International Financial Reporting Standard 11 – Joint Arrangements
Why do entities enter into collaborations?
In business reality, collaborations between entities are commonplace. The need to partner arises for many reasons, and while partnerships can be structured in many ways, they can broadly be divided into two categories based on the partners’ degree of involvement, as explained below.
What are the benefits of collaborations between entities?
Collaborations can create synergistic value between parties with similar activities, give partners access to new markets, new technology or cheaper financing than conventional debt and allow risk hedging and sharing between partners. In addition, Collaborations combine know-how and expertise with funding or operating capabilities to extract commercial value.
What is a joint arrangement under IFRS 11?
To address such needs, IFRS 11 defines a joint arrangement as an arrangement of which two or more parties have joint control. Joint control is defined as a contractually agreed sharing of control that requires unanimous consent for decisions about the arrangement’s relevant activities. The rationale behind joint control is the joint exercise of power: decisions about the relevant activities of the investee are made jointly and require unanimous consent, so no party can make these decisions unilaterally.
What are the types of joint arrangements?
The Standard distinguishes between two types of joint arrangements, based on the rights and obligations of the parties to the arrangement:
What is a joint operation?
Joint operation – when the parties have rights to the assets and obligations for the liabilities relating to the arrangement, the arrangement is classified as a joint operation.
What is a joint venture?
Joint venture – when the parties have rights to the net assets of the arrangement, it is classified as a joint venture.
How did IFRS 11 change the definition compared to IAS 31?
It should be noted that under the previous accounting standard (IAS 31), the term joint venture was a catch-all label covering all types of joint arrangements, whereas under IFRS 11 a joint venture is just one of two forms of joint arrangements (as opposed to joint operations).
What is the main change introduced by IFRS 11?
One of the main changes in IFRS 11 was the elimination of the proportionate consolidation under IAS 31. IFRS 11 requires a deeper assessment of the rights and obligations held by an entity involved in a joint arrangement. Hence:
How is a joint venture accounted for?
A joint arrangement classified as a joint venture is accounted for using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures.
How is a joint operation accounted for?
A joint arrangement classified as a joint operation is accounted for by recognising the operator’s share of assets, liabilities, revenue and expenses. Subsequent measurement follows the relevant IFRS Accounting Standards for each item. For example, property, plant and equipment will be accounted for under IAS 16.