BOMBA DE CALOR GEOTERMICA

A joint venture is a business, an entity, in which a company has a long-term interest and is jointly controlled by the company and one or more other venturers under a contractual agreement. A joint venture could be a jointly controlled business (referred to as an entity in the international rules), jointly controlled operations, or jointly controlled assets. (Venture capitalists, mutual funds, unit trusts and similar organisations do not have to account for their jointly controlled businesses in the following way. These are shown at fair value, and are covered by a different accounting rule (IAS39 Financial instruments: recognition and measurement).)

A jointly controlled business is usually accounted for in the same way as asso-ciates, using the equity method, but currently IAS 31 (Interests in joint ventures) also allows proportional consolidation. (So if an investor controlled 40% of a joint venture, it would include 40% of the joint venture’s revenue and costs into its income statement. The accounting standard allows companies to con-solidate the joint venture’s revenue and expenses into its income statement, or alternatively they can show separate line items for the joint venture’s income and expenses. Proportional consolidation is unusual in the UK, but is common in other parts of Europe. It may not be allowed in the future, as the IAS has issued a discussion document that would remove this option.) Jointly controlled operations use the venturers’ resources and assets, instead of establishing a separate business. This means that each investor recognises its share of the joint venture’s revenue and the expenses it occurs. A jointly controlled asset is one that is under the joint control, and often ownership, of assets used specifically in a joint venture. The revenue from the asset and the expenses incurred are incorporated into the income statement in accor-dance with the contractual arrangement.

The UK’s accounting rule, FRS 9 (Associates and joint ventures), only covers jointly controlled businesses and requires companies to use an expansion of the equity method, the gross equity method, to account for these joint ventures. This means that the investor’s share of the joint venture’s turnover is noted on the consolidated profit and loss account.

To show you how this works I’ll use the same numbers I used in Example 2.4, but this time I’ll assume that Company B is a joint venture and that Company A has a 30% stake in it.

Reporting significant associates and joint ventures using UK GAAP

You’ve seen that associates and joint ventures can have an important effect on the reported profits, but only affect the business’s cash flow if they pay dividends.

In some industries associates and joint ventures can be an important element of a company’s trading activities. This often happens in the construction industry where major projects are managed through joint ventures. FRS 9 requires companies to give more information where the investor’s total share in its associates or joint ventures exceed 15% of the infvesting group’s:

O OO gross assets;

O OO gross liabilities;

O OO revenue;

The consolidated profit and loss account for Company A would then be as follows:

£m £m

Turnover: group and share of joint venture 1,210 Less: share of joint venture’s revenue (210)

Group turnover 1,000

Operating costs (750)

Operating profit 250

Share of joint venture’s operating profits 54 Interest payable:

Group (50)

Joint venture (9) (59)

Profit on ordinary activities before tax 245

Tax on profit on ordinary activities¹ (69)

Profit after tax 176

The notes disclose:

1 Tax

Group (60)

Joint venture (9)

(69) Example 2.5

O OO operating results (based on a three-year average).

The company then has to disclose an associate’s revenue and give more

information about some items on the balance sheet – I’ll discuss these in the next chapter when I look at the balance sheet.

More information has to be given if an associate, or joint venture, exceeds 25% of any of the above. Then the investor’s share of the following income statement items are also disclosed:

O OO profit before tax;

O OO tax;

O OO profit after tax.

There are also more disclosures of balance sheet items.

Taxation

This is shown on the income statement as a total and if you want to know the components of the tax charge you’ll have to look at the notes to the accounts. It’s often worth a look as one of the things that you’ll notice is that the tax charge may not be the amount you would expect. (For example the UK’s tax charge is currently 28% for large companies. Even if the company trades exclusively in the UK, its tax charge isn’t always 28% of its pre-tax profit.) This is because the way that the accounting rules recognise income and expenses is often different from the tax rules. (This means that most companies prepare three sets of accounts, the statutory published accounts, the tax accounts and their detailed management accounts.)

The note on taxation discloses:

O

O the income statement’s tax charge, analysed between current tax and deferred tax;

O

O a reconciliation of the effective tax charge;

O

O the tax relating to items that have been charged to the shareholders’

equity;

O

O the main deferred tax assets and liabilities and how they have changed during the year;

O

O any unrecognised deferred tax assets and liabilities.

Firstly let’s have a look at the difference between current tax and deferred tax.

The current tax is a tax that relates to this year’s financial performance. It is the amount that will be shown on the company’s tax return for the year. So this is the tax charge that you would expect. Now let me explain deferred tax.