Lesson 21 - Advanced Accounting Course

Lesson 21: Accounting for Subsidiaries and Joint Ventures

Understanding how to account for subsidiaries and joint ventures is essential for preparing accurate and transparent consolidated financial statements. These entities play a key role in group structures, and IFRS provides specific guidelines for how to treat them in financial reports.

This lesson will explain:

• What subsidiaries and joint ventures are
  
  

• How they are identified
  
  

• How to account for them under IFRS
  
  

• Key differences between them
  
  

• Common mistakes and best practices
  
  

👨‍👩‍👧‍👦 What is a Subsidiary?

A subsidiary is a company that is controlled by another company (called the parent).
➡️ Control means the parent can direct the financial and operating policies of the subsidiary, usually by owning more than 50% of its voting rights.

📘 Standard Used: IFRS 10 – Consolidated Financial Statements

🔗 What is a Joint Venture?

A joint venture is a business arrangement where two or more parties have joint control and share rights to the net assets of the venture.
➡️ No single party has full control—they must make decisions together.

📘 Standard Used: IFRS 11 – Joint Arrangements

📊 Key Differences Between Subsidiaries and Joint Ventures

🧮 How to Account for a Subsidiary (IFRS 10)

When a company controls a subsidiary, it must consolidate it into its financial statements.

Steps for Consolidation:

1. Combine assets, liabilities, income, and expenses of the parent and subsidiary
   
   

2. Eliminate intra-group transactions (e.g., sales between parent and subsidiary)
   
   

3. Recognize Non-Controlling Interest (NCI) – the portion of the subsidiary not owned by the parent
   
   

4. Present one single set of financial statements for the entire group
   
   

✅ Example: If Company A owns 80% of Company B, A must consolidate 100% of B’s financials, and show the 20% it doesn’t own as NCI.

🧮 How to Account for a Joint Venture (IFRS 11 + IAS 28)

Joint ventures are not consolidated like subsidiaries.

Instead, the equity method is used (under IAS 28):

1. Start with the initial investment cost
   
   

2. Add the investor’s share of profits from the joint venture
   
   

3. Subtract any dividends received
   
   

4. Adjust for any impairments or changes in value
   
   

✅ Example: If Company A owns 50% of Joint Venture X, and X earns $100,000 profit, A will record $50,000 as its share of income.

👀 Common Mistakes to Avoid

✅ Best Practices

• 🔍 Assess control carefully – Review shareholder agreements, voting rights, and control indicators
  
  

• 📘 Follow IFRS standards strictly – IFRS 10, IFRS 11, and IAS 28 are your guide
  
  

• ✍️ Keep documentation – Prove why you classified the entity as a subsidiary or joint venture
  
  

• 🔄 Reassess relationships regularly – Ownership or control may change over time
  
  

• 🤝 Coordinate with legal and finance teams – Especially for joint arrangements or complex structures
  
  

📌 Summary