International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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4 JOINT CONTROL ............................................................................................ 831
4.1
Assessing control .................................................................................................. 833
4.1.1
Sequential activities ............................................................................ 833
4.2
Rights to control collectively ............................................................................ 834
4.2.1
Protective rights, including some veto rights ................................. 834
4.2.2 Potential
voting
rights and joint control ..........................................835
4.2.3
Other evidence of joint control .........................................................835
4.2.4 Delegated
decision-making ............................................................... 836
4.2.5
Related parties and de facto agents ................................................. 836
4.2.6 Role
of
a
government .......................................................................... 837
4.3
Unanimous consent .............................................................................................. 837
4.3.1
Arrangements involving parties that participate in a joint
arrangement but who do not have joint control ........................... 838
4.3.2 Ultimate
voting authority ................................................................... 838
4.3.3 Arbitration
.............................................................................................
839
4.3.4 Statutory
mechanisms ........................................................................ 839
824 Chapter
12
4.4
Other practical issues with assessing joint control ....................................... 839
4.4.1
Undivided share, lease or a joint arrangement .............................. 839
4.4.2 Evaluate
multiple
agreements together .......................................... 840
5 CLASSIFICATION OF A JOINT ARRANGEMENT: JOINT OPERATIONS
AND JOINT VENTURES ................................................................................... 841
5.1
Separate vehicle or not ....................................................................................... 843
5.2
Legal form of the separate vehicle ................................................................... 844
5.3 Contractual
terms
................................................................................................
845
5.3.1
Guarantees ............................................................................................ 846
5.3.2
Contractual terms upon liquidation or dissolution of joint
arrangement ........................................................................................... 847
5.4
Other facts and circumstances .......................................................................... 848
5.4.1
Facts and circumstances indicating rights to assets ...................... 848
5.4.1.A
Output not taken in proportion to ownership .......... 848
5.4.1.B
Consideration of derecognition requirements
for financial instruments ................................................ 849
5.4.2
Facts and circumstances indicating obligations for
liabilities ................................................................................................. 849
5.4.2.A
Assessing the obligation related to cash calls or
capital contributions ....................................................... 849
5.4.3
Interpretations Committee agenda decisions ................................ 850
5.4.3.A
How and why particular facts and
circumstances create rights and obligations ................. 851
5.4.3.B
Implication of ‘economic substance’ .......................... 852
5.4.3.C
Application of ‘other facts and circumstances’
to specific fact patterns .................................................. 852
5.4.4
Comprehensive example illustrating evaluation of facts and
circumstances ........................................................................................853
5.5
Illustrative examples accompanying IFRS 11 ................................................. 854
6 ACCOUNTING FOR JOINT OPERATIONS ...................................................... 859
6.1
Joint arrangements not structured through a separate vehicle .................. 860
6.2 Accounting
for
rights and obligations .............................................................. 860
6.3 Determining
the
relevant IFRS .......................................................................... 861
6.4
Interest in a joint operation without joint control ........................................ 862
6.5
Joint operations with a party that participates in a joint
arrangement but does not have joint control ................................................. 862
6.6
Transactions between a joint operator and a joint operation .................... 863
6.7
Accounting for a joint operation in separate financial statements ............ 863
7 ACCOUNTING FOR JOINT VENTURES .......................................................... 864
7.1
Interest in a joint venture without joint control ............................................ 864
Joint
arrangements
825
7.2
Contributions of non-monetary assets to a joint venture ........................... 865
7.3
Accounting for a joint venture in separate financial statements ................ 865
8 CONTINUOUS ASSESSMENT ......................................................................... 865
8.1
When to reassess under IFRS 11 ....................................................................... 866
8.1.1
