International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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of the accounting by a joint operation that is a separate vehicle in its financial
statements. This issue has arisen because the joint operators recognise their share of
assets and liabilities held by the joint operation, which leads to the question of whether
those same assets and liabilities should also be recognised in the financial statements of
the joint operation itself. The Interpretations Committee decided not to add the issue
to its agenda, because the following guidance exists:
• IFRS 11 applies only to the accounting by the joint operators and not to the
accounting by a separate vehicle that is a joint operation;
• the financial statements of the separate vehicle would therefore be prepared in
accordance with applicable IFRSs. Note that IFRS 3 – Business Combinations –
does not apply to ‘the accounting for the formation of a joint arrangement in the
financial statements of the joint arrangement itself’ (refer Chapter 9 at 2.2.1);
[IFRS 3.2(a)] and
• company law often requires a legal entity or separate vehicle to prepare
financial statements. Consequently, the financial statements would include the
assets, liabilities, revenues and expenses of that legal entity/separate vehicle.
The determination of which assets and liabilities to recognise and their
measurement will depend on rights and obligations of the separate vehicle and
specific facts and circumstances.
3 JOINT
ARRANGEMENT
IFRS 11 defines a joint arrangement as ‘an arrangement of which two or more parties
have joint control’. [IFRS 11 Appendix A].
IFRS 11 notes that the contractual arrangement that binds the parties together is often,
but not always, in writing. Unwritten agreements are rare in practice. Laws can also
create enforceable arrangements, with or without a contract. [IFRS 11.B2]. A joint
arrangement can be structured through a separate vehicle (see 5.1 below). That entity’s
articles, charter or by-laws also may include aspects of the contractual arrangement.
[IFRS 11.B3].
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Contractual arrangements generally specify the following:
• purpose, activity and duration of the joint arrangement;
• appointment of members of the board of directors (or equivalent governing body);
• decision-making processes:
• matters requiring decisions from the parties;
• voting rights of the parties; and
• required level of agreement for those matters;
• capital or other contribution requirements; and
• sharing of assets, liabilities, revenues, expenses or profit or loss relating to the joint
arrangement. [IFRS 11.B4].
Understanding the terms of the contractual arrangement is crucial in determining
whether joint control exists (see 4 below) and, if so, in deciding whether the joint
arrangement is a joint operation or joint venture (see 5 below). In addition, a contract to
receive goods or services may be entered into by a joint arrangement or on behalf of a
joint arrangement. The terms and conditions of the joint arrangement could impact how
the contract to receive goods or services is accounted for. (See Chapter 24 at 3.1.1).
3.1
Unit of account
The unit of account of a joint arrangement is the activity that two or more parties
have agreed to control jointly. A party should assess its rights to the assets and
obligations for the liabilities, relating to that activity, regardless of whether the
activity is conducted in a separate vehicle. [IFRS 11.BC20, BC35]. IFRS 11 does not define
‘activity’. Therefore, the determination of the unit of account may require
judgement in arrangements that are complex.
The purpose and design of an arrangement may provide insight into how to identify the
unit of account (see 4.4.2 below). For example, a framework agreement can establish
multiple joint arrangements of different types. [IFRS 11.18]. The possibility also exists that,
within the same separate vehicle, parties to the arrangement may undertake different
activities in which they have different rights to the assets, and obligations for the
liabilities, resulting in different types of joint arrangements conducted within the same
separate vehicle. The IASB believes such situations would be rare in practice.
[IFRS 11.BC36]. We are aware of scenarios where the activity is larger than a single entity
or separate vehicle. We refer to these as ‘layered agreements’, which are discussed in
Example 12.11 at 4.4.2 below.
Example 12.1 below illustrates a case where a master agreement may be accounted for
as several distinct joint arrangements, each of which is classified as either a joint
operation or a joint venture.
Example 12.1: Master agreement for manufacturing and distribution
A single contract between two parties specifies the terms and conditions related to manufacturing and
distribution activities and dictates how these activities are carried out in various jurisdictions through several
entities. The activities are carried out concurrently and not sequentially (see 4.1.1 below). In each entity, the
parties jointly control the relevant activities.
