Creating a JV and impair the investment immediately ?

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Leo
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Creating a JV and impair the investment immediately ?

Post by Leo »

Hi guys,

In order to invest in Brazil in some regulated sector, it is asked to create a JV with a partnership from another Brazilian company.

Our company injected 5m USD into JV. At the same time, the Brazilian company did nothing from their side.

We agreed with them that we will have 50% of the share of JV and they will have 50%, and JV will be accounted for by using the equity method.

In our book so far, we have :

Debit : investment in JV (equity method) : 5m USD
Credit cash : 5m USD

in the JV, they have :

Debit Cash : 5m USD
Credit: capital : 5m USD

We are asking our self the following question :
Do we need to impair immediately our investment into the JV for 2,5m USD?

or do we have to consider that in our 5m investment there is 2,5m USD that belongs to goodwill because we pay 5m USD to acquire 2,5m USD of the JV?

What's your thought on this, please?

Thanks for your help!
Leo
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Joined: 05 Apr 2020, 22:31

Re: Creating a JV and impair the investment immediately ?

Post by Leo »

However, as this is a creation not a acquisition, there shouldn't be any goodwill on the equity investment. I'd say that our company should impair the investment for 2,5m USD immediately.

The Brazilian company, will recognize a one off profit of 2,5m USD into their P&L vs 2,5 in investment assets.

What's your opinion on this please ?

Thanks !
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Marek Muc
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Re: Creating a JV and impair the investment immediately ?

Post by Marek Muc »

Immediate impairment makes no sense to me. I would think more about economics of this arrangement. Maybe you paid 2.5m of hidden bribe and invested only the other 2.5m. So 2.5m could go directly to P&L as revenue expense
Leo
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Re: Creating a JV and impair the investment immediately ?

Post by Leo »

Hi Marek,

You mean like one-off/non-recurring charges in the P&L right?

Do you know if there are some documentation similar to this one ? And what would be the IFRS standard that I could refer to ?

Thanks a lot !
JRSB
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Re: Creating a JV and impair the investment immediately ?

Post by JRSB »

Why enter into it if the other party contributes nothing? Or do they currently have some access right etc which will allow the JV project to progress etc?
Leo
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Re: Creating a JV and impair the investment immediately ?

Post by Leo »

They contributes their "know how". But in the JV's books, we only have cash for 5m and capital for 5m that's all.

In some countries, it's mandatory to do business by creating a jv with the local partner.

But I'm wondering in this case, if they bring their know how to the JV what should be the accounting entry for them ?
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Marek Muc
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Re: Creating a JV and impair the investment immediately ?

Post by Marek Muc »

if they really bring know how, this could be treated as goodwill, so your investment at cost can be 5m (no additional entries)

or maybe they bring some identifiable assets?
https://ifrscommunity.com/knowledge-bas ... ble-assets
Leo
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Re: Creating a JV and impair the investment immediately ?

Post by Leo »

Thanks Marek, insightful as always !

If I was the accountant of this company which brings the know how what should be the accounting entry in my company ?

dt : Equity investments into JV
Cr : ?????

Thanks
JRSB
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Re: Creating a JV and impair the investment immediately ?

Post by JRSB »

I've seen different cases whey they might formally assign certain intellectual property to that JV entity (including 'know how' or development work to date or something), but in others they might simply act as operator and not record any assets in contribution.
JRSB
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Re: Creating a JV and impair the investment immediately ?

Post by JRSB »

but your original question was about impairment, but if there's more than just cash in there, even if know how, that shows why not impaired perhaps.
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Marek Muc
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Re: Creating a JV and impair the investment immediately ?

Post by Marek Muc »

Leo wrote: 23 Jun 2021, 16:01 Thanks Marek, insightful as always !

If I was the accountant of this company which brings the know how what should be the accounting entry in my company ?

dt : Equity investments into JV
Cr : ?????

Thanks
If there is an identifiable asset that they contributed, then the credit entry can be shown as gain on disposal of this asset. Otherwise, I would recognise the investment at zero cost without P&L impact
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