Joint Venture – Definition

Definition of joint venture (business): A formal partnership between two independent organisations, which sees the partners share resources to achieve a common objective.

Definition of joint venture (accounting): An arrangement of which two or more parties have joint control and rights to the net assets of the arrangement. [Per IFRS 11].

What is a joint venture?

Joint ventures are surprisingly common in the business, but they’re difficult to pin down to a narrow definition.

Joint venture can refer to quite a loose arrangement between two companies:

  • An agreement to combine research & development efforts and share the resulting intellectual property
  • A marketing or promotional campaign featuring two non-competing brands (such as fast food and a new film release) to save on advertising spend.

A joint venture can also refer to an incorporated legal entity, which is owned by both joint venture partners and operates like a subsidiary of their organisation.

Ownership of a joint venture entity doesn’t have to be 50:50 or limited to just two partners. It could be any proportion which reflects the different levels of contribution.

How do joint ventures work?

Partners typically sign an extensive joint venture agreement before creating a JV, which defines clear parameters for how the two organisations will interact. This could include:

  • The equity stake of each partner
  • The balance of executive control (usually measured in board seats)
  • The purpose of the joint venture
  • What ongoing support or resources each partner will provide
  • Which partner will be responsible for accounting and administrative support.
  • What should happen in contingency scenarios, such as the JV requiring further cash, or if one of the partners wants to end the agreement?

Accounting for joint ventures is a complex area of financial accounting, and therefore you’ll often find that the best financial accounting books devote an entire chapter to joint ventures and joint operations.

Real examples of joint ventures

Here are some real life examples of past or present joint ventures:

Nissan & Renault have a ‘strategic alliance’ which involves ownership stakes in each other, and the pooling of resources to achieve corporate goals such as developing an electric vehicle platform.

Subaru & Toyota worked together to create a single vehicle which was simultaneously sold as the Toyota GT86 and the Subaru BRZ.

Vivergo Fuels was a UK bioethanol producer, formed by BP, Associated British Foods and DuPont.

Sony and Ericson’ developed mobile handset technology together, before Sony acquired Ericson outright.

Uber and Volvo operate a joint venture to develop self-driving vehicles. The companies contributing a combined $300m, and Uber committing to the purchase of 24,000 cars exclusively from Volvo.

BritBox – a streaming service launched in 2019 in which several UK terrestrial TV broadcasters have opened up their back catalogue to create a more compelling subscription offering. The BBC and ITV have an equity stake in the entity, which has also struck a further deal with Channel4.

Joint venture definition
The definition of joint venture is an accounting and business concept

How is the phrase joint venture used in a sentence?

“The joint venture is presented in these financial statements using the proportional consolidation method. The assets and liabilities of the joint venture are shown in proportion to the size of the stake the group holds in the joint venture.”

“JV partner A will manage the general ledger, budgeting and GAAP accounting for the venture.”

How does the definition of financial statements relate to investing?

Joint ventures are fluid relationships, which you will see announced in press releases or news reports.

Joint ventures generally create value, because they allow a company to leverage the resources and capital of two companies to achieve an objective which may have otherwise been unattainable. However, market reaction to joint venture announcements is not always positive, as this paper shows.

Leave a Reply

Your email address will not be published. Required fields are marked *