Overview

What you’ll learn:

• What equity accounting really means in practice
• Why joint ventures are not consolidated, even when they are very large projects
• What the “Investment in Joint Venture” balance represents
• How JV profits, losses, and cash distributions affect the investment balance
• Why JV profit and JV cash are often not the same thing

This episode explains the logic and movements behind equity accounting — not detailed journals.

Best for:

• Offshore finance teams performing JV month-end reporting
• Team members confused by the “one-line” JV balance sheet presentation
• Finance staff reconciling JV packs to group reporting
• Anyone asking, “Where did all the assets and debt go?”

Completion of Episode 2 (Control vs Joint Control) is recommended.

• Estimated time: 6 mins

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Chapter 3 EAI Accounting Conceptual Overview (AASB 128)

Context: This note outlines the conceptual framework and high-level mechanics of the equity method of accounting as prescribed by AASB 128 Investments in Associates and Joint Ventures.

1. Application Scope

The equity method is applicable to investments where the investor holds an interest in an entity but does not have full control (which would require consolidation). Specifically, it applies to:

• Associates: Entities over which the investor has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. It is presumed to exist when an entity holds 20 per cent or more of the voting power,.
• Joint Ventures: Joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. This stands in contrast to Joint Operations, which account for assets and liabilities directly.

1. The "One-Line" Consolidation Concept

The equity method is often described as a "one-line consolidation." Unlike full consolidation, where 100% of an investee's assets, liabilities, revenue, and expenses are combined line-by-line with the parent, the equity method reflects the investor's interest as a single line item in the financial statements.

• Balance Sheet: The investment is shown as a single non-current asset.
• Income Statement: The investor’s share of the investee's earnings or losses is shown as a single line item.

1. Equity Method Mechanics (High-Level)

Under the equity method, the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.

The Calculation Flow:

1. Initial Recognition: The investment is recognised at cost (fair value of consideration transferred plus transaction costs),.
2. Add/Subtract Share of Profit/Loss: The carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition.
3. Add/Subtract Share of OCI: Adjustments are made for changes in the investor’s proportionate interest in the investee arising from the investee’s other comprehensive income (OCI), such as property revaluations or foreign exchange translation differences.
4. Subtract Distributions: Distributions (dividends) received from the investee reduce the carrying amount of the investment.
5. Distinction Between Profit and Cash

A critical concept in equity accounting is the decoupling of profit recognition from cash receipt.

• Profit Recognition: Income is recognised by the investor in the period the investee earns it, reflecting the investor's share of the performance and return on investment.
• Cash Distributions: The receipt of cash distributions (dividends) is not recognised as revenue in the investor's profit or loss. Instead, distributions are treated as a return of investment and reduce the carrying value of the asset on the balance sheet,.
• Commercial Implication: An investor may recognise significant profits in their P&L without receiving any corresponding cash flow if the investee retains earnings for working capital or debt repayment. Conversely, an investor may receive cash distributions in a year where the investee reports a loss.

1. Financial Statement Presentation Impacts

Statement of Financial Position (Balance Sheet)

• The investment is classified as a non-current asset.
• It represents the investor's share of the net assets of the investee, plus any goodwill arising on acquisition, less any accumulated impairment.

Statement of Comprehensive Income (P&L)

• The investor presents its share of the investee's profit or loss. This figure is typically after the investee's tax and interest expense,.
• If the investee has other comprehensive income (e.g., FX translation reserves), the investor recognises its share of those movements in its own Statement of Comprehensive Income.

Statement of Cash Flows

• Operating vs. Investing: Distributions received are presented in the Statement of Cash Flows. They may be classified as operating cash flows (returns on investment) or investing cash flows (returns of investment).
• Reconciliation: Because the share of profit recognised in the P&L does not equal cash received, the "share of profit of equity accounted investments" is deducted from Net Profit when reconciling to Operating Cash Flows, and actual dividends received are added back.

Key Takeaways

• Equity accounting records net value, not individual assets and liabilities
• Profit increases the investment balance even without cash
• Cash distributions reduce the investment balance but are not revenue
• JV debt usually does not sit on the group balance sheet
• One balance sheet line can represent a very large underlying project

Common Mistakes / Watch-outs

• Treating JV distributions as revenue
• Expecting JV assets or debt to appear line by line in group accounts
• Forgetting to pick up the share of JV profit or loss
• Mixing JV expenses into group operating cost lines
• Not reconciling investment balances to JV net assets

🧠 Practical reminder

If the JV balance looks small compared to the project size, that is normal.

Equity accounting shows our share of value, not the full project.

Quick Links

• Next episode →Episode 4 – Booking Mechanics & Eliminations
• Back to hub →Episode 2 – Control vs Joint Control