Joint Venture

What is Joint Venture?

IFRS 11.14 requires parties to a joint arrangement to classify it as either a joint venture or a joint operation. The classification determines accounting treatment. A joint venture exists when the parties have rights to net assets, which typically occurs when the arrangement is structured through a separate vehicle (a company, partnership, or other entity) whose legal form gives the parties rights to the entity's net assets rather than direct rights to its assets and obligations for its liabilities. IFRS 11.B15–B16 emphasises that the legal form of the separate vehicle is the starting point, but contractual terms and other facts can override it.

Once classified as a joint venture, each venturer applies the equity method per IAS 28.16. The venturer recognises its investment initially at cost and adjusts it for its share of the joint venture's post-acquisition profit or loss. Dividends reduce the carrying amount. The venturer does not consolidate the joint venture line by line. On the audit side, ISA 600.25 requires the group engagement team to understand which entities are subsidiaries, associates, and joint ventures, because the classification drives the scope of audit procedures and the type of financial information the group engagement team needs from each component.

Worked example: Rossi Alimentari S.p.A.

Client: Italian food production company, FY2025, revenue EUR 67M, IFRS reporter. Rossi and a French dairy cooperative (Laiterie du Nord SCA) each hold 50% of the shares in Alpine Cheese S.r.l., a joint venture established in 2022 to produce specialty cheeses for export. Alpine Cheese has revenue of EUR 14M, total assets of EUR 9.8M, total liabilities of EUR 4.1M, and net profit of EUR 1.9M for FY2025.

Step 1 — Classify the arrangement

Alpine Cheese is a separate legal entity (S.r.l.) incorporated in Italy. Under IFRS 11.B22, the legal form of an S.r.l. gives the parties rights to the net assets of the entity. The shareholders' agreement requires unanimous consent for all operating and capital decisions. Neither party can unilaterally direct relevant activities. IFRS 11.7 confirms joint control exists because decisions about relevant activities require the unanimous consent of the parties sharing control.

Step 2 — Verify no contractual override

IFRS 11.B25–B33 requires the entity to look beyond legal form where contractual terms or other facts give the parties direct rights to assets and obligations for liabilities. Here, the shareholders' agreement does not allocate specific assets or liabilities to either party. Both parties share in all profits and bear all losses proportionately. No override applies.

Step 3 — Apply the equity method

Rossi's initial investment in 2022 was EUR 2.8M (50% of Alpine Cheese's net assets at the formation date). In FY2025, Rossi recognises 50% of Alpine Cheese's net profit: EUR 0.95M. Alpine Cheese paid dividends of EUR 0.6M total, so Rossi's share is EUR 0.3M. The carrying amount at 31 December 2025 is the opening balance of EUR 3.1M plus EUR 0.95M share of profit less EUR 0.3M dividends received, totalling EUR 3.75M. IAS 28.10 requires this single-line presentation in Rossi's consolidated balance sheet.

Step 4 — Assess for impairment indicators

IAS 28.40–43 requires the venturer to apply IAS 36 indicators to the equity-method investment as a single asset. Alpine Cheese is profitable, has growing revenue, and has no indicators of impairment. No write-down is required.

Conclusion: Rossi accounts for its 50% interest in Alpine Cheese as a joint venture under the equity method, carrying EUR 3.75M on the balance sheet. The classification is defensible because the separate legal vehicle gives the parties rights to net assets, the unanimous-consent clause establishes joint control, and no contractual terms override the legal form analysis.

Why it matters in practice

• Teams frequently classify an arrangement as a joint venture based solely on 50/50 ownership without performing the IFRS 11.B15–B33 analysis of legal form, contractual terms, and other facts. An arrangement structured through a separate vehicle can still be a joint operation if the contractual terms give each party direct rights to assets and obligations for liabilities (IFRS 11.B27–B28). Skipping this analysis produces the wrong accounting treatment from day one.
• Practitioners sometimes fail to eliminate unrealised profits on transactions between the venturer and the joint venture. IAS 28.28 requires the venturer to eliminate its share of unrealised gains on downstream transactions (sales to the joint venture) and upstream transactions (purchases from the joint venture). On engagements where the venturer transacts heavily with the joint venture (management fees, raw material sales, licensing), missing these eliminations overstates both revenue and the equity-method carrying amount.

Joint venture vs. joint operation

The distinction matters because a joint operation classified incorrectly as a joint venture collapses an operator's share of individual assets and liabilities into a single investment line. For capital-intensive arrangements (oil and gas extraction, infrastructure projects, real estate development), this can suppress hundreds of millions in assets and liabilities from the operator's balance sheet, distorting leverage ratios and covenant calculations.

Related terms

Frequently asked questions