By definition, a joint venture is an entity in which two or more venturers have joint control over the operations of the entity, regardless of differences in ownership interests. When investors have interests in economic activity and do not share in joint control, those interests are not considered an interest in a joint venture and are accounted for as an investment.
A venturer has joint control over a venture and has the right to future economic benefits (cash flows), as well as being exposed to economic risks (losses). A loan to an entity does not have similar risks and rewards.
The arrangements among joint venturers may be contractual or included in organizational documents, such as articles and bylaws. Matters normally included in such documentation include venture activities, length of life, and various policies and procedures.
Operations of an entity may be controlled jointly outside of a formal entity, such as a corporation or partnership. In such cases the venturers use their personal assets to accomplish joint activities. A contractual agreement ordinarily would prescribe the manner in which revenues and expenses would be shared by the venturers.
Certain assets also may be shared outside a formal entity. Venturers would share in the output and expenses related to the assets.
A venturer can elect either the equity method of accounting or a proportionate consolidation method. The equity method would be the same as describe for investments under the FRF for SMEs. The proportionate consolidation method would apply only to unincorporated entities in certain industries with established practices.
I’ll be presenting four, two-hour webcasts on the FRF for SMEs later this year which can be accessed through the “Live Webcasts” box on the left side of my home page, www.cpafirmsupport.com