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©SAP SAP AG 2AG 2007007 eBook-eBook-Joint Joint VenturVenture Ace Accountcountinging THE

THEBEST BEST RUN RUN BUSINBUSINESSESESSESRUN RUN SAPSAP

IOGW40

IOGW40

Joint Venture Accounting

Joint Venture Accounting

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©SAP AG 2007 eBook- Joint Venture Accounting

Joint Venture Configuration (in IMG) 4.1 Company Code Configuration 4.2 Master Data Configuration 4.3 Processing Configuration 4.4 JV Billing Configuration Unit 4

Periodic Processes 3.1 Cutback

3.2 Month End Processing 3.3 Joint Venture Billing Unit 3 Day-to-Day Processes 2.1 Data Entry 2.2 Operated Accounting Unit 2 Basics

1.1 Introduction & Accounting Principles 1.2 Master Data

1.3 Integration Unit 1

JVA Workshop - IOGW40

This online learning course consists of four units. Each unit is divided into several separate lessons so you can work with one lesson for a longer time if necessary. However, we

recommend that you complete each unit in the defined sequence in order to understand the solution better.

 After you have completed the e-books in all four units, you should have a good

understanding of joint venture accounting concepts, be able to set up and manage basic joint venture contracts using the SAP JVA solution, and have good knowledge of the breadth and capabilities of the SAP JVA functions.

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©SAP AG 2007 eBook- Joint Venture Accounting

By the end of this lesson, you will be

able to:

Define joint venture accounting concepts

Explain the accounting principles behind

SAP JVA

Unit 1.1 Objectives

By the end of this lesson, you will be able to define joint venture accounting concepts and to explain the accounting principles behind SAP JVA.

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©SAP AG 2007 eBook- Joint Venture Accounting

Introduction of JVA Concepts

JVA 1.1

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©SAP AG 2007 eBook- Joint Venture Accounting Joint Venture Apples Joint Venture Apples Joint Venture Oranges Joint Venture Oranges Farmer A FarmerB Shop Joint Venture Carrots Joint Venture Carrots

What is a Joint Venture?

Sometimes, several companies can jointly run a business venture more successfully than an individual company can. The companies can combine efforts for that one venture without merging their businesses. Such projects are known as joint ventures.

In the example shown here, a shopkeeper and two farmers enter a joint venture. The shopkeeper provides the capital, transportation, and shop space while the farmers provide the produce. The three partners share profits and losses from the joint venture as agreed between them.

The companies can run several joint ventures between them, but each venture is separate. The agreements for each joint venture can be different or they can be shared. Each

company participating in a joint venture is referred to as a partner .

SAP Joint Venture Accounting or SAP JVA was designed for the upstream oil industry so all the examples relate to upstream oil companies. Such companies regularly enter into joint ventures for exploration purposes, and to develop and maintain oil and gas production facilities.

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©SAP AG 2007 eBook- Joint Venture Accounting

Joint Venture 2 Joint Venture 2 Joint Venture 3 Joint Venture 3 Joint Venture 1 Joint Venture 1 Partner A Partner B

Plan future activities of venture Run day-to-day activities of venture

Maintain accounting records for venture

Report venture activity to partners

Report profit or loss to partners

Operator 

Who Runs a Joint Venture?

Sometimes, one partner takes responsibility for the day-to-day running of the joint venture. This partner is the operator . The operator also manages the joint venture accounts and must send profit and loss reports to the other partners.

The remaining partners, who do not operate the venture, are referred to as the non-operating partners.

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©SAP AG 2007 eBook- Joint Venture Accounting

Risk

Investment

Resources

Companies can share

Why Are Joint Ventures Used?

Companies enter joint ventures for several reasons, such as to share risks, to share the burden of large or lengthy investments, and to share personnel or other resources.

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©SAP AG 2007 eBook- Joint Venture Accounting

Non-Operating Partners

Maintain accounting records for

their own share of the venture

Settle accounts with the

operating partner, according to the conditions of the venture

Operating Partner 

• Manages the venture on a day-to-day basis

• Maintains venture accounting records • Calculates partner shares of venture

expenditure and revenue

• Reports venture activity to partners

SAP JVA

In a typical oil industry joint venture, one partner acts as the operator.

The operator is responsible for managing the venture on a day-to-day basis, maintaining the venture accounting records, calculating partner shares of venture expenditure and revenue, and reporting venture activity to the partners.

The non-operating partners are responsible for maintaining accounting records for their own share of the venture and settling accounts with the operating partner, according to the

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©SAP AG 2007 eBook- Joint Venture Accounting

Accounting Principles

The second topic of lesson 1 describes the accounting principles behind SAP JVA.

