obligations of the parties to the joint arrangement and thereby affect the economic substance
of the rights and obligations of the parties to the joint arrangement. [IFRS 11.B22, BC43].
5.3 Contractual
terms
The next step in classifying a joint arrangement structured through a separate vehicle is
to examine the contractual terms of the arrangement. While the legal form of the
separate vehicle gives certain rights and obligations to each of the parties, the
contractual terms of the joint arrangement may unwind the effects of the legal form and
give the parties different rights and obligations.
IFRS 11 includes examples (which are not exhaustive) of common contractual terms
found in joint arrangements, and indicates whether these are examples of joint
operations or joint ventures. These are included in the table below. [IFRS 11.B27].
Joint operation
Joint venture
Terms of the contractual arrangement
The parties are provided with rights to the assets,
The parties are provided with rights to the net assets of the
obligations for the liabilities, relating to the arrangement.
arrangement (i.e. it is the separate vehicle, not the parties,
that has rights to the assets and obligations for the liabilities
relating to the arrangement).
Rights to assets
The parties share all interests (e.g. rights, title or
The assets brought into the arrangement or subsequently
ownership) in the assets relating to the arrangement in a
acquired by the joint arrangement are the arrangement’s
specified proportion (e.g. in proportion to the parties’
assets. The parties have no interests (i.e. no rights, title or
ownership interest in the arrangement or in proportion to
ownership) in the assets of the arrangement.
the activity carried out through the arrangement that is
directly attributed to them).
Obligations for liabilities
The parties share all liabilities, obligations, costs and
The joint arrangement is liable for the debts and obligations
expenses in a specified proportion (e.g. in proportion to
of the arrangement.
the parties’ ownership interest in the arrangement or in
The parties are liable under the arrangement only to the extent
proportion to the activity carried out through the
of their respective investments in the arrangement, or to their
arrangement that is directly attributed to them).
respective obligations to contribute any unpaid or additional
capital to the arrangement, or both.
The parties are liable for claims raised by third parties
Creditors of the joint arrangement do not have rights of
recourse against any party with respect to debts or obligations
of the arrangement.
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Joint operation
Joint venture
Revenues and expenses and profits or losses
Each party receives an allocation of revenues and
Each party has a share in the profit or loss relating to the
expenses based on the relative performance of each party activities of the arrangement.
to the joint arrangement. For example, the contractual
arrangement might establish that revenues and expenses
are allocated based on the capacity that each party uses
in a plant operated jointly, which could differ from their
ownership interest in the joint arrangement. In other
instances, the parties might have agreed to share the
profit or loss relating to the arrangement based on a
specified proportion such as the parties’ ownership
interest in the arrangement. This would not prevent the
arrangement from being a joint operation if the parties
have rights to the assets, and obligations for the
liabilities, relating to the arrangement.
Guarantees
The parties to joint arrangements are often required to provide guarantees to third parties that, for example, receive a service from, or provide financing to, the joint arrangement. The provision of such guarantees, or the commitment by the parties to provide them, does not determine, by itself, that the joint arrangement is a joint operation. The feature that determines whether the joint arrangement is a joint operation or a joint venture is whether the parties have obligations for the liabilities relating to the arrangement (for some of which the parties might or might not have provided a guarantee). See 5.3.1 below.
In many cases, the rights and obligations agreed to by the parties in their contractual
arrangements are consistent, or do not conflict, with the rights and obligations conferred
on the parties by the legal form of the separate vehicle. [IFRS 11.B25]. However, as
discussed at 5.2 above, this is not always the case, [IFRS 11.B26], as illustrated in
Example 12.12 below. [IFRS 11 Example 4].
Example 12.12: Modification of legal form by contractual terms
A and B jointly start a corporation (C) over which they have joint control. The legal form of the separate
vehicle (a corporation) preliminarily indicates that C is a joint venture.
However, the contractual arrangement states that A and B have rights to the assets of C and are obligated for
the liabilities of C in a specified proportion. Effectively, this contractual term unwinds the effects of the legal
form (corporation). Therefore, C is a joint operation.
When the contractual arrangement specifies that the parties have rights to the assets,
and obligations for the liabilities, relating to the joint arrangement, they are parties to a
joint operation, and do not further consider other facts and circumstances when
classifying the joint arrangement. [IFRS 11.B28].
