Other practical issues with assessing joint control
4.4.1
Undivided share, lease or a joint arrangement
In some cases, it is necessary to consider whether a party owns an undivided share in a
commonly-owned asset, has a right to use an asset in return for a payment or series of
payments (i.e. a lease), or whether the parties have a joint arrangement. Example 12.10
illustrates this point.
Example 12.10: An undivided share, a lease or a joint arrangement?
Five parties jointly buy an aircraft. By contractual agreement, each party has the right to use the aircraft for a
certain number of days each year and shares proportionately in the maintenance costs. They share decision-
making regarding the maintenance and disposal of the aircraft, which are the relevant activities for that
aircraft. Those decisions require the unanimous agreement of all of the parties. The contractual agreement
covers the expected life of the aircraft and can be changed only by unanimous agreement.
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Analysis
The agreement is a joint arrangement. Through the contractual agreement, the five parties agreed to share the
use and costs of maintaining the aircraft, and decisions require unanimous consent.
Variation – The contractual agreement covers the expected life of the aircraft and can be changed only by
agreement of parties holding 75% of the voting rights. There are multiple combinations of how the 75%
threshold can be achieved and the contractual agreement does not specify which parties must agree.
Therefore, there is no unanimous consent.
Analysis
The agreement is not a joint arrangement, as the contractual agreement does not establish joint control.
4.4.2
Evaluate multiple agreements together
Sometimes it is necessary to evaluate multiple agreements together, to understand the
purpose and design of an arrangement, and to determine if there is joint control. A party
may appear to have joint control of a joint arrangement when considering one
agreement in isolation, but that party may not have joint control when considered in the
full context of its purpose and design. Example 12.11 below illustrates this point.
Example 12.11: Layered agreements
A, B, C and D enter into agreement No.1 to undertake oil and gas exploration. Committee No.1 is formed to
direct all activities related to that activity, including review and approval of annual budgets and operating
policies. Committee No.1 consists of six members, of whom D nominates three members. The remaining
three members are nominated by A, B, and C. The decisions of Committee No.1 require the unanimous vote
of the members.
Committee No. 1
Committee No. 2
D
A
B
C
A and B enter into agreement No.2, which establishes Committee No.2 to coordinate cooperation
between A and B, with respect to the same oil and gas exploration activity. A and B each appoint one
representative to Committee No.2. Committee No.2 has the power to make decisions to be submitted
for approval to Committee No.1. Any matter to be decided by Committee No.2 requires the consent of
both parties. However, if agreement cannot be reached between A and B, B has the deciding vote. The
decisions made in Committee No.2 are binding on A and B and they must vote accordingly in
Committee No.1.
In this fact pattern, there are two separate contractual agreements. However, they are evaluated together to
determine if there is a joint arrangement, because they relate to the same oil and gas exploration activity. For
example, if agreement No.1 were considered in isolation, it would appear that A, B, C and D all have joint
control over the arrangement.
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However, agreement No. 1 should be evaluated together with agreement No. 2. Accordingly, only B, C and
D would have joint control over the joint arrangement. Since B can effectively direct A how to vote (by virtue
of agreement No.2) in Committee No.2, A does not have joint control with the other parties, since it is
effectively a de facto agent of B and will represent a ‘party that participates in a joint arrangement but does
not have joint control’ (see 4.2.5 above).
5
CLASSIFICATION OF A JOINT ARRANGEMENT: JOINT
OPERATIONS AND JOINT VENTURES
IFRS 11 requires an entity to determine the type of joint arrangement in which it is involved.
[IFRS 11.14]. A joint arrangement is classified as either a joint operation or a joint venture.
[IFRS 11.6]. The classification of a joint arrangement as a joint operation or a joint venture
depends upon the rights and obligations of the parties to the arrangement. [IFRS 11.14].
The table below compares the two types of joint arrangements and provides an
overview of the accounting for each under IFRS 11. [IFRS 11.15, 16].
Type of arrangement
Joint operation
Joint venture
Definition
The parties with joint control have rights
The parties with joint control have rights to
to the assets and obligations for the
the net assets of the arrangement.
liabilities of the arrangement.
Parties with joint control
Joint operator is a party with joint control
Joint venturer is a party with joint control in
in a joint operation.
a joint venture.
