In A’s financial statements, it recognises its assets, liabilities, revenues and expenses in Z, which would be
40% of Z’s assets, liabilities, revenues and expenses, in accordance with the relevant IFRS. A does not
recognise a ‘non-controlling interest’ related to C’s interest in Z.
6.6
Transactions between a joint operator and a joint operation
IFRS 11 addresses transactions such as the sale, contribution or purchase of assets
between a joint operator and a joint operation. [IFRS 11.22].
When a joint operator enters into a transaction with its joint operation, such as a sale or
contribution of assets to the joint operation, the joint operator is conducting the
transaction with the other parties to the joint operation. The joint operator recognises
gains and losses resulting from such a transaction only to the extent of the other parties’
interests in the joint operation. [IFRS 11.B34].
However, when such transactions provide evidence of a reduction in the net realisable
value of the assets to be sold or contributed to the joint operation, or of an impairment
loss of those assets, those losses are recognised fully by the joint operator. [IFRS 11.B35].
When a joint operator enters into a transaction with its joint operation, such as a
purchase of assets from the joint operation, it does not recognise its share of the
gains and losses until the joint operator resells those assets to a third party.
[IFRS 11.B36].
However, when such transactions provide evidence of a reduction in the net realisable
value of the assets to be purchased or of an impairment loss of those assets, a joint
operator recognises its share of those losses. [IFRS 11.B37].
When there is a transaction between a joint operator and a joint operation,
consideration should be given to whether the transaction changes the nature of the joint
operator’s rights to assets, or obligations for liabilities. Any such changes should be
reflected in the joint operator’s financial statements, and the new assets and liabilities
should be accounted for in accordance with the relevant IFRS.
6.7
Accounting for a joint operation in separate financial statements
In the separate financial statements, both a joint operator and a party that
participates in a joint arrangement but does not have joint control (see 6.4 above)
account for their interests in the same manner as accounting for a joint operation in
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consolidated financial statements. That is, regardless of whether or not the joint
operation is structured through a separate vehicle, such a party would recognise in
its separate financial statements:
• 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 11.20-23, 26(a), 27(a)].
Accordingly, the guidance in 6 to 6.6 above also applies to accounting for joint
operations in separate financial statements.
7
ACCOUNTING FOR JOINT VENTURES
Joint ventures are accounted for using the equity method. IFRS 11 does not describe
how to apply the equity method. Rather, if an entity has joint control over a joint
venture, it recognises its interest in the joint venture as an investment and accounts
for it by applying the equity method in accordance with IAS 28, unless it is exempted
from doing so by IAS 28. [IFRS 11.24]. The requirements of IAS 28, including the
accounting for transactions between a joint venturer and the joint venture, are
discussed in Chapter 11.
As discussed at 2.3.1 above, venture capital organisations, mutual funds, unit trusts and
similar entities, including investment-linked insurance funds, can choose to measure
investments in joint ventures at fair value or apply the equity method under IAS 28. This
is considered a measurement exemption under IFRS 11 and IAS 28 (see Chapter 11 at 5.3).
This means, however, that such entities are subject to the disclosure requirements for
joint ventures set out in IFRS 12 (see Chapter 13 at 5).
Although this option included in IAS 28 is available to venture capital organisations and
similar entities, IFRS 10 states that an ‘investment entity’ for the purposes of that
standard would elect the exemption from applying the equity method in IAS 28 for its
investments in associates and joint ventures. [IFRS 10.B85L].
7.1
Interest in a joint venture without joint control
IAS 28 also applies if a party that participates in a joint arrangement but does not have
joint control (see 6.4 above) in a joint venture has significant influence over the entity.
[IFRS 11.25]. However, the disclosure requirements differ (see Chapter 13 at 5). If the party
that participates in a joint arrangement does not have joint control but does have
significant influence in a joint venture, but the joint venture is not an entity (i.e. but is in
a separate vehicle) (see 5.1 above), IAS 28 would not apply, and the investor would apply
the relevant IFRS.
If the party that participates in a joint arrangement but does not have joint control and
does not have significant influence, its interest in the joint venture would be accounted
for as a financial asset under IFRS 9. [IFRS 11.25, C14].
Joint
arrangements
865
7.2
Contributions of non-monetary assets to a joint venture
When an entity contributes a non-monetary asset or liability to a joint venture in
exchange for an equity interest in the joint venture, it recognises the portion of the gain
or loss attributable to the other parties to the joint venture except when the contribution
lacks commercial substance.