5.3.1 Guarantees
Parties to joint arrangements may provide guarantees to third parties. For example, a
party to a joint arrangement may provide a guarantee or commitment that:
• services provided by the joint arrangement to the third party will be of a certain
quality or nature;
• it will support the joint arrangement in the event of distress; or
• it will repay funding received from the third party.
Joint
arrangements
847
One might think that providing a guarantee (or commitment to provide a guarantee)
gives a party an obligation for a liability, which would indicate that the joint arrangement
should be classified as a joint operation. However, IFRS 11 states this is not the case.
The issuance of guarantees, or a commitment by the parties to provide guarantees, does
not determine, by itself, that the joint arrangement is a joint operation. [IFRS 11.B27].
Although perhaps counter-intuitive, the fact that a guarantee is not determinative of the
classification of a joint operation is consistent with the principles in IFRS 11. This is
because the guarantee does not give the guarantor a present obligation for the
underlying liabilities. Accordingly, a guarantee is not determinative of having an
obligation for a liability.
Similarly, an obligation to contribute unpaid or additional capital to a joint arrangement
is not an indicator that the arrangement is a joint operation; it could be a joint venture.
[IFRS 11.B27]. Cash calls and obligations to contribute unpaid or additional capital are
&
nbsp; discussed in more detail at 5.4.2.A below.
If the issuer of the guarantee has to pay or perform under that guarantee, this may
indicate that facts and circumstances have changed, or this event may be accompanied
by a change in the contractual terms of the arrangement. These changes would trigger
a reassessment of whether the arrangement is still subject to joint control and, if so,
whether the joint arrangement is a joint operation or a joint venture, as discussed
at 8 below.
When a guarantee meets the definition of a ‘financial guarantee’ (see Chapter 41 at 3.4),
the party issuing the guarantee must account for the guarantee in accordance with
IFRS 9, irrespective of the classification of the joint arrangement.
5.3.2
Contractual terms upon liquidation or dissolution of joint
arrangement
In some joint arrangements, the parties contribute assets to the joint arrangement to use
in the activity while it continues to operate. However, if the joint arrangement is
liquidated or dissolved, the contributed assets revert to the contributing party. The
question is whether this contractual term gives the parties rights to the assets. If so, the
joint arrangement is classified as a joint operation.
In our view, a contractual agreement whereby assets contributed to a joint
arrangement revert back to the contributing party upon liquidation or dissolution of
the joint arrangement, does not necessarily mean that the arrangement is a joint
operation. In such a case, the contributing party does not expect to receive the
contributed assets in the normal course of business (see 5 above). That is, the
purpose and design of the joint arrangement is not intended to give rights to assets,
or obligations for liabilities to the contributing party, at least while the joint
arrangement continues as a going concern. The joint arrangement should be
analysed in the context of its purpose and design.
All relevant facts and circumstances should be considered in reaching a conclusion. If
the party contributing the asset has a currently exercisable call option on that asset, it
should consider this in evaluating whether it has rights to the assets and obligations for
the liabilities of the joint arrangement (i.e. whether it is a joint operation). The call
option is accounted for in accordance with the relevant IFRS.
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5.4
Other facts and circumstances
When the legal form of the separate vehicle and the terms of the contractual
arrangement do not specify that the parties have rights to the assets, and obligations for
the liabilities, relating to the arrangement, then the parties must consider all other facts
and circumstances to assess whether the arrangement is a joint operation or a joint
venture. [IFRS 11.B29, B30]. The ‘other facts and circumstances’ should be substantive and
infer rights to the assets and obligations for the liabilities of the separate vehicle to
classify the joint arrangement as a joint operation.
In March 2015, the Interpretations Committee published agenda decisions, discussed
at 5.4.3 below, that provide a helpful overview of the issues that require judgement and
the guidance that should be considered. The assessment of ‘other facts and
circumstances’ can be challenging in practice.
5.4.1
Facts and circumstances indicating rights to assets
When the activities of an arrangement are primarily designed for the provision of output
to the parties, this indicates that the parties have rights to substantially all the economic
benefits of the assets of the arrangement. The parties to such arrangements often ensure
their access to the outputs provided by the arrangement by preventing the arrangement
from selling output to third parties. [IFRS 11.B31].