Accounting overview
A joint operator (and parties that participate
A joint venturer accounts for its investment
in a joint arrangement but who do not have
in the joint venture using the equity method.
joint control) accounts for the following in
Parties that participate in a joint arrangement
accordance with the applicable IFRS:
but who do not have joint control account for
Its assets, including its share of any assets
the investment in accordance with IFRS 9,
held jointly
unless the parties have significant influence,
Its liabilities, including its share of any
in which case the parties shall apply the
liabilities incurred jointly
equity method.
Its revenue from the sale of its share of the
output arising from the joint operation
Its share of revenue from the sale of the
output by the joint operation
Its expenses, including its share of any
expenses incurred jointly.
This process to classify a joint arrangement is illustrated in the following flowchart.1 The
flowchart includes several criteria to be met for the joint arrangement to be a joint
venture. The first step is to assess whether there is a separate vehicle. If not, the joint
arrangement is automatically a joint operation. However, if there is a separate vehicle,
if just one of the additional criteria indicates that the parties have the rights to the assets
and obligations for the liabilities, the joint arrangement would be a joint operation. In
all other cases it would be classified as a joint venture. IFRS 11 also includes examples
illustrating this evaluation, some within the application guidance and others as
illustrative examples accompanying the standard (see 5.5 below).
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Classifying a joint arrangement
Is the joint arrangement structured through a separate vehicle?
No
Yes
Does the legal form of the separate vehicle give the parties rights
to the assets and obligations for the liabilities relating to the
Yes
arrangement?
No
Joint
operation
Do the terms of the contractual arrangement give the parties
rights to the assets and obligations for the liabilities relating to
Yes
the arrangement?
No
Do other facts and circumstances give the parties rights to the
assets and obligations for the liabilities relating to the
Yes
arrangement?
No
Joint venture
We discuss key aspects of the classification process within this chapter as follows:
• separate vehicle – see 5.1 below;
• legal form of the separate vehicle – see 5.2 below;
• contractual terms – see 5.3 below; and
• other facts and circumstances – see 5.4 below. [IFRS 11.17, B15].
Judgement is required in assessing whether a joint arrangement is a joint operation or a
joint venture. An entity evaluates its rights and obligations arising from a joint
arrangement to classify the arrangement. [IFRS 11.17]. IFRS 12 requires that an entity shall
disclose information when it has to make significant judgements and assumptions to
classify the type of joint arrangement, specifically when the arrangement has been
structured through a separate vehicle (see Chapter 13 at 3). [IFRS 12.7].
When classifying a joint arrangement, parties to the joint arrangement would normally
reach the same conclusion regarding classification. To reach different conclusions
regarding the classification of a joint arrangement would mean that the parties have
different rights to assets and obligations for the liabilities within the same separate vehicle.
When classifying a joint arrangement as either a joint operation or a joint venture, it may
be necessary to analyse two (or more) agreements separately, such as when there is a
framework or master agreement (see 3.1 above).
The classification of joint arrangements depends upon the parties’ rights and obligations
arising from the arrangement in the normal course of business. [IFRS 11.B14]. These concepts
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are discussed in more detail in the context of analysing the contractual terms of the
arrangement, and the other facts and circumstances at 5.3 and 5.4 below, respectively.
The requirement to classify a joint arrangement based on the normal course of
business is consistent with the requirement to consider the purpose and design of
an investee in IFRS 10 (see Chapter 6 at 3.2). We believe that the purpose and
design of a joint arrangement is an important consideration in determining the
appropriate classification.
5.1
Separate vehicle or not
The first factor in classifying a joint arrangement is the assessment of whether a separate
vehicle exists. A joint arrangement in which the assets and liabilities relating to the
arrangement are held in a separate vehicle can be either a joint venture or a joint
operation. [IFRS 11.B19, B20].
A separate vehicle is defined in IFRS 11 as ‘A separately identifiable financial
structure, including separate legal entities or entities recognised by statute,
regardless of whether those entities have a legal personality.’ [IFRS 11 Appendix A]. Apart
from those entities mentioned in the definition, IFRS 11 does not provide any
examples of what might constitute a ‘separate vehicle’, and there is no clear
definition of what constitutes a ‘separately identifiable financial structure’. The IASB
viewed joint arrangements that are not structured through a separate vehicle to be
arrangements that were formerly ‘jointly controlled operations’ and ‘jointly
controlled assets’ (see 1.1 above). [IFRS 11.BC26]. The existence of a separate vehicle
does not depend on whether the assets and liabilities within the vehicle meet the
definition of a ‘business’ in IFRS 3. [IFRS 11.BC29].