The measurement of the non-monetary asset in the financial statements of the joint
venture (i.e. not the joint venturer) can differ, depending on the method of settlement.
When the consideration given by the joint venture is its own shares, the transaction is
an equity-settled share-based payment transaction in the scope of IFRS 2 – Share-
based Payment. As a result, the joint venture measures the non-monetary asset received
at its fair value. When the consideration given by the joint venture is not its own shares,
the transaction is outside the scope of IFRS 2; we believe the joint venture should
measure the non-monetary asset received at its cost, which is the fair value of the
consideration given.
However, when the contributed non-monetary asset is a subsidiary of an entity, a
conflict arises between the requirements of IAS 28 and IFRS 10. This is discussed in
Chapter 11 at 7.6.5.C and at 8.2.3 below.
7.3
Accounting for a joint venture in separate financial statements
In its separate financial statements, a joint venturer accounts for its interest in the joint
venture at cost, as a financial asset per IFRS 9, or under the equity method. [IFRS 11.26(b)].
These separate financial statements are prepared in addition to those prepared using
the equity method. The require
ments for separate financial statements are discussed in
Chapter 8 at 2.
In its separate financial statements, a party that participates in, but does not have joint
control of a joint venture (see 6.4 above) accounts for its interest as a financial asset
under IFRS 9, unless it has significant influence over the joint venture. [IFRS 11.27(b)]. In
this case, it may choose whether to account for its interest in the joint venture at cost,
as a financial asset per IFRS 9, or the equity method. [IAS 27.10].
However, if an entity elects, in accordance with IAS 28, to measure its investments in
associates or joint ventures at fair value through profit or loss in accordance with IFRS 9,
it also accounts for those investments in the same way in its separate financial
statements. [IAS 27.11].
8 CONTINUOUS
ASSESSMENT
IFRS 11 incorporates the notion of continuous assessment, consistent with the
requirements in IFRS 10.
If facts and circumstances change, an entity that is a party in a joint arrangement
reassesses whether:
• it still has joint control of the arrangement; and [IFRS 11.13]
• the classification of joint arrangement has changed. [IFRS 11.19].
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8.1
When to reassess under IFRS 11
A party reassesses upon any change in facts and circumstances whether it has joint control,
and whether the classification of joint arrangement has changed. In some cases, such change
in facts and circumstances might result in a party having control over the arrangement and
therefore losing joint control. A party also may lose joint control upon a change in facts and
circumstances. In other cases, an arrangement may remain under joint control, but the
classification might change from joint venture to joint operation (or vice versa).
Reassessment of a joint arrangement occurs upon a change in:
• How activities are directed – For example, A sets up Z to develop a new product
or technology. Initially, Z had a Board of Directors elected by shareholders,
separate management and the relevant activities were directed by voting rights
held exclusively by A. If A enters into an agreement with B so that A and B must
agree on all decisions (e.g. they replace the Board and make decisions for
management), reassessment would be required to evaluate whether A and B have
joint control of Z.
• Legal form – For example, a separate vehicle that initially did not confer separation
between the parties and the vehicle (e.g. a general partnership) and was considered
a joint operation, is converted into a separate vehicle that now does confer
separation between the parties and the vehicle (e.g. a corporation). Reassessment
would be required to evaluate whether this indicates a change in classification from
a joint operation to a joint venture.
• Contractual terms – For example, the terms of a joint arrangement are
renegotiated, such that the parties have rights to the assets or obligations for the
liabilities. Reassessment would be required to evaluate whether this indicates a
change in classification to a joint operation.
• Other facts and circumstances – For example, the terms and conditions of a joint
operation are renegotiated. Initially, a joint arrangement could sell output only to the
parties of the joint arrangement. Thereafter, the joint arrangement may also sell output
to third-party customers. Reassessment would be required to evaluate whether this
indicates a change in classification from a joint operation to a joint venture.
As discussed at 5.3.1 above, another event that might trigger reassessment would be an
event that leads a guarantor to have to pay (or perform) under a guarantee.
8.1.1
Changes in ownership
The accounting for changes in ownership of a joint arrangement depends firstly on
whether the underlying assets and liabilities constitute a ‘business’ as defined in IFRS 3.
