Financial Reporting FR

SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers

ISA 210 Terms of Audit Engagements
Spread the love

SIC-13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers provides guidance on how to account for non-monetary contributions made by venturers in a jointly controlled entity (JCE). In this article, we will discuss the definitions, explanations, examples, and case studies related to non-monetary contributions by venturers in JCEs, within a limit of 1200 words.

 

Definitions:

 

Jointly Controlled Entity (JCE):

A JCE is a contractual arrangement where two or more parties, known as venturers, jointly control the entity. Joint control is the contractually agreed sharing of control over an economic activity, and it exists when decisions about the relevant activities require unanimous consent of the venturers. JCEs can be structured as partnerships, joint ventures, or other similar arrangements.

 

Non-Monetary Contribution:

A non-monetary contribution is a contribution made by a venturer to a JCE that is not in the form of cash or cash equivalents. Non-monetary contributions can include assets such as property, plant, and equipment, intangible assets, inventory, and other non-cash resources.

 

Explanations:

When a venturer makes a non-monetary contribution to a JCE, the venturer needs to determine the appropriate accounting treatment for such contributions. SIC-13 provides guidance on how to account for non-monetary contributions based on whether the contribution is measured at cost or fair value.

 

Non-Monetary Contributions Measured at Cost:

If a venturer’s non-monetary contribution to a JCE is measured at cost, the venturer should recognize the contribution as an expense in its financial statements when the contribution is made, unless it qualifies for recognition as an asset under other applicable accounting standards. The venturer should also disclose the nature and amount of the non-monetary contribution, as well as any resulting gain or loss, if applicable.

 

Non-Monetary Contributions Measured at Fair Value:

If a venturer’s non-monetary contribution to a JCE is measured at fair value, the venturer should recognize the contribution as revenue or gain in its financial statements when the contribution is made. The venturer should also disclose the nature and amount of the non-monetary contribution, as well as any resulting revenue or gain.

 

Examples:

ABC Corp and XYZ Corp form a jointly controlled entity to develop and market a new product. ABC Corp contributes a patent with a fair value of $1 million, and XYZ Corp contributes cash of $1 million. Since the patent is a non-monetary contribution measured at fair value, ABC Corp would recognize revenue or gain of $1 million in its financial statements upon making the contribution.

Company A and Company B form a jointly controlled entity to acquire and operate a real estate property. Company A contributes a building with a carrying amount of $500,000, and Company B contributes cash of $500,000. Since the building is a non-monetary contribution measured at cost, Company A would recognize an expense of $500,000 in its financial statements upon making the contribution, unless the building qualifies for recognition as an asset under other applicable accounting standards.

 

Case Studies:

Case Study 1:

ABC Ltd and XYZ Ltd form a joint venture to develop and sell a new software product. ABC Ltd contributes software development expertise, and XYZ Ltd contributes cash of $1 million. The joint venture agreement specifies that ABC Ltd and XYZ Ltd will have equal control over the joint venture. The software development expertise contributed by ABC Ltd is a non-monetary contribution measured at cost. ABC Ltd should recognize an expense of the fair value of the software development expertise in its financial statements upon making the contribution, unless the expertise qualifies for recognition as an asset under other applicable accounting standards.

 

Case Study 2:

DEF Inc and GHI Corp form a partnership to operate a construction project. DEF Inc contributes construction equipment with a fair value of $500,000, and GHI Corp contributes land with a carrying amount of $300,000. The partnership agreement specifies that DEF Inc and GHI Corp will have equal control over the partnership. Since the construction equipment contributed by DEF Inc is a non-monetary contribution measured at fair value, DEF Inc would recognize revenue or gain of $500,000 in its financial statements upon making the contribution. On the other hand, since the land contributed by GHI Corp is a non-monetary contribution measured at cost, GHI Corp would recognize an expense of $300,000 in its financial statements upon making the contribution, unless the land qualifies for recognition as an asset under other applicable accounting standards.

 

Case Study 3:

Company X and Company Y form a joint venture to explore and extract oil from a specific oil field. Company X contributes drilling equipment with a carrying amount of $1 million, and Company Y contributes cash of $1 million. The joint venture agreement specifies that Company X and Company Y will have equal control over the joint venture. Since the drilling equipment contributed by Company X is a non-monetary contribution measured at cost, Company X would recognize an expense of $1 million in its financial statements upon making the contribution, unless the drilling equipment qualifies for recognition as an asset under other applicable accounting standards. Meanwhile, the cash contributed by Company Y is not considered a non-monetary contribution and would not have any specific accounting treatment related to SIC-13.

 

In summary, SIC-13 provides guidance on how to account for non-monetary contributions by venturers in JCEs, based on whether the contributions are measured at cost or fair value. Examples and case studies illustrate the application of this guidance in various scenarios. It is important for entities to carefully evaluate the nature and measurement of non-monetary contributions in JCEs in accordance with the applicable accounting standards and disclose the relevant information in their financial statements.