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A Ltd. has 60% interest in a joint operation. A Ltd. PURCHASES an asset from the JO; the JO sells at a profit. A Ltd. should:
ARecognise 60% of the JO's profit immediately because A is the controlling joint operator
BDefer recognition of A Ltd.'s share of the profit on the JO side until the asset is resold to a third party; A's cost of the asset is the cash paid less A's share of the JO's unrealised profit (i.e. eliminate the upstream profit by reducing A's recorded cost)
CReverse the entire JO sale
DRecord at the purchase price and recognise A's share of profit through OCI
Answer & Solution
Correct answer: B. Defer recognition of A Ltd.'s share of the profit on the JO side until the asset is resold to a third party; A's cost of the asset is the cash paid less A's share of the JO's unrealised profit (i.e. eliminate the upstream profit by reducing A's recorded cost)
Symmetry with downstream sales — the joint operator's share of unrealised profit must be eliminated against the recorded cost of the purchased asset until that asset is on-sold to a third party. This is the upstream-transaction eliminating principle as applied to JOs.
Related questions
Identify the statement that is INCORRECT about acquiring an interest in a joint operation Identify the BEST description of how a joint operator accounts for its interest in a jointWhen an entity contributes ONLY ASSETS or GROUPS OF ASSETS THAT DO NOT CONSTITUTE BUSINESSAS 27 provided an exemption from proportionate consolidation when the joint venture was 'aWhen a party that previously merely PARTICIPATED in a joint operation (no joint control) sSale BY a joint operator TO its joint operation: when the transaction provides evidence ofWhere the transaction acquiring an additional interest in a joint operation (which is a buUnder Ind AS 111, an entity classified an interest as a jointly controlled ENTITY under AS