The joint venture that is one line, and the year its losses stop appearing

Near the bottom of the consolidated statement of profit and loss, between the finance cost and the tax line, sits a row reading "share of profit/(loss) of joint ventures and associates: (60)". Sixty crore, in brackets, at a company that reported ₹460 crore. In a hundred-page annual report it is the least conspicuous number on the page. Behind it is a business with ₹1,400 crore of revenue, ₹1,800 crore of borrowings and a plant that has never run at the utilisation the project report assumed — and one page of the notes where all of that is set out for anybody who turns to it. Everything else about it is absent from the two statements everybody reads. That absence is not a disclosure failure. It is what the equity method is.

Think of it like this

The restaurant you and a friend own together

You and a friend put ₹40 lakh each into a restaurant and decide everything jointly — the menu, the rent, the hiring. Your own household book records one thing: what your half is now worth, adjusted each year for your half of what it made or lost. The restaurant's ₹1.2 crore bank loan is not in your book. Its takings are not in your income and its rent is not in your expenses. Ask what you are worth and the book answers honestly. Ask what you are exposed to and the answer is somewhere else entirely — in the guarantee you signed for that loan, which is on no page of the household book at all.

In the market

That is the equity method, and the guarantee is the contingent liabilities note. The two documents are both truthful and only one of them is usually read. A reader who wants the second question answered has to go and find the page where it is answered, because nothing in the profit statement will point there.

What the single line is, exactly

It starts at cost and then moves. The investment is recognised at what was paid, and thereafter the carrying amount rises by your share of the venture's profit, falls by your share of its loss, and falls again by any dividend received from it. A dividend from a joint venture is therefore not income; the income was recognised when the venture earned it, and the dividend is the recovery of part of what is already on your balance sheet.
It is a post-tax figure. Your share is of the venture's profit after the venture has paid its own tax. So wherever the line sits relative to "profit before tax" in a particular company's format, an effective tax rate computed by dividing the tax expense on the face of the statement by the profit above it is distorted by this line. Check where it sits before dividing — the effective tax rate you get otherwise is an artefact of the layout.
It is below EBITDA. Operating profit, EBITDA and every operating margin exclude the venture entirely. A group's price-to-earnings ratio can therefore be supported by profit that its EV/EBITDA multiple never sees. The conventional repair is to remove the value of the stake from enterprise value, so that the numerator stops paying for earnings the denominator does not contain.
It contains no revenue, and that cuts differently for different margins. Operating margin and EBITDA margin leave the venture out of the numerator and the denominator both, so neither is touched by it. Net margin is another matter: the share of profit sits inside profit for the year while none of the venture's revenue is in the denominator, so a large profitable venture flatters net margin and a loss-making one depresses it, on a revenue base that never contained either. Two groups with identical economics and different structures are not comparable on net margin at all.

The floor at zero, and the loss that disappears

The mechanism nobody expects sits in Ind AS 28. Losses are recognised against the carrying amount until that amount reaches zero, and then they stop. Further losses are recognised only to the extent the investor has other long-term interests in the venture — a long-term loan to it, for instance — or has a legal or constructive obligation, such as a commitment to fund it. Absent those, a venture can go on losing money indefinitely and the investor's profit statement will stop mentioning it. Two qualifications stop this being a mechanical countdown. The amount to be exhausted is not the equity investment alone — it includes other long-term interests that in substance form part of the net investment, so a large shareholder loan lengthens the runway rather than sitting outside it. And the investment is tested for impairment while it still has a carrying amount, so a venture whose recoverable amount has collapsed can reach zero years earlier than the share-of-loss arithmetic alone would take it.

Worked example

A joint venture losing ₹120 crore a year, and the year it left the accounts

Company A, holder of 50% of joint venture J

J, in fullOnly the loss leaves any trace in A's accounts, and only as a half-share on one line. The revenue, the EBITDA and the ₹1,800 crore of borrowings appear nowhere at allRevenue ₹1,400 cr, EBITDA ₹300 cr, loss after tax ₹120 cr, borrowings ₹1,800 cr

What A put inThe opening carrying amount from which everything below is deducted₹500 cr, carried as the investment in J

Each year of the lossOne line off A's reported profit, and ₹60 crore off the carrying amount. Nothing else in A's accounts registers it50% of ₹120 cr = ₹60 cr

After eight such years₹500 crore less eight years at ₹60 croreCarrying amount ₹20 cr

Year nineThe carrying amount cannot go below zero. The unrecognised ₹40 crore is disclosed in the notes and is not in the profit statementOnly ₹20 cr of the ₹60 cr share is recognised

Year ten onwardsJ still loses ₹120 crore a year, and nothing at all is charged for it, for the arithmetic reason that there is nothing left to write down. Mind the size of the step: against year nine, in which ₹20 crore was recognised, reported profit is only ₹20 crore higher. It is ₹60 crore higher than year eight and every year before it. The whole ₹60 crore arrives in a single year only where the carrying amount happens to run out exactly at a year endNothing at all

What A is still exposed to, on top of the equityIn the contingent liabilities note. The floor at zero does not touch it: once a payment under the guarantee becomes probable it stops being contingent and becomes a provision, recognised in full whatever the carrying amount isA guarantee over ₹900 cr of J's borrowings

A's leverage as reportedBoth figures A's own, and both correctly stated₹2,400 cr of borrowings against ₹1,100 cr of EBITDA — 2.2 times

