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BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

Objective

IFRS 11 sets out requirements for the recognition and measurement of an entity’s interest in joint arrangements. The requirements for the disclosure of an entity’s interest in joint arrangements have been included in IFRS 12 Disclosure of Interests in Other Entities (see paragraphs BC52–BC55). IFRS 11 is concerned principally with addressing two aspects of IAS 31 that the Board regarded as impediments to high quality reporting of joint arrangements: first, that the structure of the arrangement was the only determinant of the accounting, and second, that an entity had a choice of accounting treatment for interests in jointly controlled entities

The Board did not reconsider all the requirements in IAS 31. For example, the Board did not reconsider the equity method. Accordingly, this Basis for Conclusions does not discuss requirements of IAS 31 that the Board did not reconsider

The Board published its proposals in an exposure draft, ED 9 Joint Arrangements, in September 2007 with a comment deadline of 11 January 2008. The Board received over 110 comment letters on the exposure draft.

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

The objective of IFRS 11 Joint Arrangements is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements).

To meet this objective, IFRS 11:

  • Defines joint control;
  • Requires determining the type of joint arrangement; and
  • Account for the interest in a joint arrangement based on the type.

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

There are 3 basic elements of joint control:

Contractual arrangement

Please note that here, contractual arrangement must be present – often in writing in the form of contract or some documented decisions of the parties involved. Sometimes law or other statutory mechanisms are sufficient to create contractual arrangement.

Sharing of control

This condition or element is met when all parties, or group of parties, considered collectively, are able to direct the relevant decisions of the arrangement.

In other words – no single party can decide on its own.

Let me give you an example:

Imagine 3 joint venturers: Company Large has a share of 50% in a joint venture, companies Medium and Regular have shares of 25% each. Let’s say that the contract specifies that to make important decisions, at least 75% must agree.

What does that mean?

Well, although Large can veto or block any decisions by Medium and Regular (in other words, Medium and Regular do not have enough voting power to decide against Large’s decision), Large does not have a control, because to make a decision, Large still needs the support of either Medium or Regular.

In this example, collective control is present, but you still need to assess whether Large, Medium and Regular need to decide unanimously (all of them must agree) or not. That would be written in the contract, for example.

Unanimous consent

Unanimous consent means that every party of the joint arrangement must agree with (or at least does not object to) the decision and no one can block it.

In our above example, if the contract says it simply: 75% of voting power is enough to make all decisions, then there is NO unanimous consent, because just 2 parties are sufficient to present (Large and either Medium or Regular).

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

The International Financial Reporting Standards Foundation, or IFRS Foundation, is a nonprofit accounting organization. Its main objectives include the development and promotion of the International Financial Reporting Standards (IFRSs) through the International Accounting Standards Board (IASB), which it oversees.[1][3]

The foundation was formerly named the International Accounting Standards Committee (IASC) Foundation until a renaming on 1 July 2010, and as of 2012 is governed by a board of 22 trustees.

The IFRS Foundation also develops and maintains the IFRS Taxonomy, which is the representation of the IFRSs in eXtensible Business Reporting Language (XBRL), via its XBRL team. The team is supported by the XBRL Advisory Council and the XBRL Quality Review Team, which respectively provide strategic advice and reviews developed taxonomies.Additionally, in 2012 the foundation issued a call for industry participants in a project to develop “common industry practice concepts” for the taxonomy.

XBRL provides a “common, electronic format for business and financial reporting”, which will contribute to the global convergence of accounting standards towards IFRS; the director of XBRL activities at the IFRS Foundation, Olivier Servais, hopes that “everybody will be using it” in future.As of March 2012, the IFRS Taxonomies have “considerably fewer” tags than GAAP taxonomies, and the Security and Exchange Commission has not approved the IFRS Taxonomy for use in XBRL filings in the United States.

BASIS FOR CONCLUSIONS ON IFRS 11 OBJECTIVE

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