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Basis for conclusions on IFRS types of joint arrangement

Basis for conclusions on  IFRS types of joint arrangement

Basis for conclusions on  IFRS types of joint arrangement

Joint arrangements

The Board decided to use the term ‘joint arrangement’, rather than ‘joint venture’, to describe arrangements that are subject to the requirements of the IFRS. As noted in paragraph BC13, the IFRS does not change the two essential characteristics that IAS 31 required for arrangements to be ‘joint ventures’: a contractual arrangement that binds the parties to the arrangement exists, and the contractual arrangement establishes that two or more of those parties have joint control of the arrangement.

Joint control

In ED 9, the proposed definition of ‘joint arrangement’ required ‘shareddecision-making’ by all the parties to the arrangement. Some respondents questioned how ‘shared decision-making’ was intended to operate and how it differed from ‘joint control’. The Board introduced the term ‘shared decision-making’ in the exposure draft instead of ‘joint control’ because control was defined in IAS 27 Consolidated and Separate Financial Statements in the context of having power over the financial and operating policies of an entity.1 During its redeliberation of ED 9, the Board concluded that in joint arrangements, it is the activity undertaken by the parties that is the matter over which the parties share control or share decision-making, regardless of whether the activity is conducted in a separate entity. Consequently, the Board concluded that ‘joint control’ is a term that expresses better than ‘shared decision-making’ that the control of the activity that is the subject matter of the arrangement is shared among the parties with joint control of the arrangement.

Basis for conclusions on  IFRS types of joint arrangement

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 types of joint arrangement

There are 2 types of joint arrangements:

  • Joint ventureIn a joint venture, the parties having joint control have rights to the net assets of the arrangement. These parties are called “joint venturers”.
  • Joint operationIn a joint operation, the parties having joint control have rights to the assets and obligations for the liabilities relating to the arrangement. These parties are called “joint operators”.

Basis for conclusions on  IFRS types of joint arrangement

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.

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