Join venture is a contract between more than one parties to carry on an economic operation or activity which is under the control of all the parties jointly. A joint venture (JV) can take several forms in practice, but there are two characteristics which are common to a JV:
the establishment of JV creates the joint control of all the venturers,
the ventures are bound by the contract terms and conditions.
Accounting Treatment
The accounting treatment of joint venture depends on the nature of the contractual agreement between the venturers as follows:
Jointly controlled operations
Under this, there is no separate entity is established but the venturers use each other assets and resources. So the accounting will only show the assets, liabilities, income share and expenses in each individual entity financial statements.
Jointly controlled assets
Under this, more than one parties own the single or combination of assets and as a result, have controls over the asset. This is quite common in oil pipeline over which two or more venturers has the control and ownership. The financial statements of venturers will show the details as under:
the liability that the venturer has incurred,
the portion of the jointly controlled assets and jointly controlled liabilities,
the portion of income earned and the portion of the expenses.
Jointly controlled entities
In this arrangement, a separate entity is established in the form a company or a partnership firm. This is quite common in circumstances where a foreign company enters into the country by making a venture with the Government or its agency. The preferred accounting treatment for this type of joint venture is the use of Proportionate consolidation. However, as an alternative, an entity may use the Equity method for consolidation purposes as it is allowed by the International Accounting Standard (IAS).