Changes in ownership ........................................................................ 866
8.2
Changes in ownership of a joint venture that constitutes a business......... 867
8.2.1
Acquisition of an interest in a joint venture .................................... 867
8.2.2
Gaining control over a former joint venture .................................. 868
8.2.3
Former subsidiary becomes a joint venture ................................... 868
8.2.4
Joint venture becomes an associate (or vice versa) ...................... 869
8.2.5
Joint venture becomes a financial asset (or vice versa) ............... 869
8.2.6
Disposal of an interest in a joint venture ........................................ 870
8.2.7
Interest in a joint venture held for sale ........................................... 870
8.3
Changes in ownership of a joint operation that is a business ..................... 870
8.3.1
Acquisition of an interest in a joint operation ............................... 870
8.3.2
Control or joint control over a former joint operation ................. 871
8.3.3
Former subsidiary becomes a joint operation ................................ 872
8.3.4
Other changes in ownership of a joint operation .......................... 872
8.3.5 Disposal
of
interest
in a joint operation ........................................... 873
8.4
Changes in ownership of a joint arrangement that does not
constitute a business ............................................................................................ 873
8.4.1
Joint operator obtains control or parties that participate in
a joint arrangement but do not have joint control obtain
joint control ........................................................................................... 873
9 DISCLOSURES................................................................................................ 874
List of examples
Example 12.1:
Master agreement for manufacturing and distribution ................ 830
Example 12.2:
Agreements with control and joint control ..................................... 831
Example 12.3:
Directing sequential activities separately ....................................... 834
Example 12.4:
Directing sequential activities jointly .............................................. 834
Example 12.5:
Protective rights and joint control ....................................................835
Example 12.6:
De facto agents in joint control ......................................................... 836
Example 12.7:
Role of a government .......................................................................... 837
Example 12.8:
Ultimate decision-making authority – no joint control (1) .......... 838
Example 12.9:
Ultimate decision-making authority – no joint control (2) ......... 839
Example 12.10:
An undivided share, a lease or a joint arrangement? .................... 839
Example 12.11:
Layered agreements ............................................................................ 840
Example 12.12:
Modification of legal form by contractual terms ........................... 846
826 Chapter
12
Example 12.13:
Construction and real estate sales .................................................... 850
Example 12.14:
Modification of legal form and contractual arrangement by
facts and circumstances .......................................................................853
Example 12.15:
Construction services ......................................................................... 854
Example 12.16:
Shopping centre operated jointly ..................................................... 854
Example 12.17:
Joint manufacturing and distribution of a product......................... 855
Example 12.18:
Bank operated jointly .......................................................................... 857
Example 12.19:
Oil and gas exploration, development and production
activities ................................................................................................. 858
Example 12.20:
Liquefied natural gas arrangement ................................................... 858
Example 12.21:
Accounting for rights to assets and obligations for
liabilities ................................................................................................. 860
Example 12.22:
Joint operation with a party that participates in a joint
arrangement but does not have joint control ................................. 863
827
Chapter 12
Joint arrangements
1 INTRODUCTION
1.1
The nature of joint arrangements
An entity may pursue an economic activity with one or more third parties and share
decision-making relating to those activities. IFRS 11 – Joint Arrangements – is
applicable when the arrangement establishes joint control over an activity, [IFRS 11.4],
between two or more of the parties involved.
A joint arrangement is an arrangement that has the following characteristics:
(a) the parties are bound by a contractual arrangement; and
(b) the contractual arrangement gives two or more of those parties joint control of the
arrangement. [IFRS 11.5].
The terms ‘joint arrangement,’ ‘joint control’ and ‘joint venture’ are specifically defined
by IFRS 11 and have important accounting consequences. However, these terms also
may be used loosely in practice and may appear in legal documents and public
statements by management.
IFRS 11 classifies joint arrangements into one of two types: joint operations and joint
ventures. [IFRS 11.6]. Parties to a joint operation have rights to the assets, and obligations
for the liabilities, whereas parties to a joint venture have rights to the net assets of the
arrangement. [IFRS 11 Appendix A, BC24]. Whether a separate legal entity is involved is not
the definitive issue in classification (see 1.2 below).
