A joint venture is a business arrangement in which two or more parties agree to combine their resources to complete a specific task. This task can take many forms, including operations, assets, or entities. While each participant in the joint venture is responsible for any profits, losses or costs, the venture is considered its own entity and is separate from the participants’ other business interests.
Joint Venture Accounting
The accounting for a joint venture will depend on the level of control a participant holds over the venture. The two main accounting methods used for joint ventures are the equity method and the proportional consolidation method.
Equity Accounting & Significant Influence
This is the most commonly used accounting method for joint ventures. If an investor holds 20% or more of the voting power, it is presumed that the investor has significant influence.
Possible indicators of significant influence include:
- Voting power
- Board seat
- Policy making
- Holder of technical information
The equity method determines the net income generated from the joint venture in proportion to the size of a company’s investment in the venture. The investment is recorded at cost, and then adjustments are made depending on the venture’s current value and any expenses. All income is listed on the company’s income statement. It’s important to note that the value reported by each company represents only that firm’s share of the venture.
The proportional consolidation method records the assets and liabilities of a joint venture in proportion to the percentage of participation a company maintains in the venture. All income and expenses from the joint venture are included on the balance sheet and income statement.
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Joint ventures can be an excellent investment if they are managed properly. A properly trained accountant will help minimize errors and make sure you’re getting the most out of your investment. Call or visit us today to schedule an appointment.