Factsheet Series: Accounting for Joint Arrangements in IFRS 11

IFRS 11 Joint Arrangements governs the requirements on how entities account for their interests in joint arrangements. The International Accounting Standards Board (“IASB) introduced the standard in May 2011. The standard replaces IAS 31 Financial Reporting of Interests in Joint Ventures.  

We have previously discussed in Key principles in accounting for investments in associates and joint ventures. The article explains how entities apply the equity method to account for their investments in joint ventures. What if an arrangement is not a joint venture? How do we account for an arrangement which is not a joint venture? This article shares with you the answers to these questions.  

Let us now go into the details of the accounting requirements under IFRS 11.

What is a joint arrangement?

IFRS 11 defines a joint arrangement as an arrangement of which two or more parties have joint control. A joint arrangement has the following characteristics: 

1. The parties are bound by a contractual arrangement.
2. The contractual arrangement gives two or more of those parties joint control of the arrangement.

Contractual arrangement

The contractual arrangement sets out the terms upon which parties participate in the activity that is the subject of the arrangement. For instance: 

• The purpose, activity and duration or period of the joint arrangement. 
• How the members of the board of directors or its equivalent, of the joint arrangement are appointed. 
• The decision-making process – matters that require decision from the parties, the voting rights and the required level of support for those matters. 
• The capital and other contributions required of the parties. 
• How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement. 

Contractual arrangements are commonly evidenced in writing in the form of a contract or documented discussion between the parties. Nevertheless, written contract is not always the case.  

Joint control

IFRS 11 further defines joint control as the contractually agreed sharing of control of an agreement. When an entity enters into an arrangement, it must assess whether the contractual arrangement gives all the parties or a group of the parties, control of the arrangement collectively. 

Once it has been determined, joint control exists only when decision about the relevant activities requires the unanimous consent of the parties sharing the control.  It is important to remember that in a joint arrangement, no single party controls the arrangement on its own. This means a party with joint control can prevent any of the other parties from controlling the arrangement. 

In addition, it is not necessary for all the parties to have joint control in a joint arrangement. A joint arrangement may have parties that jointly controlled the arrangement as well as parties that participate but do not have joint control of the joint arrangement. This requires entities to consider all facts and circumstances to establish parties that have joint control and those that only participate in a joint arrangement.  

An entity should only re-assess whether it still has joint control if facts and circumstances have changed.  

Types of joint arrangement

IFRS 11 states that a joint arrangement can either be a joint operation or a joint venture. This classification depends on the rights and obligations of the parties to the arrangement. The following table explains the difference between a joint operation and a joint venture: 

Entities will need to apply judgments to assess whether an arrangement is a joint operation or a joint venture. In assessing the rights and obligation on the arrangement, entities consider the structure and legal form of the arrangement, the terms agreed by the parties and other facts and circumstances. 

IFRS 11 also touches on an important point whereby joint operation and joint venture can co-exist when parties undertake different activities that form part of the same framework agreement. Entities should re-assess whether the type of joint arrangement in which it is involved has changed if facts and circumstances has changed since the last assessment.  

Accounting for joint arrangements

In this section, we discuss on how parties to joint arrangements account for their joint control or participation.  

Joint operations

IFRS 11 states that a joint operator recognises the following for its interest in a joint operation:

1. Firstly, its assets, including its share of any assets held jointly.
2. Secondly, its liabilities, including its share of any liabilities incurred jointly.
3. Thirdly, its revenue from the sale of its share of the output arising from the joint operation. 
4. Fourthly, its share of the revenue from the sale of the output by the joint operation; and 
5. Finally, its expenses, including its share of any expenses incurred jointly.  

A joint operator needs to account for the assets, liabilities, revenue and expenses relating to its interest in a joint operation in accordance with the applicable IFRSs.

Transactions between joint operator and the joint operation

Sometimes a joint operator may also enter into a transaction with the joint operation where it is a joint operator, such as a sale or contribution of assets to the joint opperation. In such circumstances, the joint operator is conducting the transaction with the other parties to the joint operation. 

Accordingly, IFRS 11 requires the joint operator to recognise gains or losses resulting from such transactions only to the extent of the other parties’ interests in the joint operation. When such transactions provide evidence of a reduction in the net realisable value of the assets to be sold or contributed or of an impairment loss of those assets, the joint operator should recognise those losses in full. 

What if a joint operator purchases assets from a joint operation? When a joint operator purchases assets from the joint operation, it should not recognise its share of the gains or losses until it re-sells those assets to a third party. IFRS 11 further states that when the transactions provide evidence of a reduction in the net realisable value of the assets to be purchased or of an impairment loss of those assets, the joint operator only recognises its share of those losses.

A party that participates in, but does not have joint control of, a joint operation will also account for its interest in the arrangement similar to the joint operator if that party has rights and obligations relating to the joint operation. 

Joint venture

A joint venturer accounts for its interest in a joint venture as investment using the equity method. A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in accordance with IFRS 9 Financial Instruments, unless it has significant influence over the joint venture.

The above summarises the key focus to account for joint arrangements under IFRS 11. We will bring you discussion for other accounting requirements in our upcoming articles. Stay tuned for our upcoming articles by following us on social media.  Meantime, enjoy other articles in Financial Accounting section or ask your queries by Joining on Community. It is free and open to join for all, now.