Accounting for Joint Ventures under IFRS

Very Hard Intercorporate Investments Joint Ventures

XYZ Ltd. and ABC Inc. have formed a joint venture called Innovations LLC, where both companies hold a 50% equity stake. XYZ Ltd. has a fiscal year ending December 31 and reports financial statements using IFRS. As part of the joint venture, Innovations LLC engages in research and development for smart technology, generating significant tax credits and deferred income taxes.

In the recent annual report, XYZ Ltd. is required to account for its investment in Innovations LLC. The joint venture has generated an operating profit of $4 million for the year. XYZ Ltd. intends to recognize its share of the profits on its income statement while also factoring in the impact of the tax credits and deferred tax liabilities arising from Innovations LLC's activities.

Given this context, what is the most accurate method XYZ Ltd. should use to report the financial performance of its investment in Innovations LLC on its consolidated financial statements?

Equity method, accounting for the share of net income but not accounting for tax credits.

Proportional consolidation, including line-by-line consolidation of Innovations LLC's income and expenses.

Equity method, including both the share of net income and the tax credits as income.

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