This blog explains the difference between a “joint operation” and a “joint venture” and how they are accounted!
They are both Joint Arrangements!
First let me confirm that both joint operations and joint ventures are “joint arrangements”. This means that there is joint control.
Joint control is where an agreement exists between two or more parties, stipulating that all important decisions must be made with the unanimous consent of all the parties sharing control of the joint arrangement.
What is a Joint Venture?
A joint venture is an arrangement where the parties sharing the control would have rights to a share of net assets. Joint ventures are structured through a separate legal entity. A limited liability company is formed.
What is a Joint Operation?
A joint operation on the other hand, is not conducted through a separate legal entity. Hence the parties have direct rights to the assets and obligations for the liabilities of the arrangement.
Muscat and Troy agree to set up in business as a taxi firm, make decisions only when there is consensus and to share profits and losses equally. Oman and Helen also commit to the same business plan. Muscat & Troy and Oman & Helen therefore have both entered into joint arrangements.
However, Muscat and Troy decide to set up a company (Taxi plc) and each subscribe to 50% of the shares. Taxi plc borrows money and buys a motor vehicle. Muscat and Troy therefore have an interest in the net assets of Taxi plc. Taxi plc is a joint venture between Muscat and Troy.
Oman and Helen simply open up a joint bank account. The bank lends them the cash to buy a motor vehicle in their joint names. Oman and Helen now each have a direct right to the motor vehicle, and both have an obligation for the bank loan. Oman and Helen’s arrangement is a joint operation.
Accounting treatment for Muscat & Troy’s interest in Taxi plc the Joint Venture
Muscat and Troy’s interest in the joint venture company, Taxi plc, is accounted in their financial statements using equity accounting. This means that each party will account for the cash paid to subscribe for the shares in Taxi plc by recognising a non-current asset “Investment in a Joint Venture”. The carrying value of this investment will subsequently increase by the share of the retained profits of Taxi plc. The share of Taxi plc’s annual profits will be reported in a single line in the statements of profit and loss.
Equity accounting is also used to account for investments in associates.
Accounting treatment for Oman & Helen’s Joint Operation
On the other hand, for Oman and Helen, when accounting for their joint operation, each party must account for its interest in the joint operation on a line-by-line basis by recognising their share of assets, liabilities, revenues, and expenses of the joint operation. In other words both Oman and Helen will account for half of the taxi and half of the bank loan.
So, the difference between a “joint operation” and a “joint venture” and the accounting is “same same but different”