08 November 2012
X, Y, Z are 3 existing companies. The said companies decide to carry a joint development project of constructing a building. Instead of forming a separate entity (joint venture) for the proposed project, it was decided Z will carry out the entire operation. Accordingly, X gave Z 3cr INR and Y gave Z 1.2cr INR. Both X and Y are showing the said amounts under Non - Current Investments(investment in joint venture with Z), while Z has shown the amounts received under the head current liabilities(Joint Venture a/c)
My question is: 1. is such type of venture allowed? Isn't there a need to form a separate entity for JV?
2. If it is allowed, how will be the sharing of income and expenses be done?
3. is the current disclosure by x and Y in their books right?
1. Forming a separate entity would be advantageous from legal, accounting and tax perspective though there is no such requirement if there is proper legal arrangement between the three companies.
2. The sharing of income and expenses needs to be properly captured in the legal agreement itself. Further, accounting needs to be separately done for the activity to provide better clarity.
3. All the three disclosures are incorrect. Since there is no separate JV, X and Y needs to show the amounts as long term loans and advances (unless shares in Z has been issued to X and Y). For Z also, the same would be a long term liability. The above classification will also be dependent upon the terms of the agreement between the parties involved.
08 November 2012
Thank you Mr. Vivek for the reply.... I am not clear on the part that if the amounts will be shown as loans and advances in the books of X and Y, how will be the sharing in profits of the project done?
As regards the profit sharing, it is a purely business arrangement and nothing to do with accouting. The Legal Advisor would have to take care of the same. Or else, the JV partner will have to decide.
As regards the disclosure, to show the same as investment, X & Y need to be shareholders either in Z or in the new JV entity.
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