liabilities resulting from the arrangement based on their agreed participating interest. On that basis, each party also
recognises its share of the revenue (from the sale of their share of the production) and its share of the expenses.
Example 12.20: Liquefied natural gas arrangement12
Company A owns an undeveloped gas field that contains substantial gas resources. Company A determines
that the gas field will be economically viable only if the gas is sold to customers in overseas markets. To do
so, a liquefied natural gas (LNG) facility must be built to liquefy the gas so that it can be transported by ship
to the overseas markets.
Company A enters into a joint arrangement with company B to develop and operate the gas field and the LNG facility.
Under that arrangement, companies A and B (the parties) agree to contribute the gas field and cash, respectively, to a
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new separate vehicle, entity C. In exchange for those contributions, the parties each take a 50 per cent ownership
interest in entity C. The main feature of entity C’s legal form is that it causes the separate vehicle to be considered in its own right (i.e. the assets and liabilities held in the separate vehicle are the assets and liabilities of the separate vehicle and not the assets and liabilities of the parties).
The contractual arrangement between the parties specifies that:
(a) companies A and B must each appoint two members to the board of entity C. The board of directors
must unanimously agree the strategy and investments made by entity C;
(b) day-to-day management of the gas field and LNG facility, including development and construction
activities, will be undertaken by the staff of company B in accordance with the directions jointly agreed by
the parties. Entity C will reimburse B for the costs it incurs in managing the gas field and LNG facility;
(c) entity C is liable for taxes and royalties on the production and sale of LNG as well as for other liabilities
incurred in the ordinary course of business, such as accounts payable, site restoration and
decommissioning liabilities; and
(d) companies A and B have equal shares in the profit from the activities carried out in the arrangement and,
are entitled to equal shares of any dividends distributed by entity C.
The contractual arrangement does not specify that either party has rights to the assets, or obligations for the
liabilities, of entity C.
The board of entity C decides to enter into a financing arrangement with a syndicate of lenders to help fund
the development of the gas field and construction of the LNG facility. The estimated total cost of the
development and construction is CU1,000 million.
The lending syndicate provides entity C with a CU700 million loan. The arrangement specifies that the syndicate has
recourse to companies A and B only if entity C defaults on the loan arrangement during the development of the field
and construction of the LNG facility. The lending syndicate agrees that it will not have recourse to companies A and
B once the LNG facility is in production because it has assessed that the cash inflows that entity C should generate
from LNG sales will be sufficient to meet the loan repayments. Although at this time the lenders have no recourse to
companies A and B, the syndicate maintains protection against default by entity C by taking a lien on the LNG facility.
Analysis
The joint arrangement is carried out through a separate vehicle whose legal form confers separation between
the parties and the separate vehicle. The terms of the contractual arrangement do not specify that the parties
have rights to the assets, or obligations for the liabilities, of entity C, but they establish that the parties have
rights to the net assets of entity C. The recourse nature of the financing arrangement during the development
of the gas field and construction of the LNG facility (i.e. companies A and B providing separate guarantees
during this phase) does not, by itself, impose on the parties an obligation for the liabilities of entity C (i.e. the
loan is a liability of entity C). Companies A and B have separate liabilities, which are their guarantees to
repay that loan if entity C defaults during the development and construction phase.
There are no other facts and circumstances that indicate that the parties have rights to substantially all the
economic benefits of the assets of entity C and that the parties have an obligation for the liabilities of entity C.
The joint arrangement is a joint venture. The parties recognise their rights to the net assets of entity C as
investments and account for them using the equity method.
6
ACCOUNTING FOR JOINT OPERATIONS
For a joint operation, the joint operator recognises its:
• assets, including its share of any assets held jointly;
• liabilities, including its share of any liabilities incurred jointly;
• revenue from the sale of its share of the output arising from the joint operation;
• share of the revenue from the sale of the output by the joint operation; and
• expenses, including its share of any expenses incurred jointly. [IFRS 11.20].
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IFRS 11 requires each of these items to be accounted for in accordance with the
applicable IFRS. [IFRS 11.21]. Careful consideration should be given to the nature of the
rights to the assets, and the obligations for the liabilities (or the share of assets, liabilities,
revenues, and expenses) if any, of the joint operation (see 6.3 below).
