Understanding Joint Arrangements in Business Collaboration

Amid today’s increasingly collaborative business landscape, companies are, more than ever, entering into various forms of partnerships to accelerate growth and strengthen competitiveness. However, not all collaborations share the same characteristics, particularly from an accounting and financial reporting perspective. In this context, the concept of joint arrangements becomes highly relevant, as it provides a structured way to classify and understand the substance of business collaborations.

What Is a Joint Arrangements?

A joint arrangement refers to an arrangement in which two or more parties share joint control over an economic activity. In other words, joint control means that no single party can unilaterally make strategic decisions. Instead, all key decisions require the unanimous consent of the parties involved.

Therefore, this concept plays a critical role not only in describing the legal form of a collaboration but also in capturing how rights and obligations are distributed among the parties. Put differently, a joint arrangement reflects the underlying economic substance of a business partnership rather than merely its legal structure.

Two Main Forms: Joint Operation and Joint Venture

Broadly speaking, joint arrangements fall into two main categories, joint operations and joint ventures. The distinction between the two lies in the nature of the rights and obligations held by the parties involved.

Joint Operation

In a joint operation, the parties hold direct rights to the assets and direct obligations for the liabilities related to the arrangement. As a result, each party:

• Uses assets directly (such as facilities, equipment, or other resources)
• Assumes a share of the liabilities incurred
• Actively participates in the operational activities

For instance, two companies collaborating on a construction project without forming a separate legal entity. Each party contributes and utilizes its own resources while sharing access to project assets. Consequently, in a joint operation, collaboration occurs at the operational level rather than through ownership of a separate entity.

Joint Venture

In contrast, within a joint venture, the parties do not hold direct rights to specific assets or obligations for specific liabilities. Instead, they hold rights to the net assets of a jointly controlled entity. Typically, the parties establish a separate legal entity to carry out the business activities. This entity then:

• Owns the assets
• Bears the liabilities
• Manages day-to-day operations

Meanwhile, the participating parties act as investors, holding an interest in the entity.

For example, two companies may establish a jointly owned company to develop a new product. In this case, the newly formed entity conducts all operational activities, while the parties receive returns based on their ownership interests. Thus, in a joint venture, collaboration takes place at the investment level rather than through direct operational involvement.

Also Read: Merger vs Acquisition: A Practical Guide for Growing Companies

Conflict of Interest Risks in Joint Arrangements

In practice, joint arrangements often face conflicts of interest among cooperating parties. Moreover, differences in business objectives, strategies, and priorities may create tensions during decision-making processes. Typically, conflicts of interest arise when parties hold balanced influence and comparable economic interests. Consequently, these conditions may trigger deadlocks in determining strategic corporate policies.

A deadlock occurs when parties fail to reach agreement on critical corporate matters. As a result, this situation may disrupt operations and threaten the continuity of the joint arrangement. Therefore, parties should establish conflict resolution mechanisms from the beginning of the arrangement. Commonly, organizations apply several approaches, including the following:

• Mediation as an Initial Dispute Resolution Mechanism
  First, parties may adopt mediation before pursuing arbitration or litigation processes. Accordingly, this approach helps maintain cooperative business relationships and improves resolution efficiency.
• Implementation of Specific Clauses as an Exit Strategy
  Furthermore, clauses such as shotgun clauses may resolve deadlocks in a decisive manner. Under this mechanism, one party offers its share price to the other party. Subsequently, the other party must choose either to purchase or sell at that offered price.
• Leadership Rotation Within the Organizational Structure
  Additionally, periodic rotation of directors or commissioners may preserve balanced authority among the parties. At the same time, this measure reduces dominance and minimizes potential conflicts of interest.
• Appointment of an Independent Third Party
  In certain situations, parties may appoint an independent third party to determine strategic decisions. Therefore, this approach supports resolution when parties cannot achieve mutual agreement independently.

Through these mechanisms, parties may manage conflicts of interest and deadlock risks more effectively. Ultimately, these measures support stability and preserve the primary objectives of the joint arrangement.

The Role of Consultants in Joint Arrangement Executions

At the initial stage, the accounting service firm may assist in assessing the structure of the collaboration to determine the appropriate classification under IFRS 11 or Indonesian PSAK 66, specifically whether the arrangement should be treated as a joint operation or a joint venture. This classification is crucial because it affects the accounting treatment, recognition of assets and liabilities, and the presentation of financial statements by each participating party.

Operationally, the accounting service firm may help establish the financial and administrative framework of the joint arrangement. This includes developing standard operating procedures (SOPs), designing shared chart of accounts, setting authorization mechanisms, and creating systems for cost allocation and revenue sharing among the parties. On a day-to-day basis, the firm may also handle bookkeeping, transaction reconciliation, cash flow monitoring, and the calculation of profit-sharing or capital contribution arrangements in accordance with the joint arrangement agreement.

Also Read: The Importance of Segregation of Duties in a Company’s Financial Functions

From a reporting perspective, the accounting service firm may support the preparation of periodic financial reports, project-based financial statements, and audit working papers required by external auditors or stakeholders. Tax compliance is also a significant area of involvement, including assistance with VAT, withholding taxes, corporate income tax implications, and the tax treatment of intercompany or shared transactions within the arrangement.

In more complex arrangements, the accounting service firm may further provide financial projections, feasibility studies, performance monitoring dashboards, and internal control assessments to reduce operational and financial risks. Therefore, the operational involvement of an accounting service firm in a joint arrangement extends beyond bookkeeping functions and contributes to stronger governance, accountability, and sustainability of the collaborative venture.

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