IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an arrangement. Joint control involves the contractually agreed sharing of control and arrangements subject to joint control are classified as either a joint venture (representing a share of net assets and equity accounted) or a joint operation (representing rights to assets and obligations for liabilities, accounted for accordingly).

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : The Board added the joint ventures project to its agenda as part of the project to reduce differences between International Financial Reporting Standards (IFRSs) and US generally accepted accounting principles (GAAP). The requirements of IFRS 11 were not deliberated by the US Financial Accounting Standards Board
(FASB).

The Board focused its deliberations on enhancing the faithful representation of joint arrangements that an entity provides in its financial statements, by establishing a principle-based approach to accounting for joint arrangements, and by requiring enhanced disclosures. Even though the Board focused its efforts on improving the reporting of joint arrangements, the result is that the requirements of the IFRS achieve closer convergence with US GAAP than did IAS 31 Interests in Joint Ventures, which IFRS 11 supersedes.

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.

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : The problem with basing different accounting requirements solely on the existence of an entity, combined with the choice of accounting treatment for jointly controlled entities, was that some arrangements that gave the parties similar rights and obligations were accounted for differently and, conversely,arrangements that gave the parties different rights and obligations were accounted for similarly. The Board’s policy is to exclude options in accounting treatment from accounting standards whenever possible. Such options can lead to similar transactions being accounted for in different ways and, therefore, can impair comparability.

In the Board’s view, the accounting for joint arrangements should reflect the rights and obligations that the parties have as a result of their interests in the arrangements, regardless of those arrangements’ structure or legal form. This is the principle that IFRS 11 establishes for parties to a joint arrangement when
accounting for their interests in the arrangements. However, the Board acknowledges that sometimes the structure or the legal form of the joint arrangements is decisive in determining the parties’ rights and obligations arising from the arrangements and, consequently, in determining the classification of the joint arrangements.

Entities applying IAS 31 were required to choose the same accounting treatment (ie proportionate consolidation or equity method) when accounting for all of their interests in jointly controlled entities. Applying the same accounting treatment to all the interests that an entity has in different jointly controlled
entities might not always lead to the faithful representation of each of those interests. For example, an entity whose policy was to account for all of its interests in jointly controlled entities using proportionate consolidation might have recognised assets and liabilities proportionately even though this did not
faithfully represent the entity’s rights and obligations in the assets and liabilities of particular joint arrangements. Conversely, an entity might have accounted for all of its interests in jointly controlled entities using the equity method, when the recognition of the entity’s rights and obligations in particular joint arrangements would instead have led to the recognition of assets and liabilities.

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : The IFRS should be applied by all entities that are a party to a joint arrangement. The IFRS does not change the two essential characteristics that IAS 31 required arrangements to have in order to be deemed ‘joint ventures’, ie that a contractual arrangement that binds the parties to the arrangement exists, and that the contractual arrangement establishes that two or more of those parties have joint control of the arrangement.

The Board believes that the new definition of control and the application requirements to assess control in IFRS 10 Consolidated Financial Statements will assist entities in determining whether an arrangement is controlled or jointly controlled, and in that respect it might cause entities to reconsider their previous assessment of their relationship with the investee. Despite the changes that these reassessments might cause, the Board believes that arrangements that were within the scope of IAS 31 would generally also be within the scope of IFRS 11.

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : The Board reconsidered the scope exception of IAS 31 that had also been
proposed in ED 9. The Board concluded that the scope exception in ED 9 for interests in joint ventures held by venture capital organisations, or mutual funds, unit trusts and similar entities, including investment-linked insurance funds, that are measured at fair value through profit or loss in accordance with IFRS 9 Financial Instruments, is more appropriately characterised as a measurement exemption, not as a scope exception.

The Board observed that when venture capital organisations, or mutual funds, unit trusts and similar entities, including investment-linked insurance funds, conclude that they have an interest in a joint arrangement, this is because the arrangement has the characteristics of a joint arrangement as specified in
IFRS 11 (ie a contractual arrangement exists that establishes that two or more parties have joint control of the arrangement).

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : In ED 9, the proposed definition of ‘joint arrangement’ required ‘shared
decision-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 partie 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.

In response to concerns expressed by some respondents who pointed out that, unlike IAS 31, ED 9 did not include the term ‘investors in a joint arrangement’, the Board clarified during its redeliberation of ED 9 that not all the parties to a joint arrangement need to have joint control for the arrangement to be a joint arrangement. Indeed, some of the parties to a joint arrangement can have joint control whereas others, although able to participate, do not have joint control of the arrangement. The Board decided to use the terms ‘joint operators’ to designate parties with joint control of a ‘joint operation’ and ‘joint venturers’ to designate parties with joint control of a ‘joint venture’

IFRS 11 Joint Arrangements

IFRS 11 Joint Arrangements : The classification of joint arrangements into two types was considered by the Board in its redeliberation of the exposure draft. ED 9 proposed to classify joint arrangements into three types—‘joint operations’, ‘joint assets’ and ‘joint ventures’. The Board observed that in some instances it might be difficult to assess whether an arrangement is a ‘joint operation’ or a ‘joint asset’. This is because elements from both types of joint arrangement are sometimes present (in many arrangements joint assets are also jointly operated, and therefore such arrangements could be viewed as a ‘joint asset’ or as a ‘joint operation’). Additionally, both types of joint arrangement result in the same accounting outcome (ie recognition of assets and liabilities and corresponding revenues and expenses). For these reasons, the Board decided to merge ‘joint operations’ and ‘joint assets’ into a single type of joint arrangement called ‘joint operation’. This decision simplifies the IFRS by aligning the two types of joint arrangement presented by the IFRS (ie ‘joint operations’ and ‘joint ventures’) with the two possible accounting outcomes (ie recognition of assets, liabilities, revenues and expenses, or recognition of an investment accounted for using the equity
method).

IFRS 11 Joint Arrangements

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