AS-27
This query is : Resolved
09 June 2010
Dear Sir,
As per Para 41 of AS-27, When a Asset is transferred by a venturer to Joint venture, the gain or loss should be recognised which is attributable to interests of the other venturers.
Query:
1. Why the venturer should recognised the gain or loss which is attributable to other venturer?
2. what is the logic behind this approach?
As per Para 41 of AS-27, When a Asset is transferred by a venturer to Joint venture, the gain or loss should be recognised which is attributable to interests of the other venturers.
Query:
1. Why the venturer should recognised the gain or loss which is attributable to other venturer?
2. what is the logic behind this approach?
10 June 2010
Hi dear,
You may note that para 41, at the same time, requires consideration of substance of the transaction. Though legally joint venture is a separate entity and sale of asset to JV implies transfer of risk and rewards of ownership, in subtance it is effectively under the control of venturers. Thus, transfer of asset by venturer to JV implies that venturer transfers the asset which is presently under his sole risk to the joint risk of himself and other venturer. Accordingly, on net basis, he has transferred risk and rewards only to the extent of share of other venturer in JV.
For example, A Ltd. and B Ltd. have formed JV AB Ltd. with 60% and 40% share respectively. If A Ltd. transfers asset of Rs. 100 crores to AB Ltd. at Rs. 110 crores, it implies the asset which was under its 100% ownership is now under joint ownership of itself and B Ltd. So, out of total profit of Rs. 10 crores, Rs. 4 crores is accrued gain as 40% risk has been transferred to B Ltd. Remaining Rs. 6 crores represents gain attributable to A Ltd. itself which is not yet realised in substance as one can not sell the property to itself.
Thus, the logic behind the pronounced treatment is to ensure compiance with accrual and prudence principles.
You may note that para 41, at the same time, requires consideration of substance of the transaction. Though legally joint venture is a separate entity and sale of asset to JV implies transfer of risk and rewards of ownership, in subtance it is effectively under the control of venturers. Thus, transfer of asset by venturer to JV implies that venturer transfers the asset which is presently under his sole risk to the joint risk of himself and other venturer. Accordingly, on net basis, he has transferred risk and rewards only to the extent of share of other venturer in JV.
For example, A Ltd. and B Ltd. have formed JV AB Ltd. with 60% and 40% share respectively. If A Ltd. transfers asset of Rs. 100 crores to AB Ltd. at Rs. 110 crores, it implies the asset which was under its 100% ownership is now under joint ownership of itself and B Ltd. So, out of total profit of Rs. 10 crores, Rs. 4 crores is accrued gain as 40% risk has been transferred to B Ltd. Remaining Rs. 6 crores represents gain attributable to A Ltd. itself which is not yet realised in substance as one can not sell the property to itself.
Thus, the logic behind the pronounced treatment is to ensure compiance with accrual and prudence principles.
11 June 2010
very nice explanation.. clear...
Thanks a lot
Thanks a lot
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