6.1
Joint arrangements not structured through a separate vehicle
For joint arrangements not structured through a separate vehicle, the contractual
arrangement establishes the parties’ rights to the assets, and obligations for the liabilities,
relating to the arrangement, and the parties’ rights to the corresponding revenues and
obligations for the corresponding expenses. [IFRS 11.B16].
A contractual arrangement often describes the nature of the activities that are the subject
of the arrangement and how the parties intend to undertake those activities together. For
example, the parties could conduct an activity together, with each party being responsible
for a specific task and each using its own assets and incurring its own liabilities and the
parties share revenues and expenses. In such a case, each joint operator recognises in its
financial statements the assets and liabilities used for the specific task, and recognises its
share of the revenues and expenses in accordance with the contractual arrangement.
[IFRS 11.B17]. When the parties agree, for example, to share and operate an asset together
and share the output or revenue from the asset and operating costs, each joint operator
accounts for its share of the joint asset, its agreed share of any liabilities, and of the output,
revenues and expenses. [IFRS 11.B18].
6.2
Accounting for rights and obligations
An entity’s rights and obligations for the assets, liabilities, revenues and expenses
relating to a joint operation as specified in the contractual arrangement, are the basis for
accounting for a joint operation under IFRS 11. This may differ from its ownership
interest in the joint operation. [IFRS 11.BC38].
When the joint operator has differing rights (and percentages) to various assets, and/or
different obligations for various liabilitie
s, the financial statements would likely change
as a result of accounting for those individual rights and obligations, as compared with
consolidating a blended percentage of all assets and liabilities. Example 12.21 below
illustrates joint operation accounting in this case.
Example 12.21: Accounting for rights to assets and obligations for liabilities
D and E establish joint arrangement F, using a separate vehicle, classified as a joint operation. Accordingly, D and
E account for their rights to assets and their obligations for liabilities relating to F in accordance with relevant IFRS.
D and E each own 50% of the equity (e.g. shares) in F. However, the contractual terms of the joint
arrangement state that D has the rights to all of Building No. 1 and the obligation to pay all the third party
debt in F. D and E have rights to all other assets in F, and obligations for all other liabilities in F in proportion
to their equity interests (i.e. 50%). F’s balance sheet is as follows (in CUs):
Assets
Liabilities and equity
Cash
20
Debt
120
Building No. 1
120
Employee benefit plan obligation
50
Building No. 2
100
Equity
70
Total assets
240
Total liabilities and equity
240
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arrangements
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Under IFRS 11, D would record the following in its financial statements, to account for its rights to the assets
in F and its obligations for the liabilities in F. This differs from consolidating a blended percentage of all
assets and liabilities.
Assets
Liabilities and equity
Cash
10
Debt (2) 120
Building No. 1 (1)
120
Employee benefit plan obligation
25
Building No. 2
50
Equity
35
Total assets
180
Total liabilities and equity
180
(1) Since D has the rights to all of Building No. 1, it records that amount in its entirety.
(2) D’s obligations are for the third-party debt in its entirety.
6.3
Determining the relevant IFRS
As noted at 6 above, joint operators are required to recognise their rights to assets and
their obligations for liabilities ‘in accordance with the IFRSs applicable’. In some cases,
the relevant IFRS is clear, but questions have arisen in other cases.
• Right of use – The illustrative examples of joint operations in IFRS 11 refer to
recognising the joint operator’s share of assets (e.g. property, plant and equipment,
accounts receivable, cash),13 rather than recognising a ‘right of use’. Therefore, a
joint operator would recognise its share of an asset in accordance with IAS 16 –
Property, Plant and Equipment, or IAS 38 – Intangible Assets, as applicable. When
the contractual terms of the joint operation provide a joint operator with a right to
use an asset, not a share of the asset itself, the joint operator would apply IFRIC 4
– Determining whether an Arrangement contains a Lease (see Chapter 23 at 2.1),
or IFRS 16 – Leases – if early adopted (see Chapter 24).
