ABSTRACT
In the light of developing commercial applications, the current financial reporting standards for subsidiaries and joint agreements have been reviewed and a number of innovations have been made in those existent standards. In order to constitute parallelism with the international standards, same innovations have been made in Turkey and similar standards have been reached. With this study, under financial reporting standards in force, the issue of consolidating the financial statements of the partnerships established as joint venture will be inspected by evaluating the joint venture agreements, which have not regulated comprehensively according to Turkish Laws yet, in accordance with the legislation in force. In this regard, first, briefly the concept of the joint venture and, secondly the scope of application of the financial reporting standards, and finally, the issues of consolidating the partnerships established as a joint venture will be evaluated.
I. INTRODUCTION
In consideration of the global economic understanding and the developing and varying approaches and expectations in the financial markets and corporations’ economic growth strategies, a number of changes in financial reporting standards, which commercial partnerships are subject to, have occurred. In this context, accurate and reliable presentation of the financial reports of the local or cosmopolite structures that have emerged as a result of companies’ growth strategies such as corporate group, holding or joint venture becomes highly important. Especially, in consideration of the partnerships arising from the joint venture agreements, the standards which the shareholders wanting to consolidate the partnership are subject to, and the requirements of these standards have great importance in terms of the shareholders. The financial reporting standards to be preferred in respect to joint venture have the characteristics of the nature of structure and relations between the shareholders. The full authority of consolidation of a partnership, in accordance with the financial reporting standards which show financial statements of a company, associated with multiple subsidiaries, as owned by a single company on the basis of certain principles requires the full control authority over a partnership of a single partner according to the relevant standard. In this regard, while the method of consolidation to be implemented differs according to the respective financial reporting standard, the authority to make important decisions in financial matters in the management of partnerships such as joint venture, in other words the control of the partnership, is also evaluated within this scope. In this respect,the consolidation of the financial statements of the partnerships to be established by joint venture agreements will be inspected, after analyzing the joint venture agreements in terms of Turkish Law.
II. JOINT VENTURE AGREEMENTS UNDER TURKISH LAW
In joint ventures, which has become an important investment method today, more than one shareholder convened under a joint venture or a shareholders agreement can join their partnerships under the same roof of a legal entity, while they are also able to create a joint structure by only sustaining the contractual relationship without establishing any legal entity. In this context, pursuant to the “Trading Companies” provision of the Turkish Commercial Code (TCC), joint venture companies can be established as collective, commandite, joint stock, limited or cooperative companies. They can also be established in accordance with the contract of association unless they are listed in the TCC under any company type and registered in and announced by the registry of commerce pursuant to the “Unincorporated Partnership Agreement” provision of the Turkish Code of Obligations (TCO). Furthermore, an unincorporated or commercial partnership established as a joint venture can be established as a partnership through which its shareholders may permanently engage in any activity, while it can be established for a specific period of time or in a common purpose to be performed.
Due to the both the facilities brought by the TCC and providing the right to be able to claim against the third parties by being registered and announced, it is often seen that in practice these partnerships are merging under a legal entity. The most frequently preferred structures of those company partnerships that can be established according to the TCC are joint stock companies and limited liability companies.
According to the TCO, the unincorporated company agreement is defined as an agreement which two or more parties combine their efforts and assets to reach a common purpose. A partnership which can be defined as an ordinary unincorporated partnership must not contain any distinguishing features of the partnerships regulated under the TCC. Since it is not one of the partnership forms regulated under the TCC, the ordinary unincorporated partnership cannot be registered in and announced by the registry of commerce, and it cannot have a legal personality either. If a joint venture is going to be limited within the scope of joint venture agreement, which was signed by the shareholders and not going to maintain its existence as an independent legal entity which can claim rights against the third parties, the relationships among the shareholders will be subject to the provisions of the TCO instead of the TCC. However, another important aspect regarding the partnership structure in the joint venture is the demonstration of respective companies’ financial and activity status by means of a single financial statement, in other words by a consolidated financial statement due to the constitution of a capital relationship between the parent firm and joint venture through the partners’ investment of in-kind or in cash capital. It must be stated that in order to set out consolidated financial statements, of the partners among which have a capital relationship one of them shall be the main partner and the other one shall be the subsidiary partner. Besides, there are different standards prescribed over the regulation of the consolidated financial statements depending on the aspects of both “the partnership interest which is obtained as a result of an investment” and “the controlling of financial and activity policies of the partnership”.
It is also necessary to mention hereby that the concepts of control and dominance, which have a decisive role in the process of consolidation of the financial statements, have been clarified in our legislation for the first time under the provision titled as “Corporate Groups” regulated under the TCC, numbered 6201. With the concept of the “Corporate Groups” which was not regulated in the former TCC, a significant deficiency has been resolved by regulating and clearly defining the concepts such as control and dominance in the new TCC1. However, since a partnership established by a joint venture is not able to constitute a corporate group automatically, the concepts of control and dominance that have the importance in terms of our subject are only addressed within the scope of the consolidation of the financial statements of a partnership established by a joint venture agreement.