Joint
arrangements
831
Master agreement
Manufacturing
Distribution
activities
activities
Country A:
Country B:
Country C:
Country D:
General partnership
Limited partnership
General partnership
Limited partnership
joint operation
joint venture
joint operation
joint venture
The parties may determine that this agreement contains several discrete joint arrangements (one for each
activity in each jurisdiction, which corresponds to an entity). In this case, each entity would likely be classified
as a joint venture or a joint operation. This would likely be the case if the terms and conditions relating to
each activity were distinct for each separate vehicle. Although in this example, it is concluded that the general
partnerships are joint operations and the limited partnerships are joint ventures, this may not always be the
case depending on the legal form, contractual terms, and facts and circumstances.
In some cases, there will be multiple contractual agreements between parties that relate
to the same activities, which may need to be analysed together to determine whether a
joint arrangement exists, and if so, the type of joint arrangement.
In other cases, there may be a single master agreement between two parties that covers
several different activities. Some of these activities may be controlled solely by one of
the two parties, while the parties may jointly control other activities. Careful analysis is
required to determine the unit of account and to assess whether any of the arrangements
are jointly controlled. Example 12.2 below illustrates a case where a contract contains
multiple agreements, only one of which is a joint arrangement.
Example 12.2: Agreements with control and joint control
Assume the same information as per Example 12.1 with the following variation: One party has the ability to
direct the manufacturin
g activities in the entity in Country A and the other party has the ability to direct the
manufacturing activities in the entity in Country B. As in Example 12.1, in Country C and D the parties jointly
control the relevant activities.
In this case, there would not be joint control between the two parties in the entities in Country A and B.
Rather, each party controls its respective entities, and therefore such entities would not be joint arrangements.
The distribution activities conducted in the entities in Country C and D would still be joint arrangements and
would each be classified as either a joint operation or a joint venture. See Example 12.17, at 5.5 below, for a
case where two parties have two joint arrangements and each joint arrangement relates to a specific activity.
4 JOINT
CONTROL
As noted above, the crucial element in having a joint arrangement is joint control, and,
therefore, it is important to understand this concept.
Joint control is ‘the contractually agreed sharing of control of an arrangement, which
exists only when decisions about the relevant activities require the unanimous consent
of the parties sharing control.’ [IFRS 11.7, Appendix A].
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As discussed under 2.3 above, not all the parties to the joint arrangement need to have
joint control of the relevant activities for the arrangement to be classified as a joint
arrangement. Therefore, IFRS 11 distinguishes between parties that have joint control
of a joint arrangement and those that do not. [IFRS 11.11]. A joint operator and a joint
venturer refer to parties that have joint control of a joint operation and joint venture
respectively. [IFRS 11 Appendix A]. IFRS 11 does not explicitly define a party that participates
in, but does not have joint control of, a joint arrangement. We refer to these parties as
‘parties that participate in a joint arrangement but do not have joint control’. IFRS 11
specifies the accounting for parties that participate in a joint arrangement but do not
have joint control (see 6.4 and 7.1 below).
The following flowchart provided in IFRS 11 illustrates how a party to a joint
arrangement should evaluate if joint control exists. [IFRS 11.B10].
Does the contractual arrangement give all the
parties (or a group of the parties)
†control of the No
arrangement collectively?
Outside the
scope of IFRS 11
Yes
(not a joint
Do the decisions about the relevant activities
arrangement)
require the unanimous consent of all the parties No
that collectively control the arrangement?
Yes
Joint arrangement
† The reference to ‘a group of the parties’ refers to a situation in which there is joint control between two or more parties, but other parties to the arrangement are parties that participate in a joint arrangement but do not have joint control.
We discuss key aspects of joint control within this chapter, as follows:
• contractual arrangement – See 3 above;
• assessing control – See 4.1 below;
• rights to control collectively – See 4.2 below;
• unanimous consent – See 4.3 below; and
• other practical issues with assessing joint control – See 4.4 below.
Judgement is required when assessing whether all the parties, or a group of the parties,
have joint control of an arrangement by considering all facts and circumstances.
[IFRS 11.12].
In some cases, it will be clear that there is not collective control (see 4.2 below), or not
unanimous consent (see 4.3 below). In cases where it is clear that neither of the two
criteria are met, there would not be a joint arrangement, for example, a cooperative
advertising cost-sharing agreement between a retailer and a wholesaler that does not
establish joint control over the marketing activities. We also believe that it would be
rare for a publicly listed entity to be subject to joint control, since it would be unusual
to have a contractual agreement among all the shareholders to direct the activities of
such an entity.