5.4.1.A
Output not taken in proportion to ownership
In March 2015, the Interpretations Committee published an agenda decision that
addressed the accounting treatment when the joint operator’s share of output purchased
differs from its share of ownership interest in the joint operation. The Interpretations
Committee specifically considered a variation to Example 5 of the application guidance
to IFRS 11 where a joint arrangement that is structured through a separate vehicle and
for which the parties to the joint arrangement have committed themselves to purchase
substantially all of the output produced at a price designed to achieve a break-even
result. In that example, the parties to the joint arrangement would be considered to have
rights to the assets and obligations for the liabilities and the arrangement would be
classified as a joint operation. The variation considered is when the parties’ percentage
ownership interest in the separate vehicle differs from the percentage share of the
output produced, which each party is obliged to purchase.
The Interpretations Committee identified several issues:
• When the joint arrangement agreement does not specify the allocation of assets,
liabilities, revenues or expenses, should the share of assets, liabilities, revenue and
expenses recognised reflect the percentage of ownership of the legal entity, or
should it reflect the percentage of output purchased by each joint operator?
• When the share of output purchased by each party varies over the life of the joint
arrangement, over what time horizon should the share of output be considered?
• If the joint operators made a substantial investment in the joint operation that
differed from their ownership interest, it would be necessary to determine the
other elements of the arrangements that could explain why there is a difference
between the percentage of ownership interest and the percentage share of the
output produced that each party is obliged to purchase.
Joint
arrangements
849
The Interpretations Committee noted that it is important to understand why the share of
the output purchased differs from the ownership interests in the joint operation and that
judgement would be needed to determine the appropriate classification and accounting
for the joint arrangement. However, the Interpretations Committee decided not to add
the issue to its agenda because it would require the development of additional guidance.2
5.4.1.B
Consideration of derecognition requirements for financial instruments
When classifying a joint arrangement, one must be mindful of the derecognition
requirements with respect to financial instruments. This is particularly important where
the activities of the joint arrangement relate to transferred receivables and securitisation
arrangements (see Chapter 48 at 3.2).
Therefore, when determining if the facts and circumstances indicate that a party has
rights to net assets (a joint venture), or rights to assets, and obligations for liabilities (a
joint operation), one should consider whether the assets that have been transferred to
the joint arrangement meet the criteria for derecognition by the transferor. The
conclusions reached with respect to derecognition would likely also affect the amounts
recognised when applying the equity method (if the joint arrangement is a joint venture),
or accounting
for the rights to the assets (if the joint arrangement is a joint operation).
5.4.2
Facts and circumstances indicating obligations for liabilities
When the parties to a joint arrangement are substantially the only source of cash flows
contributing to the continuity of the operations of the arrangement, this indicates that
the parties have an obligation for the liabilities relating to the arrangement. [IFRS 11.B32].
Many situations may result in the parties to a joint arrangement being substantially the
only source of cash flows:
• The parties make payments to third parties under previously issued guarantees on
behalf of the joint arrangement.
• The parties are obligated to provide loan financing or working capital funding in
the normal course of business.
• The parties commit to provide cash calls in the future (see 5.4.2.A below).
• The parties may be obligated to purchase all the output produced by the joint
arrangement, which they may or may not resell to third parties.
5.4.2.A
Assessing the obligation related to cash calls or capital contributions
Questions have arisen as to whether parties would be considered ‘substantially the only
source of cash flows’ if they provide cash flows at inception of a joint arrangement, but
are not expected to do so thereafter, and no other parties are expected to provide cash
flows until the end of an activity. Alternatively, parties might provide cash flows through
a series of ‘cash calls’ throughout the arrangement. IFRS 11 is clear that an obligation to
contribute unpaid or additional capital to a joint arrangement, by itself, is not an indicator
that the arrangement is a joint operation; it could be a joint venture. [IFRS 11.B27].
In our view, the provision of cash flows at the inception of a joint arrangement, and/or
the expectation that no other parties will provide cash flows until the end of an activity,
are not conclusive in determining whether there is an obligation for a liability. That is,
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it is not conclusive whether the joint arrangement is a joint operation or a joint venture
(see Example 12.13 below).
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 167
