It is important to note that assessing whether an entity is a principal or an agent will
require consideration of all factors collectively. See Chapter 6 at 6.1 for more details
regarding the principal versus agent requirements.
Where it is determined that a manager is acting as a principal and therefore controls an
arrangement, the impact of this will depend upon the rights and obligations conveyed
by the arrangement (see 7.1.2.A and 7.1.2.B below for further discussion on this issue).
Where it is determined that the manager is acting as an agent, the manager would only
recognise its own interests in the joint arrangement (the accounting for which will
depend upon whether it is a joint operation or joint venture) and its
operator/management fee.
7.1.2.A
Implications of controlling a joint operation
While the principal versus agent assessment may lead to a conclusion that an manager
has control, if the joint arrangement is a joint operation, and each party has specific
rights to, and obligations for, the underlying assets and liabilities of the arrangement by
virtue of the contract, then the manager does not control anything over and above its
own direct interest in those assets and liabilities. Therefore, it still only recognises its
interest in those assets and liabilities conveyed to it by the contractual arrangement.
This accounting applies regardless of whether the arrangement is in a separate vehicle
or not, as the contractual terms are the primary determinant of the accounting. Note
that IFRS 11 defines a separate vehicle 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]. To explain this further, it is
worth considering the two types of joint arrangements contemplated by IFRS 11 – one
that is not structured through a separate vehicle (e.g. a contract alone) and one that is
structured through a separate vehicle.
No separate vehicle: Even if the manager ‘controlled’ the arrangement, there is really
nothing for it to control. This is because each party would continue to account for its
rights and obligations arising from the contract, e.g. it would apply IAS 16 to account for
its rights to any tangible assets, IAS 38 to account for its rights to any intangible assets
or IFRS 9 to account for its obligations for any financial liabilities etc. Additionally, the
consolidation requirements of IFRS 10 would not apply as they only apply to entities
and, in most circumstances, a contract does not create an entity.
Separate vehicle: If a manager controls an arrangement structured through a separate
vehicle, e.g. a company or trust, one may consider that an entity would automatically
look to IFRS 10 and consolidate the arrangement and account for the interests of the
other parties as non-controlling interests. However, in such situations, a contract may
exist which gives other parties to the arrangement direct rights to, and obligations for,
the underlying assets and liabilities of that arrangement. Therefore, this requires
consideration of the impact of such an arrangement on the separate financial statements
of the joint operation.
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industries
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Given this, the rights and obligations arising from the contractual arrangement should
be accounted for first. That is, each party to the arrangement should recognise its
respective share of the assets and liabilities (applying each IFRS as appropriate, e.g.
IAS 16, IAS 38, IFRS 9 etc.).
To the extent that the parties to the arrangement have specific rights to the assets, or
obligations for the liabilities, from the perspective of the separate vehicle, this means
that the rights to, and obligations for, its assets and liabilities have been contracted out
to other parties (i.e. the parties to the contractual arrangement) and therefore there may
be no assets or liabilities remaining in the separate vehicle to recognise.
Consequently, from the perspective of the manager of the joint arrangement, who may
be considered to control the separate vehicle, it would initially account for its and other
parties’ rights and obligations arising from the contract, and then when it looks to
consolidate the separate vehicle, there may be nothing left to consolidate, as the
separate vehicle may effectively be empty. However, this would only apply where the
separate vehicle was an entity as IFRS 10 only applies to entities.
The above analysis demonstrates that where parties to an arrangement genuinely have
contractual rights to, and obligations for, the underlying assets and liabilities of the
arrangement, concluding that a manager controls the arrangement does not change the
accounting for either the manager or the non-operator parties. However, the disclosure
requirements would likely differ, since IFRS 12 does not apply to joint arrangements in
which a party does not have joint control, unless that party has significant influence.
The disclosure requirements of IFRS 12 are discussed in Chapter 13.
7.1.2.B
Implications of controlling a joint venture
If a manager has control of a joint venture which was structured through a separate
vehicle which is considered to be an entity, the manager would have to consolidate the
separate vehicle and recognise any non-controlling interest(s). However, if the joint
venture is structured through a separate vehicle that is not an entity, IFRS 10 would not
apply, and the manager would apply the relevant IFRSs.
7.1.3
Parties to a joint arrangement without joint control or control
The accounting treatment of an interest in a contractual arrangement that does not give
rise to joint control or control depends on the rights and obligations of the party.
