Magazine article The CPA Journal

The Accountant's Role in Joint Venture Arrangements

Magazine article The CPA Journal

The Accountant's Role in Joint Venture Arrangements

Article excerpt

As business becomes increasingly global, finding ways to expand and compete has become imperative.

In the same way that corporate takeovers dominated the 1990s, the joint venture may be the defining organizational structure of the next decade. According to Andersen Consulting, alliances will be a prime vehicle for future growth and are expected to account for 16-25% of median company value or $25-40 trillion within five years (See Exhibit 1).

The Alliance Advantage

The versatility of alliances, as opposed to "going it alone," allows businesses to more effectively manage the risks and uncertainties of the global marketplace while providing access to specialized skills, customers, and geographical areas.

In a joint venture, one popular form of alliance, two or more businesses (venturers) enter into a collaborative arrangement to undertake a specific economic enterprise. Typically, venturers will have complementary attributes in areas such as marketing, manufacturing, distribution, or technology. Advantages can include the following:

* Ability to expand into foreign markets;

* Reduced risks (e.g., reduced capital outlays, reduced political risk); and

* Greater long-term market penetration through promotion of a local image and knowledge of local customs and institutions.

A joint venture allows companies to collaborate quickly and without undertaking a full-scale merger. Joint ventures have emerged as the preferred vehicle for entering foreign markets and are being developed at a fast pace.

The CPA's Role

Measurement and reporting. Myriad accounting and reporting standards for joint venture interests exist internationally. Areas of disagreement range from basic questions, such as what constitutes a joint venture, to complex recognition, measurement, and disclosure rules. For exampie, in the United States, APB Opinion No. 18 prescribes the equity method of accounting for corporate joint ventures but does not address the proper accounting treatment of partnerships or unincorporated joint ventures. Canada defines joint ventures more broadly and requires proportionate consolidation. The IASC defines a joint venture in a manner similar to Canada but permits either proportionate consolidation or the equity method. A CPA knowledgeable in these areas can interpret the various international standards, structure the collaborative arrangement according to management's intentions, and then prepare appropriate financial statements and disclosures (See Exhibit 2).

To facilitate harmonization of the various international standards, the G4+1 group of standard setters has issued Reporting Interests in Joint Ventures and Similar Arrangements, a special report containing proposals for the accounting and disclosure of joint venture arrangements. Although the G4+1 recommendations do not constitute GAAP, they indicate the future direction of the various standards-setting bodies.

The concept of joint control is central to the G4+1 report. Joint control is defined as a situation in which "no one party alone has the power to control its strategic operating, investing, and financing decisions, but two or more parties together can do so, and each of the parties sharing control (joint venturers) must consent." The G4+1 thinks that this def inition gives the joint venture economic characteristics that merit distinctive measurement and reporting of its activities. The G4+1 further defines a joint venture as "an enterprise that is jointly controlled by the reporting enterprise and one or more other parties. …

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