OT02115 - Oil Industry accounting: joint venture accounting - FRS 102

Section 15 of FRS 102 Investments in Joint Ventures deals with joint venture accounting. Below is a summary of the definitions given in FRS 102:

Joint venture - a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint ventures can take the form of jointly controlled operations, jointly controlled assets or jointly controlled entities.

Joint control - the contractually agreed sharing of control over an economic activity. It exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers).

Jointly controlled entity - a joint venture that involves the establishment of a corporation, partnership or other entity in which each venturer has an interest. The entity operates in the same way as other entities, except that a contractual arrangement between the venturers establishes joint control over the economic activity of the entity.

Venturer - a party to a joint venture that has joint control over that joint venture.

The scope of a joint operating agreement typically covers exploration for, and production of, petroleum, as well as treatment, storage and transportation. It will also cover income allocation, and cost sharing, and the joint venture’s accounting and audit arrangements will normally provide for the appointment one of the participators as “operator”.

The specific features of each joint arrangement should be accounted for according to Section 15 of FRS 102 if UK GAAP is being applied. It is anticipated that the more common arrangements in the oil and gas sector are likely to be considered as jointly controlled assets in accordance with FRS 102, though they may commonly be referred to as ‘joint ventures’ in the oil and gas industry.

A summary of the nature of the relationship and accounting treatment within the individual entity accounts as described in Section 15 of FRS 102 is provided in OT02116.

Tax treatment

For CT purposes ‘joint venture’ activities are treated as part of a company’s business and trading activities and are reflected in the returns and supporting accounts and computations filed by the individual company.

For PRT the tax unit is the individual participator but the scheme is field-based and recognises joint venture activity. For example, Schedule 5 OTA 1975 provides for PRT expenditure relief to be claimed on a field basis by the field “responsible person” on behalf of the joint venture participants. This will normally be the person who has been appointed the operator under the Joint Operating Agreement (JOA).