A joint venture is a temporary partnership between two or more firms in any particular business venture for a short period of time. Organizational structures of a joint venture are corporations, partnerships or undivided interests. U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) determine acceptable accounting practices and reporting methods. Both base the need to consolidate an organization’s accounting books and reporting on the level of control of the parties in the joint venture.
According to U.S. GAAP, joint ventures usually must use the equity method of accounting. The exception for using the accounting equity method would be unincorporated industries that require proportionate consolidation. Equity-method accounting offers the option to account for investments at fair value or cost value, and does not require uniform accounting policies between investor and investee. Special purpose entities, such as a joint venture, require the primary beneficiary, who holds the most amount of power and benefits, to consolidate the variable interest entities.
Investments in joint ventures, as determined by IFRS, allow either the proportionate consolidation method or the equity method of accounting. Investors are usually required to use the equity method of accounting for their investments in consolidated financial statements. However, venture capital may use proportionate accounting for industries that require it, allowing separate financial statements presented by the controlling interest in the investment with subsidiaries’ financial statements. Investments accounted for at either cost or fair value and uniform accounting are required.
Power to control is determined by the party that owns more than 50 percent of the votes or potential voting rights. The controlling partner has the ability to manage the financial and operating policies of an entity to obtain benefits.
JVA Journal Entries
Journal entries record the financial transactions in an organization’s accounting system or books. There are two methods used for keeping the accounting books. Either the joint venture records journal entries in one consolidated book, or each party in the joint venture must keep separate books. The type of joint venture and investing parties will determine the best method for keeping the accounting books.
Using a memorandum joint venture account is another method to record the transactions in the books of the various parties. The joint venture account is prepared on a memorandum basis to determine the profit or loss, but is not a part of the financial books. Various transactions from all parties in the joint venture combine into a memorandum joint venture account. Each party debits or credits the memorandum joint venture account on its books, recording its share of the profit or loss. After each party’s book is balanced, all balances should be reconciled by settling the differences between each party. This method is not keeping a double book, but is reconciling the accounting records kept between joint venture parties in order to present a consolidated financial statement.