A's leverage including its half of JHalf of J's borrowings and half of its EBITDA added in. This is not an accounting treatment; it is an arithmetic sanity check. Which way it moves depends on whether the venture carries more debt against its own EBITDA than the parent does — J is at six times against A's 2.2, so here it worsens the ratio. A joint venture running less leverage than its parent would improve it, and the reason the correction usually goes the unwelcome way is that the capital-heavy project vehicles are the ones most often structured this way in the first place₹3,300 cr against ₹1,250 cr — 2.6 times

The equity method conceals nothing: every figure above is in the same annual report, on a page of notes a hundred pages from the profit line. What it does is remove a loss-making business from the two statements that get read, and then — once the carrying amount is exhausted — remove it from those statements entirely, at which point reported profit stands ₹60 crore above every year in which the full share was charged — reached in one step or in two, depending on where inside a year the carrying amount ran out — and stays there, with nothing whatever having got better. The guarantee is the part to hold on to. The floor at zero limits what the accounting will recognise. It limits nothing at all about what the company owes.

Where "it is a joint venture, so the debt is off the balance sheet" is simply wrong

Ind AS 111 splits joint arrangements in two, by what the parties actually hold rather than by what the arrangement is called. Where the parties have rights to the net assets of a separate vehicle, it is a joint venture and the equity method applies — the case worked above. Where instead each party has direct rights to the assets and direct obligations for the liabilities, it is a joint operation, and each party recognises its own share of the assets, the liabilities, the revenue and the expenses, line by line. Unincorporated arrangements commonly fall on this side, and jointly held oil and gas exploration blocks are the standard Indian example. So two companies with economically similar fifty-per-cent interests can show completely different balance sheets, and neither is wrong. One qualification on the wording: this is not the old proportionate consolidation, which Ind AS 111 removed as an option for joint ventures. It is recognition of the party's own assets and its own obligations, which merely resembles a proportion on the face of the accounts. The basis of consolidation note states which of the two applies, in a paragraph rather than a table.

Loading interactive demo…

Push the debt share up to where a proportionate share of a joint venture's borrowings would put the group, and watch what an unchanged operating return does to return on equity. The point is that the effect is not linear, which is why the omitted half of the leverage matters more than its size suggests.

The four questions the notes will answer

Twenty minutes on a company with a material joint venture

1
Which arrangement is it, and on what basis?
The basis of consolidation note says joint venture or joint operation and gives the reasoning. If the answer is joint operation, stop — the share of every line is already in the accounts you are reading and there is nothing missing.
2
What are the venture's own figures?
The disclosure standard requires summarised financial information for each material joint venture and associate — revenue, profit or loss, and current and non-current assets and liabilities — and for a joint venture it goes further, requiring cash and financial liabilities to be shown separately as well. This is the table that turns one line back into a business.
3
What has the investor committed, guaranteed or not recognised?
Three disclosures sit together: commitments relating to the venture, any corporate guarantee or other contingent liability in respect of it, and the investor's unrecognised share of losses. The third is the one that tells you the floor at zero has been reached — and it is a number, so it can be added back for your own purposes.
4
Has cash ever come out of it?
Dividends received from joint ventures and associates appear in the cash flow statement. Add five years of that line and compare it with five years of the share of profit. A share of profit that has never been accompanied by a dividend is a claim on value retained inside somebody else's balance sheet, and the next lesson but one is about what it takes to move it.

Check yourself

A company reports profit of ₹520 crore against ₹460 crore last year. The whole improvement is that its 50%-owned joint venture, which lost ₹120 crore in each of the two years, stopped appearing in the profit statement. Why did it stop?

Simple bhasha mein

Ek line, jiske peeche ₹1,800 crore ka karza

A ke paas joint venture J ka 50%. J: revenue ₹1,400 crore, karza ₹1,800 crore, nuksaan ₹120 crore saal ka. A ki kitaab mein iska nishaan? Sirf ek line — 50% ka ₹60 crore nuksaan. Revenue nahi, karza nahi, interest nahi. A ne J mein ₹500 crore lagaye the; aath saal mein 8 × ₹60 = ₹480 crore kat gaya, bacha ₹20 crore. Nauve saal ₹60 crore ka hissa banta hai par sirf ₹20 crore likha ja sakta hai — carrying amount zero se neeche nahi jaati. Dasve saal se kuch bhi nahi. J waise hi ₹120 crore doob raha hai, par A ki kitaab mein ek rupya bhi charge nahi. Step ka size dhyaan se: nauve saal se sirf ₹20 crore zyada, aur aathve saal se ₹60 crore zyada. Par J ke ₹900 crore ke karze ki guarantee A ne di hai, aur woh contingent liability note mein zinda hai. Nuksaan gaayab hua, khatra nahi.

What to remember

A joint venture or associate contributes one post-tax line of profit and one line of carrying amount, and no revenue, assets or borrowings at all.
That line sits below EBITDA, so a group's earnings multiple can be supported by profit its EV/EBITDA multiple never sees.
Losses stop being recognised once the carrying amount reaches zero, unless there are other long-term interests or an obligation — reported profit then improves with nothing having changed.
Guarantees and funding commitments are unaffected by that floor and live in the contingent liabilities note.
A joint operation is the opposite case: each party recognises its own share of every line, so identical economics can produce very different balance sheets.

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