7.1.3.A Joint
operations
In some cases, a mining company or oil and gas company may be involved in a joint
operation, but it does not have joint control or control of that arrangement. Similar to
the situation discussed above at 7.1.2.A, effectively, if the joint arrangement is a joint
operation (i.e. joint control exists between two or more parties), and the party has rights
to the assets and obligations for the liabilities relating to that joint operation, it does not
matter whether the party in question has control, joint control or not – the accounting
is the same as that for a joint operation under IFRS 11, which is discussed in more detail
in Chapter 12 at 6.4. [IFRS 11.23]. The critical aspect of this accounting is whether there is
joint control by two or more parties within the arrangement (and therefore it is a joint
operation in accordance with IFRS 11). However, the disclosure requirements would
likely differ, since IFRS 12 does not apply to joint arrangements in which a party does
3262 Chapter 39
not have joint control, unless that party has significant influence. The disclosure
requirements of IFRS 12 are discussed in Chapter 13.
If the party 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 IFRSs. [IFRS 11.23]
. For example, if it:
(a) has significant influence over a separate vehicle which is an entity – apply IAS 28
– Investments in Associates and Joint Ventures;
(b) has significant influence over a separate vehicle which is not an entity – apply
other applicable IFRSs;
(c) does not have significant influence over a separate vehicle – account for that
interest as a financial asset under IFRS 9; or
(d) has an interest in an arrangement without a separate vehicle – apply other
applicable IFRSs.
7.1.3.B Joint
ventures
In some cases, a mining company or oil and gas company may be involved in a joint
venture, but it does not have joint control or control of that arrangement. In this instance
it would account for its interest as follows:
(a) significant influence over a separate vehicle which is an entity – still apply IAS 28,
[IFRS 11.25], however, the disclosure requirements differ for an associate versus a
joint venture (see Chapter 13 at 5);
(b) significant influence over a separate vehicle which is not an entity – apply other
applicable IFRSs; or
(c) does not have significant influence over a separate vehicle – account for that
interest as a financial asset under IFRS 9 at fair value through profit or loss or other
comprehensive income, unless the investment was held for trading.
See Chapter 44 for further information on IFRS 9. [IFRS 11.25, C14].
7.1.4
Managers of joint arrangements
It is clear that a participant in a joint operation is required to recognise its rights to the
assets, and its obligations for the liabilities (or share thereof), of the joint arrangement.
Therefore it is important that an entity fully understands what these rights and
obligations are and how these may differ between the parties.
See 7.1.2 above for a discussion of the principal versus agent assessment that needs to
be considered when an entity is appointed as manager of a joint arrangement and what
impact that assessment might have on the manager’s accounting.
7.1.4.A
Reimbursements of costs
A manager often carries out activities on behalf of the joint arrangement on a no gain, no loss
basis. Generally, these activities can be identified separately and are carried out by the
manager in its capacity as an agent for the joint arrangement, which is effectively the principal
in those transactions. The manager receives reimbursement of direct costs recharged to the
joint arrangement. Such recharges are reimbursements of costs that the manager incurred as
an agent for the joint arrangement and therefore have no effect on profit or loss in the
statement of comprehensive income (or income statement) of the manager.
Extractive
industries
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In many cases, a manager also incurs certain general overhead expenses in carrying out
activities on behalf of the joint arrangement. As these costs can often not be specifically
identified, many joint operating agreements allow the manager to recover the general
overhead expenses incurred by charging an overhead fee that is based on a fixed
percentage of the total costs incurred for the year. Although the purpose of this recharge
is very similar to the reimbursement of direct costs, the manager is not acting as an agent
in this case. Therefore, the manager should recognise the general overhead expenses
and the overhead fee in profit or loss in its statement of comprehensive income (or
income statement) as an expense and income, respectively.
7.1.4.B
Direct legal liability for costs incurred and contracts entered into
The manager of a joint arrangement may have a direct legal liability to third party
creditors in respect of the entire balance arising from transactions related to the joint
arrangement, e.g. suppliers, lessors etc.102 IFRS prohibits the offsetting of such liabilities
against the amounts recoverable from the other joint arrangement participants.
[IAS 1.32, IAS 32.42]. The manager may therefore need to recognise and/or disclose, for
example, some of the leases or supply arrangements that it has entered into on behalf
of the joint arrangement, as if it entered into these in its own name.
