind in the desert of Saudi Arabia.

…. do you see a common feature here?

Yes, those are examples of joint ventures (JVs).

🤝 The concept of a joint venture foresees contribution of resources, expertise, and capital in pursuit of a common business objective.

📜 Contributions of partners in a JV are contractually agreed or incorporated in the statues of a JV legal entity.

Reasons for setting up a JV?

🎯 Agility and razor sharp focus on innovations.

Examples?

🌭 A very recent one is an innovative joint venture between the food producer Kraft Heinz and an artificial intelligence company, NotCo. Their JV will use AI to develop plant-based variations on Heinz` classics, such as (Not) Mayo, (Not) sausage, (Not) cheese.

🏙 Another example is Noem. The futuristic city being built in the desert of Saudi Arabia. It aims to create a zero-car environment, with no roads, zero-time delays, prefect climate, no pollution, and zero gravity. Noem goes into the joint venture with the Danish logistic giant (DSV).

The idea of a JV sounds great…any challenges?

Definitely.

1️⃣ Joint control of the venture requires unanimous decision making. Veto rights, parity on the Board or Co-CEO structure are some practical examples of joint control.

Combine with: 2️⃣ Partial responsibility for the liabilities of the venture (to the extent of an investment).

Add: 3️⃣ Changes of the ownership structure (exit, enter, scale up or down).

Plus: 4️⃣ Complex communication requirements, possible differences in culture and/ or expectations....

..and you might end up with a complex structure under which even the best intentions “to collaborate happily ever after” might come to an end.

📕 What happens for the accounting part according to the IFRS?

Joint ventures (and associates, check my previous post) are consolidated at equity (IAS28 Investments in Associates and Joint Ventures), unless an investment is held by a venture capitalist, a mutual fund, unit trust or similar holding.

In the latter case an investor may opt for the measurement at fair value through profit or loss in accordance with IFRS 9 Financial Instruments.

📊 Investor’s profit or loss absorbs his share of the investee’s profit or loss. Share of losses reduces the carrying amount of the investment in JV up to zero (but not below). Further losses are provided for against a liability to the extent the entity is legally liable for.

📍 And finally, IFRS 11 Joint Arrangements establishes principles for financial reporting by entities that have an interest in joint ventures.

Do you have any experience with joint ventures that you would like to share?