Overview

What you’ll learn:

• Why auditors spend so much time reviewing Joint Ventures
• The most common JV accounting mistakes identified during audits
• How control, profit allocation, eliminations, and impairment create audit risk
• What auditors look for as “red flags” in JV balances
• How finance teams can prepare before audit questions arise

This episode focuses on audit behaviour and risk awareness, not accounting theory.

Best for:

• Offshore finance teams supporting audit and year-end close
• Team members responding to audit queries or review comments
• Finance staff preparing working papers and explanations
• Anyone wanting to reduce audit rework, stress, and last-minute fixes

Completion of Episodes 1–6 is strongly recommended.

• Estimated time: 6 mins

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Chapter 7 Audit and Risk Focus

Context: This note identifies high-risk areas in the accounting for joint arrangements, specifically focusing on audit challenges related to classification, profit elimination, and disclosure under AASB 10, AASB 11, AASB 12, and AASB 128.

1. Control Misclassification (AASB 10 vs. AASB 11)

A primary audit risk is the incorrect assessment of whether an investor has Control (Subsidiary) or Joint Control (Joint Arrangement).

• Definition of Control: Under AASB 10, control exists only if an investor has power over the investee, exposure to variable returns, and the ability to use power to affect those returns.
• Definition of Joint Control: Joint control exists only when decisions about "relevant activities" require the unanimous consent of the parties sharing control.
• Audit Risk:

◦ Casting Votes: Auditors scrutinize shareholder agreements for "casting vote" mechanisms. If one party (e.g., the Developer) holds a casting vote on operating decisions, they likely have Control, requiring consolidation rather than equity accounting, regardless of a 50/50 ownership split.

◦ Substantive vs. Protective Rights: Auditors assess whether veto rights are merely "protective" (e.g., protecting against fundamental changes like changing the business nature) or "substantive" (giving power over relevant activities). Only substantive rights result in joint control.

◦ De Facto Agents: Auditors review relationships to ensure other parties are not acting as "de facto agents," which could aggregate voting power and trigger consolidation.

1. Incorrect Classification: JV vs. Associate vs. Joint Operation

Misclassifying the type of arrangement leads to incorrect measurement methods (Equity Method vs. Line-by-Line).

• Joint Venture vs. Associate:

◦ Significant Influence (Associate): Presumed at 20% voting power. Does not require unanimous consent.

◦ Joint Venture: Requires a contractual arrangement for unanimous consent on relevant activities.

◦ Risk: Treating an investment as a JV (Joint Control) when only Significant Influence exists, or vice versa. While both use the equity method, the disclosure requirements under AASB 12 differ.

• Joint Venture vs. Joint Operation:

◦ Joint Venture: Parties have rights to the net assets of the arrangement.

◦ Joint Operation: Parties have rights to specific assets and obligations for specific liabilities.

◦ Risk: Assuming all SPVs are Joint Ventures. Even if structured through a separate vehicle (e.g., a company), if contractual terms entitle parties to all output or substantially all economic benefits of the assets, it may be classified as a Joint Operation, requiring line-by-line accounting rather than equity accounting.

1. Elimination of Internal Profits (AASB 128)

AASB 128 requires the elimination of "upstream" (Investee to Investor) and "downstream" (Investor to Investee) transactions to the extent of the investor's interest.

• The "One-Line" Limitation: Unlike consolidation (where 100% of internal transactions are eliminated), equity accounting requires partial elimination.
• Risk of Over/Under Elimination:

◦ Under-elimination: Booking 100% of the profit on a fee charged to the JV. The portion of the profit corresponding to the investor's interest is unrealized and must be eliminated.

◦ Over-elimination: Eliminating 100% of the transaction value (as done in full consolidation), rather than just the investor’s share.

• Capitalized Costs: When an investor charges a fee (e.g., Development Management fee) to a JV, the JV often capitalizes this into Inventory (WIP). The investor must eliminate the profit component of this fee against the "Investment in JV" carrying amount until the inventory is sold to a third party.

1. Fee Double Counting Risks

In property development, the developer often acts as both the equity partner and the service provider (Development Manager).

• The Mechanism: The developer recognizes fee revenue for services rendered. Simultaneously, the JV recognizes a profit (or reduction in expense) driven by the value added by those services.
• The Risk: If the developer recognizes the full fee revenue and recognizes their full share of the JV's net profit (without adjustment), they effectively count the economic benefit twice.
• Correct Treatment: The investor must reduce their share of the JV's profit (or the carrying value of the investment) by the amount of the internal profit component of the fee income recognized.

1. Disclosure Expectations (AASB 12)

AASB 12 Disclosure of Interests in Other Entities requires extensive qualitative and quantitative disclosures which are often overlooked.

• Significant Judgments: Entities must disclose the significant judgments and assumptions made in determining control, joint control, or significant influence.

◦ Audit Expectation: Explicit disclosure of why a 50% interest is classified as a JV rather than a Joint Operation or Subsidiary.

• Summarized Financial Information: For material joint ventures, the investor must disclose summarized financial information (e.g., cash, current/non-current liabilities, revenue, D&A, tax expense).
• Unrecognized Losses: If the investor's share of losses equals or exceeds their interest, they must stop recognizing losses. AASB 12 requires disclosure of the cumulative unrecognized share of losses.
• Commitments and Contingencies: The investor must disclose commitments (e.g., to provide funding) and contingent liabilities incurred relating to the joint venture.

Key Takeaways

• Auditors focus on JVs because they are large, complex, and judgement-heavy
• Ownership percentage alone does not determine control or profit allocation
• Missing eliminations are a common and avoidable audit finding
• Ignoring impairment signals is one of the biggest audit risks
• Good documentation and early escalation prevent most audit issues

Common Mistakes / Watch-outs

• Assuming 50% ownership automatically means JV classification
• Booking profit strictly by ownership without reviewing the waterfall
• Forgetting to eliminate internal development fees
• Delaying impairment assessments despite clear warning signs
• Relying on outdated agreements or feasibility models

🧠 Practical reminder

Audits usually fail where understanding stops.

If you understand:

• who controls the JV,
• how money really flows,
• and where judgement is applied,

then audit questions become explanations — not surprises.

Quick Links

• Back to hub →Episode 6 – Impairment & Losses