IFRS 11 - Joint Arrangements (detailed review)

Monday, May 19, 2014 Print Email

Objective

This standard defines joint control, along with the guidelines for the identification of type of joint arrangement in which entity is involved. It also prescribes the accounting principles which are applicable when an entity has interest in jointly controlled arrangements. This standard classifies the joint arrangements on the basis of rights and obligations.

Scope

The requirements of this standard are applicable to entities which have interest in joint arrangements

Joint Arrangement

The arrangements which are subject to joint control of two or more parties are termed as joint arrangements. These are established in order to share the risk and costs, and these have the following features:

  • These are contractual agreements i.e. arise as a result of a contract
  • The involvement of two or more parties

A joint arrangement may be a joint operation or a joint venture

Joint Control

It is contractually agreed sharing of control by two or more parties which requires the independent consent of each party sharing control when decisions about the relevant core activities are made.

  • In joint arrangements, no single party can control the joint arrangement independently and a party sharing joint control can prevent any of the other parties from controlling the arrangement on individual basis.
  • In some certain situations, the terms of the contract relating to the decision making process are agreed upon by the parties which implicitly leads to joint control.

Example 1

A joint arrangement has three parties in which A owns 50% voting rights, while B owns 30% and C owns 20% voting rights in the arrangement. The terms of the contract among the parties A, B and C state that at minimum 75% of the voting rights are needed to exercise the control over the arrangement.

In this case, although A can obstruct the decision making process, but it cannot exercise control over the arrangement. It requires the consent of B because the provisions of contract specify that at minimum 75% voting rights are needed to control over the arrangement. This reflects that both A and B jointly control the arrangement as no individual party can take decision without the consent of the other party

Example 2

An arrangement is established by two parties and each party owns 50% voting rights of the arrangement and the terms of the contract require that at minimum 51% voting rights are needed to exercise the control over the arrangement.

In this case, it is implicit in the contract terms that both parties jointly control the arrangement because no party can exercise the control over the arrangement on individual basis without the consent of the other party.

However, in some situations, the contractual terms agreed upon by the parties to the joint arrangement need a minimum percentage of the voting rights to exercise the control over the arrangement. If that required minimum percentage of the voting rights can only be obtained by amalgamation of the voting rights of more than one parties acting together, in such circumstances the terms of the contract should specify that which combination of investors are needed to agree independently to exercise the control over the arrangement.

Example

A joint arrangement is established by three parties in which A owns 50% voting rights while B and C each own 25% voting rights of that arrangement. The terms of the contract among A, B and C state that a minimum of 75% voting rights are needed to exercise the control over the arrangement.

In this case, although A can obstruct the decision making process but it cannot control the arrangement because it needs the consent of either B or C. In such a situationthe terms of the contract among the parties should specify that which combination or group of parties is needed to independently exercise the control over the arrangement, i.e. either (A & B) or (A & C).

Types of Joint Arrangement

The entity is required to identify the types of joint arrangement in which it is involved. This standard classifies the joint arrangements on the basis of rights and obligations relating to the parties to joint arrangement as follows:

Joint Operation

The joint arrangement in which parties to the joint arrangement have the direct right to the assets and liabilities of that joint arrangement, is termed as joint operation and the parties to the joint operation are called as joint operators.

Joint Venture

The joint arrangement in which parties to the joint arrangement have the right to the net assets of that joint arrangement, is termed as joint venture and the parties to the joint venture are called as joint venturers.

In the assessment of rights and obligations, the entity should take into account the following aspects:

a) Formation of the arrangement

b) If the joint arrangement is formed in the form of a separate vehicle then the entity should consider:

  • The legal form of separate vehicle
  • The contractual terms of the arrangement
  • Other relevant circumstances

Joint Arrangement not Structured through Separate Vehicle

  • The joint arrangements which are not formed in the form of separate vehicle are joint operations because the parties to such joint arrangements have the direct right to the assets and liabilities of that joint arrangement. When an entity has an interest in a joint operation, it will recognize its proportionate share of assets, liabilities, incomes and expenses from that joint operation in its own financial statements
  • In some cases, the parties to a joint arrangement may agree to have an asset in common which will be shared and operated together, and the terms of the contract establish the right of each party to the jointly control asset and how the operating costs and revenue relating to the jointly control asset will be shared among the parties. In this case, each party will recognize its proportionate share of joint asset, relating liability, and proportionate share of incomes and expenses from that jointly control asset

Joint Arrangement Structured through Separate Vehicle

  • The joint arrangements which are formed in the form of a separate vehicle i.e. assets and liabilities are held under a separate legal entity, which causes the separation of the legal entity from its joint owners, such arrangements are normally joint ventures, because the parties to such joint arrangements have the right to the net assets of that joint arrangement. However the party should also consider the legal form of the entity, contractual terms of the arrangement and other relevant circumstances
  • In some cases, the parties to the joint arrangement which is formed in the form of a separate legal entity, may modify the feature of the contractual agreement relating to the legal entity in such a way which enables those parties to have the direct right to the assets and liabilities of the legal entity in a specified proportion, such modification to the feature of the corporation will cause the joint venture to be a joint operation

Example

Two parties established a joint arrangement in the form of an incorporated separate legal entity. Each party to the arrangement owns 50% voting rights of the incorporated entity. The incorporation results in the separation of the joint owners from this entity and this reflects that the assets and liabilities held in the jointly control entity are the assets and liabilities of the incorporated entity. In such a case, the parties to the jointly controlled entity have the right to the net assets of the jointly controlled entity, therefore it will be treated as a joint venture.

However the parties to the jointly controlled entity, modify the feature of the contractual agreement relating to the legal entity in such a way which enables those parties to have the direct right to the assets and liabilities of the legal entity in a specified proportion, such modification to the feature of the corporation will cause the joint venture to be joint operation

When an investor has interest in a joint venture, it will account for its interest in joint venture as per the equity method under IAS 28.

Joint Investor

The party which is participant to a joint operation or joint venture, but does not have joint control over the joint arrangement as per the contractual terms, will be termed as joint investor. The joint investor will account for its interest in joint operation or joint venture as follows:

  • If the joint investor is a party to joint operation, it will recognize its proportionate share of assets, liabilities, incomes and expenses from that joint operation in its own financial statements
  • If the joint investor is a party to joint venture, it will account for its interest in joint venture as per the requirements of IFRS 9.
Classification of Joint Arrangements
  Joint Operation Joint Venture
Structure These joint arrangements are normally in the form of un-incorporated arrangements These joint arrangements are structured in the form separate legal entities
The terms of the contract The contractual terms provide the parties to the arrangement, direct right to the assets and liabilities of the joint arrangement The contractual terms provide the parties to the arrangement, right to the net assets of the joint arrangement
Right of the parties The parties to the arrangement, have the direct right to the assets and liabilities of the joint arrangement i.e. the assets and liabilities of the joint arrangement are the assets and liabilities of joint operators The parties to the arrangement have right to the net assets of the joint arrangement i.e. the assets and liabilities of the joint arrangement are the assets and liabilities of the separate legal entity
Obligation for Liabilities The parties to the joint operation are liable for the liabilities of the joint operation The parties to the joint venture are not liable for the liabilities of the joint venture, instead the separate legal entity will be liable for the liabilities of the joint operation

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