A joint operation results in the recognition of assets and liabilities and revenues and
expenses. [IFRS 11.BC25]. An entity must apply judgement to classify an existing
jointly controlled entity either as a joint operation or a joint venture based on an
assessment of the parties’ rights and obligations that arise from the arrangement.
[IFRS 11.BC28].
No matter the terminology used to describe the arrangement, or its purpose,
management needs to evaluate the terms of the arrangement, and the relevant facts and
circumstances, to determine if it is a joint arrangement as defined in IFRS 11.
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12
2
EFFECTIVE DATE, OBJECTIVE AND SCOPE OF IFRS 11
2.1 Effective
date
IFRS 11 was effective for annual periods beginning on or after 1 January 2013 and was
effective for a first-time adopter of IFRS on the date of transition to IFRS (see
Chapter 5). Early adoption was permitted with disclosure of that fact, if the entity
adopted IFRS 10 – Consolidated Financial Statements, IFRS 12, IAS 27 (as amended
in 2011) and IAS 28 (as amended in 2011) as of the same date. [IFRS 11.C1]. As noted at 8.3.1
below, paragraphs 21A, B33A-B33D and C1AA and their related headings, which were
introduced by the May 2014 amendment to IFRS 11 – Acquisitions of Interests in Joint
Operations, were effective prospectively for annual periods beginning on or after
1 January 2016.
2.2 Objective
The objective of IFRS 11 is to establish principles for financial reporting by entities that
have an interest in a joint arrangement. [IFRS 11.1]. As a result, the standard defines and
provides guidance on:
• what a joint arrangement is and when joint control is present (see
3 and 4 below);
• the two types of joint arrangements and how to classify an arrangement (see 5
below); and
• how to account for each type of joint arrangement in the financial statements of a
party to a joint arrangement (see 6, 7 and 8 below). [IFRS 11.2].
2.3 Scope
IFRS 11 applies to all entities that are a party to a joint arrangement. [IFRS 11.3]. A ‘party
to a joint arrangement’ is defined as ‘an entity that participates in a joint arrangement,
regardless of whether that entity has joint control of the arrangement’. [IFRS 11 Appendix A].
Therefore, an entity could be required to apply IFRS 11 to an arrangement even though
it does not have joint control of it.
2.3.1
Application by venture capital organisations and similar entities
IFRS 11 applies to all entities that are party to a joint arrangement, including venture
capital organisations, mutual funds, unit trusts, investment-linked insurance funds and
similar entities (referred to hereafter as ‘venture capital organisations’). However,
venture capital organisations can choose to measure investments in joint ventures at fair
value under the measurement exemption in IAS 28 (see Chapter 11 at 5.3), but remain
subject to the disclosure requirements of IFRS 12 (see Chapter 13 at 5). [IFRS 11.BC15-18].
It should be noted that a venture capital organisation with investments in subsidiaries and
associates and/or joint ventures could only qualify as an ‘investment entity’ under IFRS 10
and measure its investments in subsidiaries at fair value, if it elected to measure its
investments in associates and/or joint ventures at fair value through profit or loss. [IFRS 10.B85L].
Joint
arrangements
829
2.3.2
Application to joint arrangements held for sale
As discussed at 8.2.7 below, an investment in a joint venture (or portion thereof)
that is classified as held for sale under IFRS 5 – Non-current Assets Held for Sale
and Discontinued Operations – is accounted for under IFRS 5 and is effectively
scoped out of IFRS 11 and IAS 28. [IAS 28.20]. Similarly, a joint operation that is held
for sale under IFRS 5 would be effectively scoped out of IFRS 11 and accounted for
under IFRS 5.
2.3.3
Accounting by a joint operation
The scope of IFRS 11 does not address the accounting by the joint operation itself.
In March 2015, the Interpretations Committee published its agenda decision on the issue