Understanding the Concept of “Control of an Entity”

Project 4: Understanding the Concept of “Control of an Entity”

Project Brief

Scenario:

Two companies have just entered into a joint venture agreement. Each of the companies/partners needs to make a decision as to whether they will consolidate the joint venture or apply equity method accounting to it. The following options are possible:

• Both partners choose to apply the equity method of accounting
• One partner chooses to consolidate, while the other chooses the equity method of accounting.

One of the partners – Greif – has indicated that it wishes to consolidate while the other has indicated that it wishes to use the equity method to accommodate Greif’s choice. As the auditor, you need to represent one of the partners and evaluate the language in the agreement to see whether it supports the desired accounting positions.

KEY TASKS –

1. Review the first two chapters in both the PwC Consolidation Guide and the PwC Equity Method and Joint Venture Guide.
   1. PwC Guidance on Consolidations

1. PwC Guidance on Equity Method Investments and Joint Ventures

1. Read the following article that presents a point of view on what constitutes control in a joint venture.
   1. Who’s in Charge? Decision-Making in 50:50 Joint Ventures Water Street VenturesLinks to an external site.

1. Access the joint venture agreement Look specifically at the table of contents and ascertain which sections will be directly applicable to this exercise. Read those sections.

1. Choose which party you want to represent. Evaluate the language in the agreement to see whether it supports your party’s desired accounting position.

1. Summarize your conclusions and explain why, using the accounting guidance provided by PwC (see above), you believe that the agreement either supports or does not support the accounting that your chosen entity has chosen to employ. This summary should be completed using project 4 response template.

Supporting Materials

• Once you’ve read through the joint venture agreement, review pages 55 and 65 of this documentLinks to an external site., which mention joint ventures and indicate whether Greif is consolidating or recording under the equity method of accounting.
• You should also review the following letter, focusing on the response from Greif to question 1. The analysis in this response is similar to the analysis that you are performing on this joint venture.

WHAT TO SUBMIT:

• A filled-out version of the Project 4 Response Template.