Joint
arrangements
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When it is not clear whether joint control exists, a party to a joint arrangement would
need to exercise significant judgement to determine whether there is joint control. In
such cases, IFRS 12 requires that an entity disclose information when it has to make
significant judgements and assumptions to determine that it has joint control (see
Chapter 13 at 3). [IFRS 12.7].
When an arrangement is outside the scope of IFRS 11, an entity accounts for its interest
in the arrangement in accordance with relevant IFRSs, such as IFRS 10, IAS 28 or IFRS 9
– Financial Instruments. [IFRS 11.B11, C14].
4.1 Assessing
control
The first step in evaluating joint control is to assess whether the contractual
arrangement gives a single party control of the arrangement. [IFRS 11.10]. The IASB
believes that the definition of control and the application requirements to assess
control in IFRS 10 will assist an entity in determining whether it unilaterally
controls an arrangement per IFRS 10, or whether it controls an arrangement along
with other parties, per IFRS 11. [IFRS 11.BC14]. Therefore, if one of the parties to the
arrangement is exposed, or has rights, to variable returns from its involvement in
the arrangement and has the ability to affect those returns through its power, it
would have control over the arrangement and joint control will not be possible.
[IFRS 11.B5].
To perform this assessment, it is therefore necessary first to consider the following
factors within IFRS 10 as they relate to the activities of the arrangement:
• the purpose and design of the arrangement (see Chapter 6 at 3.2);
• what the relevant activities of the arrangement are and how decisions about those
activities are made (see Chapter 6 at 4.1);
• whether the rights of the party give it the current ability to direct the relevant
activities (see Chapter 6 at 4.2 to 4.6);
• whether the party is exposed, or has rights, to variable returns from its involvement
with the arrangement (see Chapter 6 at 5); and
• whether the party has the ability to use its power over the investee to affect the
amount of its returns (see Chapter 6 at 6). [IFRS 10.B3].
4.1.1 Sequential
activities
The determination of the relevant activities of an arrangement might be complicated
when the arrangement includes different activities that occur at different times. For
example, some joint arrangements operate in sequential production phases, such as
those in the mining, construction, real estate, and life-sciences industries. These
arrangements generally fall into two types of situations:
• parties have rights to direct different activities; or
• parties collectively direct all of the activities.
In the first situation, each party would assess whether it has the rights to direct the
activities that most significantly affect returns, and therefore whether they control the
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arrangement (see Chapter 6 at 4.1.1). The parties to the arrangement should reconsider
<
br /> this assessment over time if relevant facts or circumstances change. [IFRS 11.13].
Example 12.3 and 12.4 illustrate the above principles. They are based on an example
taken from IFRS 10. [IFRS 10.B13 Example 1].
Example 12.3: Directing sequential activities separately
Company A and B enter into an arrangement, structured through a separate vehicle, to develop and
market a medical product. Company A is responsible for developing and obtaining regulatory approval
for the medical product. This includes having the unilateral ability to make all decisions relating to
the development of the product and to obtain regulatory approval. Once the regulator has approved the
product, Company B will manufacture and market it and has the unilateral ability to make all decisions
about the manufacturing and marketing of the project. All of the activities – developing and obtaining
regulatory approval as well as manufacturing and marketing of the medical product – are relevant
activities. The most relevant activity is the developing and obtaining regulatory approval of the
medical product.
In Example 12.3 above, there is no joint control because the parties to the arrangement
do not collectively direct the most relevant activity of the arrangement. Rather, one
party directs each activity. However, if the fact pattern were different such that they
collectively directed the most relevant activity of the arrangement, then there would be
joint control. This is described in Example 12.4 below.
Example 12.4: Directing sequential activities jointly
Company A and B enter into an arrangement, structured through a separate vehicle, to develop and
market a medical product. Company A and Company B are responsible for developing and obtaining
regulatory approval for the medical product. The arrangement establishes joint control over the
decisions relating to the development of the product and to obtain regulatory approval. Once the
regulator has approved the product, Company B will manufacture and market it and have the unilateral
ability to make all decisions about the manufacturing and marketing of the project. All of the activities
– developing and obtaining regulatory approval as well as manufacturing and marketing of the medical
product – are relevant activities. The most relevant activity is the developing and obtaining regulatory
approval of the medical product.