III. CONSOLIDATION AND FINANCIAL REPORTING STANDARDS RELATING TO THE CONSOLIDATION
International Financial Reporting Standards (“IFRS”) has been changed by the International Accounting Standards Board (“IASB”) and the consolidation standards including IFRS 10 (Consolidated Financial Statements) and IFRS 11 (Joint Operation) have been published on May 12, 2011 in order to be effective after January 1, 2013. Aiming to constitute parallelism with IFRS, the Accounting Standards Board of Turkey has published a Communique on Turkey’s Financial Report ing Standards Relating to the Consolidated Financial Statements and a Communique on Turkey’s Financial Reporting Standards Relating to the Joint Operations in the Official Gazette, numbered 28098 dated October 28, 2011 in order to be applied for the accounting periods after December 31, 2012.
With regard to the partnerships that can be established pursuant to the TCC or the TCO, the related financial reporting standards are able to provide one shareholder with the authority to audit the partnership financially and to control over the partnership, and also provide the shareholders with these authorities to be executed by all shareholders equally. Within this scope, the management of the partnership will take form with IFRS 10 and IFRS 11 standards which is preferable for the joint venture.
A. IFRS 10 (Consolidated Financial Statements)
IFRS 10 is based on the principle of the consolidation of the partnership single-handedly. In other words, it is based on the principle of single-handed control of the partnership and it embodies the main principles for the application of the control principle by defining the “control” principles in order to constitute a basis for singlehanded control and consolidation of the partnership.
Relevant articles of IFRS 10 states (i) possession of power over the partnership, (ii) gaining right of or receiving the returns, (iii) leading the amounts of the future returns, as the control symptoms2. All the elements mentioned above shall be occurred cumulatively for the existence of the control over the partnership.
As it is seen in the control description on IFRS 10, the standard in question is subject to the relationships of parent partnership and subsidiary partnership. In this context, the results of controlling over subsidiary partnership or association in every sense, management of revenues and ownership of rights upon these revenues automatically arises along with selection of IFRS 10.
As a result the usage of IFRS 10 among the partners gathered from the joint venture, absolute single handedly control right over the joint venture shall be acknowledged for one partner over another partner or partners joining when the abovementioned conditions occur. As mentioned above, the selection of IFRS 10 also gives right about single handedly authorization over the partnership and partnership investments and its operation beside the single handedly decision making over mere financial issues, in other words authorization of full consolidation.
B. IFRS 11 (Joint Operations)
In case the IFRS 10, which empowers one partner with the control over the joint venture, is not preferred, partners may prefer IFRS 11. IFRS 11, differs from IFRS 10 since it is based on the principle of mutual control among the partners.
In accordance with IFRS 11 which is regulating mutual control agreements based on the joint control principle, a joint operation is an agreement where two or more parties have mutual control over it. The features of a joint operation are: (i) the parties are restricted by an agreement which is subject to the same agreement, and (ii) the parties are empowered with joint control by the agreement which is subject to the same agreement3. The joint agreement can be defined as a joint operation, or can also be evaluated as a business partnership or joint venture.
IFRS 11 regulated that the “control”, whose criteria were stated in IFRS 10, is exercised jointly in the business partnership. In this direction, taking decisions unanimously regarding the joint venture will be evaluated as a significant indication of the joint control. With the condition of taking decisions unanimously, it has been aimed to prevent each and every shareholder who has joint control on the joint venture to take decision unilaterally without the others’ consent.
Furthermore, unlike IFRS 10 which allows authority for full consolidation, IFRS 11 adopted the equity method which provides each shareholder with an authority to consolidate according to their proportion of shares. The joint control of the shareholders over the joint venture and activities carried out by the joint venture can be considered as important elements in the preferability of IFRS 11.
IV. CONCLUSION
In the direction of the requirements of improving and varying commercial life, joint venture, which is established by convening two or more partners, is regulated under both the TCC and the TCO. Despite of the fact that certain differences exist in the legislative regulations depending upon the acquirement of legal personality, any financial reporting standard can be chosen for the partnership without considering the applicable regulation. With IFRS 10 and IFRS 11 that have been effectuated with renewal on January 1, 2013, shareholders who convene with a joint venture agreement are able to decide whether the single-handed control or the joint control is valid. The most important issue to be underlined hereby is that choosing a financial reporting standard does not constitute only a decision-making authority related to financial matters. On the contrary, it ensures to one shareholder the assignment of the full control over the joint venture established by a joint venture agreement. In case shareholders prefer to assign the full consolidation, in other words full control to one shareholder, the standard to be applied is IFRS 10, and in other case in which shareholders prefer joint control, in other words the decisions to be taken unanimously, the standard to be applied for the joint venture is IFRS 11.
BIBLIOGRAPHY
“IFRS 10-Consolidated Financial Statements”, http://www.iasplus.com/en/standards/ifrs/ifrs10, Last Access: 06.11.2016
“IFRS 11-Joint Arrangements”, http://www.iasplus.com/en/standards/ifrs/ifrs11, Last Access: 06.11.2016
Yavuz Akbulak, “Yeni Bir Kurum: Şirketler Topluluğu”, ISMMO July-August 2011
FOOTNOTE
1 Yavuz Akbulak, “Yeni Bir Kurum: Şirketler Topluluğu”, ISMMO July-August 2011, p.262.
2 “IFRS 10-Consolidated Financial Statements”, http://www.iasplus.com/en/standards/ifrs/ifrs10, Last Access: 06.11.2016.
3 “IFRS 11-Joint Arrangements”, http://www.iasplus. com/en/standards/ifrs/ifrs11, Last Access: 06.11.2016.