7.1.4.C
Joint and several liability
It is also possible that there may be liabilities in the arrangement where the obligation
is joint and several. That is, an entity is not only responsible for its proportionate share,
but it is also liable for the other party’s or parties’ share(s) should it/they be unable or
unwilling to pay. A common example of this in the extractives industries is restoration,
rehabilitation and decommissioning obligations.
In these instances, each party not only takes up its proportionate share of the
decommissioning/restoration obligation, it is also required to assess the likelihood that
the other party/ies will not be able or willing to meet their share. The facts and
circumstances would need to be assessed in each case, and any additional liability and
disclosures would be accounted for, and disclosed, in accordance with IAS 37.
Any increase in the provision would be accounted for under IFRIC 1, if it related to a
restoration or decommissioning liability that had both been included as part of an asset
measured in accordance with IAS 16 and measured as a liability in accordance with
IAS 37 (see Chapter 27 at 6.3.1 and 6.3.2 for more details). Such an addition to the asset
would also require an entity to consider whether this is an indication of impairment of
the asset as a whole, and if so, would need to test for impairment in accordance with
IAS 36. Increases that do not meet the requirements of IFRIC 1 would be recognised in
profit or loss.
7.1.5
Non-operators of joint arrangements
For expenses and liabilities incurred by the manager directly in its own name which it
recharges to the non-operators, the non-operator entities would be required to
recognise an amount payable to the operator for such amounts. These would be
recognised as a financial instrument under IAS 32 and IFRS 9 or potentially a provision
under IAS 37 and not under the standard which relates to the type of cost being
reimbursed. For example, the non-operator’s share of employee entitlements relating
3264 Chapter 39
to the manager’s employees who work on the joint project would not be recognised as
an employee benefit under IAS 19 – Employee Benefits. In addition, the related
disclosure requirements of IAS 19 would not apply, instead the disclosure requirements
of other standards, e.g. IFRS 7 – Financial Instruments: Disclosures – would apply.
Expenses and liabilities incurred by the manager jointly on behalf of all of the parties to
the arrangement would have to be recognised directly by each of the non-operator
parties in proportion to their respective interests in the arrangement.
7.2 Undivided
interests
Undivided interests are usually subject to joint control (see Chapter 12 at 4.4.1) and can,
therefore, be accounted for as joint operations. However, some JOAs do not establish
joint control but are, instead, based on some form of supermajority voting whereby a
qualified majority (
e.g. 75%) of the participants can approve decisions. This situation
usually arises when the group of participants is too large for joint control to be practical
or when the main investor wants to retain a certain level of influence.
Where joint control does not exist, such undivided interests cannot be accounted for as
joint operations in the scope of IFRS 11. Instead, the appropriate accounting treatment
by the investor depends on the nature of the arrangement:
• if the investor has rights to the underlying asset then the arrangement should be
accounted for as a tangible or intangible asset under IAS 16 or IAS 38, respectively.
The investor’s proportionate share of the operating costs of the asset (e.g. repairs
and maintenance) should be accounted for in the same way as the operating costs
of wholly owned assets; or
• if the investor is entitled only to a proportion of the cash flows generated by the
asset then its investment will generally meet the definition of a financial asset under
IAS 32. As the investor is exposed to risks other than just credit risk, such
investments are unlikely be considered debt instruments and instead would be
considered equity investments under IFRS 9. Under IFRS 9, equity instruments are
normally measured at fair value through profit or loss. [IFRS 9.4.1.4]. However, on
initial recognition, an entity may make an irrevocable election (on an instrument-
by-instrument basis) to present in other comprehensive income subsequent
changes in the fair value of an investment in an equity instrument within the scope
of IFRS 9. See Chapter 44 at 2 for a detailed analysis of the impact of IFRS 9 on
the classification of this investment.
With respect to such undivided interests, entities also enter into arrangements in which
they buy and sell parts of undivided assets, e.g. carried interests (see 6.1 above) and
farm-in arrangements outside the E&E phase (see 6.2.2 and 6.2.3 above). Although
neither IAS 16 nor IAS 38 addresses part-disposals of undivided assets, it is industry
practice to apply the principles in those standards when the vendor disposes of these
interests in circumstances in which it can demonstrate that it neither controls nor jointly
controls the whole of the original asset. In these circumstances, the principles of IAS 16
and IAS 38 are applied and the entity derecognises part of the asset, having calculated
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 645