The desired economic substance often drives the selection of a particular legal form of
a separate vehicle. However, the choice may be driven by tax, regulatory requirements
or other reasons that can alter the intended economic substance, necessitating that the
parties use contractual arrangements to modify the effects that the legal form would
otherwise have on their rights and obligations. [IFRS 11.BC32].
Many common arrangements, such as partnerships, corporations, trusts and syndicates,
are likely to be considered separate vehicles, although local laws should be considered.
In some jurisdictions, an oral agreement is considered sufficient to create a contractual
partnership, and thus, the hurdle for having a separate vehicle could be quite low.
A contract alone may create a separate vehicle, such as when it creates a deemed
separate entity (referred to as a ‘silo’ in IFRS 10), or creates a partnership. A silo exists
when specified assets of an arrangement are the only source of payment for specified
liabilities of an arrangement, and parties other than those with the specified liability do
not have rights or obligations related to the specified assets or to residual cash flows
from those assets. That is, a silo exists when, in substance, all the assets, liabilities and
equity of that deemed separate entity are ring-fenced from the ‘host’ arrangement. The
identification of silos is discussed further in Chapter 6 at 8.1.
The term ‘separate vehicle’ is broader than an ‘entity’ as illustrated in the diagram below.
We understand that this was done primarily to address concerns that, in some
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jurisdictions, separate vehicles created to establish a joint arrangement are not
necessarily legal reporting entities or juristic persons.
Entities recognised
Separate vehicles
by statute
Separate
legal
entities
The IASB concluded it would be rare that a joint arrangement would give the parties
rights to the net assets without having a separate vehicle. Therefore, they considered
that the benefits of introducing an additional assessment in the classification of joint
arrangements when these are not structured through separate vehicles would not
outweigh the costs of increasing the complexity of the IFRS. [IFRS 11.BC27].
5.2
Legal form of the separate vehicle
Once it is determined that a separate vehicle exists, the second step is to analyse the
legal form of the separate vehicle to determine whether it gives the parties rights to the
net assets, or rights to the assets and obligations for the liabilities of the arrangement.
[IFRS 11.B21]. In other words, does the separate vehicle confer separation between the
parties and the separate vehicle?
The legal form of the separate vehicle is relevant as an initial indicator of the parties’
rights to the assets, and obligations for the liabilities, relating to the arrangement. The
exception
is when the legal form of the separate vehicle does not confer separation
between the parties and the vehicle, in which case the conclusion is reached that the
arrangement is a joint operation. [IFRS 11.B24, BC31].
If the legal form of the separate vehicle does confer separation between the parties and
the separate vehicle, the classification is not yet conclusive. The terms agreed by the
parties in their contractual arrangement (see 5.3 below) and other facts and
circumstances (see 5.4 below) can override the assessment of the rights and obligations
conferred upon the parties by the legal form of the separate vehicle and the arrangement
can still be classified as a joint operation. [IFRS 11.B23].
Local laws may affect the form of the separate vehicle. For example, in many countries,
a corporation confers separation between the parties and the separate vehicle and
provides the parties with rights to net assets. These are indicators of the corporation
being a joint venture. That is, the liabilities of the corporation are limited to the
corporation. Creditors do not have recourse to the investors in the corporation for those
liabilities. However, this may not be true in all countries.
Similarly, partnerships that have unlimited liability, which are common in many
countries, often do not confer separation between the parties and the separate vehicle.
That is, they provide the partners with rights to the assets and obligations for the
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liabilities, indicating that the arrangement is a joint operation. When creditors of the
partnership have direct recourse to the joint arrangement partners, the partners are the
primary obligors, which is indicative of a joint operation. However, in a partnership
where creditors only have recourse to the partners after the partnership has defaulted,
there is separation between the partners and the vehicle. The liability of the partners as
secondary obligor is akin to a guarantee. This would be an indicator of a joint venture.
In March 2015, the Interpretations Committee published an agenda decision in which it
observed that two seemingly similar joint arrangements from an operational perspective
might need to be classified differently merely because one is structured through a separate
vehicle and the other is not. The legal form of the separate vehicle could affect the rights and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 166