Secondly, it depends on the type of interest held before and after the change in
ownership occurred.
The diagram below provides a reference for additional guidance when the assets and
liabilities meet the definition of a business. The key questions that arise on these
transactions are:
Joint
arrangements
867
• Should a cost-based approach or a fair value (IFRS 3) approach be used?
• Should any previously held (retained) interest be remeasured?
• Should a profit on sale be recognized and if how should it be measured?
Matrix of transactions involving changes of interest in a business14
To:
Holder of financial
Investee in
Joint
Joint Operator
Parent
asset
associate
Venturer
From:
Holder of financial
IFRS 9
IFRS not
IFRS not
See 8.3.1 below
IFRS 3
asset
See Chapter 44
clear
clear
See Chapter 9
See
8.2.5 below
at 9
Chapter 11
See
at 7.4.2.A
Chapter 11
at 7.4.2.A
Investee in associate
IAS 28 and IFRS 9
IAS 28
See 8.3.1 below
IFRS 3 and
or
See Chapter 11
See Chapter 11 at 7.4.2.B;
IAS 28
Joint Venturer
at 7.12.2
7.4.2.C, 7.12.3 and 7.12.4
See Chapter 11
at 7.12.1
Joint Operator
IFRS not clear
IFRS not clear
See 8.3.2 below
See 8.3.2 below
See 8.3.4 below
See 8.3.4 below
Parent
IFRS 10
IFRS 10
See 8.3.3 below
IFRS 10
See Chapter 7 at 3.2
See Chapter 11 at 7.4.1 and
See Chapter 7
8.2.3 below
at 3.3
The rights and obligations of the parties that participate in a joint arrangement but who
do not have joint control (see 6.4 above) should determine the appropriate category per
the table above.
In 8.2 and 8.3 below, we discuss changes in accounting that result from changes in
ownership in joint ventures and joint operations that constitute a business, respectively.
The accounting for a change in an interest in a joint arrangement that does not meet the
definition of a business is discussed at 8.4 below.
8.2
Changes in ownership of a joint venture that constitutes a
business
8.2.1
Acquisition of an interest in a joint venture
The accounting for the acquisition of an interest in a joint venture that meets the
definition of a business is accounted for per IAS 28 (see Chapter 11 at 7.4) and the
procedures are similar to those applied for an acquisition of a business in IFRS 3.
However, it is clear from the scope of IFRS 3 that the formation of a joint venture that
constitutes a business, in the financial statements of the joint venture itself,
is not
covered by IFRS 3. [IFRS 3.2].
868 Chapter
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8.2.2
Gaining control over a former joint venture
If an entity gains control over a former joint venture, and the acquiree meets the
definition of a business, the entity applies IFRS 3 (see Chapter 9 at 9).
8.2.3
Former subsidiary becomes a joint venture
Under IFRS 10, if a parent entity loses control of a subsidiary that constitutes a business
in a transaction that is not a downstream transaction (see 7.2 above), the retained
interest must be remeasured at its fair value, and this fair value becomes the cost on
initial recognition of an investment in an associate or joint venture. [IFRS 10.25]. If the
subsidiary does not constitute a business, we believe that an entity can develop an
accounting policy to apply IFRS 10 paragraph 25 to:
• the loss of control limited only to subsidiaries that constitute a business; or
• to the loss of control over all subsidiaries, i.e. those that constitute a business and
those that do not.
Where an entity only applies IFRS 10 paragraph 25 to subsidiaries that constitute a
business; for transactions where the subsidiary does not constitute a business and the
loss of control is through a downstream transaction, it will apply the guidance in IAS 28.
For all other types of transactions, it will need to develop an accounting policy in terms
of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors – to
account for the retained interest.
Where the loss of control occurs through a downstream transaction, the requirements
in IFRS 10 relating to the accounting for loss of control of a subsidiary are inconsistent
with the accounting required by IAS 28. Under IAS 28, the contributing investor is
required to restrict any gain arising as a result of the exchange relating to its own assets,
to the extent that the gain is attributable to the other party to the joint venture (see 7.2).
However, under IFRS 10, the gain is not restricted to the extent that the gain is
attributable to the other party to the associate or joint venture, and there is no
adjustment to reduce the fair values of the net assets contributed to the associate or joint
venture. In September 2014, the IASB issued Sale or Contribution of Assets between an
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 171
