AFM291 Chapter Notes - Chapter 7: Unanimous Consent, Joint Venture, Limited Liability
26 Jun 2018
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When one enterprise invests in the equity of another, that investment could be so substantial
that it gives the investor control of the latter enterprise
Control is the power to govern the financial and operating policies of an entity
Parent: an entity that control another entity
Subsidiary: an entity that is controlled by another entity
Typically, we say an investor company has control if it holds greater than 50% of the voting
power of the investee because such voting power allows the appointment of the board of
directors, which sets the strategic direction of the investee
It is the percentage of voting power that is important rather than the amount of the investment
Accounting Treatment – Consolidation
treat both companies as one economic unit, since the management of the parent company can
direct the subsidiary’s affairs as well as the parent’s
see example on page 297 and exhibit 7-3 on page 298
2. Joint Operations
joint operations and joint ventures are two types of joint arrangements.
joint arrangements: a contractual arrangement whereby 2/more parties undertake an economic
activity that is subject to joint control
joint control: a contractually agreed upon sharing of control over an economic activity; joint
control exists only when the strategic decisions relating to the activity require the unanimous
consent of the parties sharing control
joint arrangements usually have a limited life and a defined set of objectives/activities
o i.e. companies in the oil and gas industry often enter joint arrangements for the purpose
of exploration and production at a particular geographic location
Partnership vs. Joint arrangements
o joint arrangements are different from a typical partnership because partnerships do not
require unanimous consent from the partners
o a partnership that has an agreement that does require unanimous consent would be a
joint arrangement for accounting purposes
Joint operation: the investor has rights to the assets and obligations for the liabilities of the
arrangement
i.e. it could involve a contractual arrangement that uses an unlimited liability
partnership in which the partners share control of the assets and are exposed to
the liabilities of the partnership
Joint venture: the investors has rights to the net assets of the arrangement
i.e. could involve the sharing of control over a corporate entity that has limited
liability
Accounting Treatment – Proportionate Consolidation
Proportionate consolidation which takes the investor’s proportionate share of the joint
operation’s assets, liabilities and income and adds it to the investor’s accounts
See example on page 299
Document Summary
When one enterprise invests in the equity of another, that investment could be so substantial that it gives the investor control of the latter enterprise. Control is the power to govern the financial and operating policies of an entity. Parent: an entity that control another entity. Subsidiary: an entity that is controlled by another entity. It is the percentage of voting power that is important rather than the amount of the investment. Joint operation: the investor has rights to the assets and obligations for the liabilities of the arrangement. Proportionate consolidation which takes the investor"s proportionate share of the joint operation"s assets, liabilities and income and adds it to the investor"s accounts.