• Liability for entire balance of certain liabilities – One of the joint operators
may have a direct legal liability for the entire balance of certain liabilities of
the joint operation. It may also have a right to reimbursement by the other
parties for their share of that liability of the joint operation. The joint operator
would recognise 100 per cent of the joint operation’s liabilities and a
receivable for the reimbursement due from the other parties for their share of
such liability. IFRS prohibits the offsetting of the liability against the
receivable. If the other parties were unable to pay, the joint operator would
not be able to recognise a receivable for the full amount due. Accordingly, the
receivable would be impaired (or less than the third party share of the liability
would be recorded), which would result in a reduction in profit in the joint
operator’s financial statements.
• Jointly and severally liable – In some cases, the joint arrangement (or legal form of
the separate vehicle, if applicable) gives joint and several liability for the
obligations of the arrangement. This may result in the joint operator recognising
the entire obligation due, not just its share. The facts and circumstances need to be
assessed in each case, and the liability accounted for in accordance with IAS 37 –
Provisions, Contingent Liabilities and Contingent Assets.
• Obligation to reimburse other parties – A party to the joint arrangement who has
an obligation to reimburse another party would recognise a financial liability for
the amount related to the reimbursement.
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• Service fee income – In some joint operations, one joint operator receives fees
from the other joint operators for providing management services in respect of the
joint operation. IFRS 11 does not specifically require that such parties account for
any fees received in accordance with IFRS 15 – Revenue from Contracts with
Customers. Paragraph BC55 of IFRS 15 explains that a contract with a collaborator
or a partner in a joint arrangement could also be within the scope of IFRS 15 if that
collaborator or partner meets the definition of a customer for some or all of the
terms of the arrangement.
• Inter-company sales – In March 2015, the Interpretations Committee published an
agenda decision that addressed the issue of revenue recognition by a joint
operator. If a joint arrangement is structured through a separate vehicle, classified
as a joint operation, the joint operators’ purchase of all the output from the joint
operation, is in effect a sale to itself. The Interpretations Committee interpreted
paragraph 20(d) of IFRS 11 to mean that a joint operator only would recognise its
share of the joint operation’s revenue when the joint operation sells its output to
third parties (i.e. other parties who have rights to the assets and obligations for the
liabilities relating to the joint operation).
6.4
Interest in a joint operation without joint control
A party that participates in a joint arrangement but does not have joint control
(see 4 above) is not a joint operator. However, if that party has rights to assets and
obligations for liabilities, the accounting is the same as that for a joint operator, as
discussed above. [IFRS 11.23].
If the party that participates in a joint arrangement but does not have joint control does
not have rights to the assets and obligations for the liabilities relating to the joint
operation, it accounts for its interest in the joint operation in accordance with other
applicable IFRS. [IFRS 11.23]. For example, if it has:
(a) an interest in a separate vehicle over which it has significant influence, it should
apply IAS 28;
(b) an interest in a separate vehicle over which it does not have significant influence,
it should account for that interest as a financial asset
under IFRS 9; or
(c) an interest in an arrangement without a separate vehicle, it should apply other
applicable IFRS (see 4.4.1 above).
Effectively, if the joint arrangement is a joint operation, and the party has rights to
the assets and obligations for the liabilities relating to that joint operation, it does
not matter whether the parties to that joint arrangement have joint control or not –
the accounting is the same. The disclosure requirements of IFRS 12 that may apply
are discussed in Chapter 13 at 5.
6.5
Joint operations with a party that participates in a joint
arrangement but does not have joint control
A joint operation conducted through a separate vehicle may involve a party that
participates in the joint arrangement but does not have joint control (see 4 and 6.4
above). In such cases, a joint operator does not recognise the rights to assets and
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obligations for the liabilities attributable to such party, or recognise a higher
percentage with a ‘non-controlling interest’. Rather, a joint operator only recognises
its share of any assets held jointly and its obligations for its share of any liabilities
incurred jointly. Example 12.22 illustrates this point.
Example 12.22: Joint operation with a party that participates in a joint
arrangement but does not have joint control
A and B enter into a joint operation that is structured through a separate vehicle Z. Each of the two entities owns
40% of the shares of the separate vehicle. The remaining 20% of Z is owned by C, which participates in the joint
arrangement but does not have joint control. C does has rights to the assets and obligations for the liabilities of Z.
Accordingly, A, B and C (see 6.4 above) recognise their assets, including their share of any assets held
jointly, and their liabilities, including their share of any liabilities incurred jointly, in accordance with
relevant IFRS.
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 170