JVA 1.1

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©SAP AG 2007 eBook- Joint Venture Accounting

100 2 50 150 1 Partner Account Account name

Debit entry Credit entry

Final balance of account

Asset account Liability account Capital account Increase Decrease Decrease Increase Decrease Increase

150 1 150 JV Costs 50 50 2 JV Bank Notes

1. Partner share of venture costs 2. Settle partner account

T Accounts

 Accounting principles are often illustrated using T accounts.

 As with other forms of bookkeeping, JVA uses a double entry system. Each accounting transaction requires at least two entries, one debit and one credit. You usually make the entries to different accounts. For example, if you purchase an asset using a check, the transaction is recorded as a debit entry to an asset account and a credit entry to a bank account.

These transactions are displayed in T accounts. Debits are shown on the left side of the T and credits on the right.

One important feature of double entry bookkeeping is that the sum of all entries always equals zero.

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©SAP AG 2007 eBook- Joint Venture Accounting

Company B

Company A Notes

1. Company A incurs costs running the venture.

2. Company A calculates company B’s share of costs as 40%.

3. Company B accounts for its own share of costs. 4. Company B reimburses company  A. 4 40 40 2 Partner B 60 40 4 1 100 Venture Bank 60 2 40 100 1 Venture Costs 40 4 3 40 Venture Account 4 40 Own Bank 40 3 Venture Costs

Operator Oriented Accounting

In this example, company A operates a joint venture and holds a 60% share. Company B is the only other venture partner. The accounting steps are as follows:

In step 1, the operator, company A, incurs costs of 100 on behalf of the venture. In this example,

the costs are paid directly from the venture bank. This is done to simplify the example even though not all ventures have their own bank accounts. Typically, only large ventures use this operating method. In recent years even large ventures tend to be funded from shared bank accounts.

 In step 2, company A calculates 40% of the costs and charges these costs to the account for the partner, company B.

In step 3, company A notifies company B of the costs incurred, and company B records its own

40% share of these costs in its books.

In step 4, company B reimburses company A. Funds are transferred from the company B bank

to the venture bank and the partner accounts are cleared.

Company A combines accounting records for the activities within the venture with those for its own activity. This ensures simple accounting entries, however, great care is needed when

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©SAP AG 2007 eBook- Joint Venture Accounting

Operating Co. Company A

Venture Notes

1. Company A incurs costs while running the venture. 2. Company A

calculates the share of costs for partner A and partner B. 3. Company A accounts

for its own share of costs.

4. Company B accounts for its own share of costs. 5. Company A reimburses the venture. 6. Company B reimburses the venture. 5 60 60 2 Partner A 60% 40 6 60 5 1 100 Venture Bank 2 40 2 60 100 1 Venture Costs 60 5 3 60 Venture Account 60 5 60 Own Bank 60 60 3 Venture Costs Company B 40 6 4 40 Venture Account 40 6 40 Own Bank 40 40 4 Venture Costs 6 40 40 2 Partner B 40%

Partner Oriented Accounting

Company A operates a joint venture and holds a 60% share. The venture has one other partner, company B. Company A creates a special operating company in which to record the venture accounts separately from its own accounts. Sometimes a real legal entity is created for a large venture. In the oil industry, this would be an exception. The accounting steps are as follows:

In step 1, the venture incurs costs of 100. These are paid directly from the venture bank to

simplify the example.

 In step 2, company A assumes 60% of the costs, and 40% of the costs are charged to company B.

In step 3, company A records its 60% share of the costs in its own books.

 In step 4, company A notifies company B of the costs incurred, and company B records its 40% share of the costs in its books.

In step 5, company A reimburses the venture. Funds are transferred from the company A bank

to the venture bank and the partner accounts are cleared.

In step 6, company B reimburses the venture. Funds are transferred from the company B bank

to the venture bank and the partner accounts are cleared.

In this method, the operator, company A, keeps separate accounting records for activities within the venture and for its own activity. This means more accounting entries are required, but reporting for venture activity and a company’s own activity is clear and simple.

