Characteristics of Joint Venture Company have been set by IFRS 11. The word ‘arrangement’ describes an activity or an operation or a specific group of assets and liabilities, which may or may not structure a legal entity such as a company. As per the paragraph 4 of IFRS 11, a joint arrangement arises whereby two or more individual company have an arrangement between each other in a way that these individual companies have joint control of the arrangement.
Joint venture examples: For example, Company X and Company Y may agree to form joint venture Company Z and the management of Company Z is under the joint control of both Company X and Company Y.
The Characteristics of Joint Venture Company
A joint arrangement has two main characteristics:
1. The related parties are bounded by a contractual arrangement: The agreement between the parties is in the mode of a contract which would generally be in writing. The contractual arrangement may be written into the Articles of Association or constitution of the companies themselves.
The agreement sets out the terms under which the parties agree to participate in relation to the joint activity as under:
- The capital or other contributions required of the parties
- How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement.
- The purpose, activity and duration of the joint arrangement
- How the members of the board of directors will be appointed
- The decision-making process, the matters which need decisions, the voting rights of the parties and the required level of support for these matters
2. The contractual arrangement gives two or more parties joint control of the arrangement: The criterion which focuses on a contractual arrangement as a joint arrangement is that of joint control. A Joint control exists when:
- There is a contractually agreed sharing of control
- The agreement is that decisions regarding the relevant activities necessitate the common consent of the parties sharing control
Each party that has joint control on the arrangement is referred to as a Joint Venturer or a Joint Operator. Other parties in the joint arrangement are a party to a joint arrangement. Where there is a joint arrangement, there is no single party who has control. The joint venturers or operators must act together to manage the affairs of the arrangement. The Characteristics of Joint Venture is a very repeated question in Professional Accounting bodies.