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©SAP AG 2007 eBook- Joint Venture Accounting

Company A

Company

Venture Notes

1. Company A incurs costs running the venture.

2. Company A

calculates the share of costs for partner  A and partner B. 3. Company A

accounts for its own share of costs. 4. Company B

accounts for its own share of costs. 5. Company A reimburses the venture. 6. Company B reimburses the venture. 5 60 60 2 Partner A 60% 40 6 60 5 1 100 Venture Bank 2 40 2 60 100 1 Venture Costs 60 5 3 60 Venture Account 60 5 60 Own Bank 60 60 3 Venture Costs Company B 40 6 4 40 Venture Account 40 6 40 Own Bank 40 40 4 Venture Costs 6 40 40 2 Partner B 40%

Operator and Partner Accounting

Company A operates a joint venture and holds a 60% share. Company B is the only other venture partner. Company A records the venture accounts separately from its own accounts, but as the same company. The accounting steps are as follows:

In step 1, the venture incurs costs of 100. These are paid directly from the venture bank to

simplify the example.

 In step 2, company A assumes 60% of the costs, and 40% of the costs are charged to company B.

In step 3, company A records its 60% share of the costs in its own books.

 In step 4, company A notifies company B of the costs incurred and company B records its 40% share of the costs in its books.

In step 5, company A reimburses the venture. Funds are transferred from the company A bank

to the venture bank and the partner accounts are cleared.

In step 6, company B reimburses the venture. Funds are transferred from the company B bank

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©SAP AG 2007 eBook- Joint Venture Accounting

Expenditure based

Invoice based

Cash based

Joint venture partners are billed for their share of expenditure

using the following types of billing basis:

Billing Basis

Billing basis refers to the point in the procurement cycle at which joint venture partners are charged for their share of expenditure.

When billing is expenditure based, partners are charged as soon as expenditure is incurred, such as when venture materials are received at the warehouse.

When billing is invoice based, partners are charged when the operator receives an invoice for venture services or materials.

When billing is cash based, when the operator pays for services and materials for the venture, partners are charged when funds actually leave the operator’s bank account.

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©SAP AG 2007 eBook- Joint Venture Accounting Venture 100 100 1 Expenditure 100 3 2 100 Vendor  100 3 100 Venture Bank 100 2 1 100 GRNI Accruals       B       i       l       l     a       b       l     e       N     o      n    -      B       i       l       l     a       b       l     e Notes 1. Expenditure is incurred in month 1. 2. An invoice is received in month 2. 3. An invoice is paid in month 3. JV Billing Month 1 100 Total 100 Expenditure JV Billing Month 2 0 Total 0 Expenditure JV Billing Month 3 0 Total 0 Expenditure

Billing Basis: Expenditure Based

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©SAP AG 2007 eBook- Joint Venture Accounting

Venture 100 100 1 Expenditure 100 3 2 100 Vendor  100 3 100 Venture Bank 100 2 1 100 GRNI Accruals       B       i       l       l     a       b       l     e       N     o      n    -      B       i       l       l     a       b       l     e Notes 1. Expenditure is incurred in month 1. 2. An invoice is received in month 2. 3. An invoice is paid in Month 3. JV Billing Month 1 0 Total -100 GRNI Accruals 100 Expenditure JV Billing Month 2 100 Total 0 GRNI Accruals 100 Expenditure JV Billing Month 3 0 Total 0 GRNI Accruals 0 Expenditure

Billing Basis: Invoice Based

Invoice based billings are calculated using transactions from expenditure accounts and from accruals accounts, such as the goods received, not invoiced (GRNI) account.

The balance in the accruals accounts offsets the value of expenditure, resulting in a zero billing until the accrual is reversed by an incoming invoice.

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©SAP AG 2007 eBook- Joint Venture Accounting Venture 100 100 1 Expenditure 100 3 2 100 Vendor  100 3 100 Venture Bank 100 2 1 100 GRNI Accruals       B       i       l       l     a       b       l     e       N     o      n    -      B       i       l       l     a       b       l     e Notes 1. Expenditure incurred in month 1. 2. Invoice received in month 2. 3. Invoice paid in month 3. JV Billing Month 1 0 Total 0 Vendor  -100 GRNI Accruals 100 Expenditure JV Billing Month 2 0 Total -100 Vendor  0 GRNI Accruals 100 Expenditure JV Billing Month 3 100 Total 0 Vendor  0 GRNI Accruals 100 Expenditure

Billing Basis: Cash Based

Invoice based billings are calculated using transactions from expenditure accounts, from accruals accounts, and from payable accounts.

The balance in the accruals and the payables accounts offsets the value of expenditure, resulting in a zero billing until the accrual balance is reversed by an incoming invoice and the payable balance is reversed by an outgoing payment.

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©SAP AG 2007 eBook- Joint Venture Accounting

 You are now able to:

Define joint venture accounting concepts

Explain the accounting principles behind

SAP JVA

Unit 1.1 Summary

You are now able to:

Define joint venture accounting concepts

References

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