IFRS 11 Joint Arrangements

Today’s agenda

► Background and objectives

► Joint arrangements
► Classification of a joint arrangement
► Accounting treatment
► Continuous assessment
► Transition
► Consequential amendments
► Disclosures

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Background and objectives

► Eliminate accounting policy choice to account for jointly

controlled entities using proportionate consolidation
► Structure is no longer the only determinant of
classification
► Converge IFRS and US GAAP

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Joint arrangements

A joint arrangement is an arrangement over which two or

more parties have joint control

► A joint arrangement is either a joint operation or a joint

venture and has the following characteristics:
► The parties are bound by a contractual arrangement
► That contractual arrangement gives two or more of those parties
joint control of the arrangement
► Contractual arrangement defines the terms
► Often, but not always, in writing
► Documented discussions

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Joint arrangements
Joint control
Joint control is the contractually agreed sharing of control of an
arrangement , which exists only when the decisions about the
relevant activities require the unanimous consent of the parties
sharing control

► Control: the investor is exposed, or has rights, to variable

returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee
► Relevant activities: the activities of the arrangement that
significantly affect the investee’s returns
► Unanimous consent: no single party controls the arrangement
and two or more parties must agree to share control

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Joint arrangements
Joint control – Example

► Two investors form an investee to develop and market a

medical product
► One investor is responsible for developing and obtaining
regulatory approval
► Other investor is responsible for manufacturing and marketing
► Determine which activity most significantly affects returns
► Purpose and design of the investee
► Factors that affect profit margin, revenue , value, etc
► Effect on returns from each decision-maker’s authority
► Investors’ exposure to variability of returns

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Joint arrangements
Joint control

Does the contractual arrangement give

all the parties (or a group of the parties)
control of the arrangement collectively? No Outside the scope
of IFRS 11
Yes
(not a joint
Do the decisions about the relevant arrangement)
activities require the unanimous consent
of all the parties that collectively control No
the arrangement?
Yes
Joint operation
Joint Arrangement
Joint venture

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Joint arrangements
Joint control - Examples

Example 1 Example 2 Example 3

Requirement 75% vote to direct 75% vote to direct Majority vote to
relevant activities relevant activities direct relevant
activities
Party A 50% 50% 35%
Party B 30% 25% 35%
Party C 20% 25% Widely dispersed
Conclusion Even though A No control (or No control (or
can block any joint control) joint control)
decision, A does because multiple because multiple
not control B, combinations combinations
because A needs could be used to could be used to
B to agree = joint reach agreement reach agreement
control between
A and B.

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Joint arrangements
Unit of account

Master
agreement

Manufacturing Distribution

Country A: Country B: Country C: Country D:

unlimited partnership limited partnership unlimited partnership limited partnership
joint operation joint venture joint operation joint venture

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Classification of a joint arrangement

Does the legal form of the separate vehicle

Legal form of
give the parties rights to the assets, and
the separate
obligations for liabilities, relating to the Yes
vehicle
arrangement?

No

Do the contractual terms of the arrangement

Contractual
specify that the parties have rights to the
terms of the
assets, and obligations for the liabilities,
Joint
arrangement Yes operation
relating to the arrangement?

No
Is the arrangement designed so that
Other facts & • The parties have rights to substantially all of
circumstances the economic benefits of the JA?
• The JA depends on the parties on a Yes
continuous basis for settling the liabilities?
No

Joint venture

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Classification of a joint arrangement
Legal form
► Legal form is no longer the sole factor, but is still very important in
classifying a joint arrangement

Joint Operations Joint Ventures

Parties have rights to the assets and Parties have rights to the net assets
obligations for the liabilities of the of the arrangement
arrangement

Without a separate vehicle, the joint To be a joint venture, there must be a

arrangement is a joint operation separate vehicle
The legal form of the separate vehicle The legal form of the separate vehicle
does not confer separation between the causes it to be considered in its own
parties and the separate vehicle (e.g., right (e.g., corporation)
general partnership)
► Separate vehicle: A separately identifiable financial structure, including
separate legal entities or entities recognised by statute, regardless of
whether those entities have a legal personality
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Classification of a joint arrangement
Legal form - Example

► Fact pattern:
► A and B jointly establish a new corporation (C) in which each party
has a 50% ownership interest
► The purpose of this arrangement is to manufacture the materials
required by both parties for their own individual manufacturing
processes
► Analysis:
► Incorporation enables the separation of C from A and B
► Assets and liabilities of C are the assets and liabilities of the
incorporated entity
► Legal form of the separate vehicle indicates that the parties have
rights to the net assets of the arrangement
► Therefore – Joint Venture

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Classification of a joint arrangement
Examples of contractual terms
Joint Operations Joint Ventures
Assets •Share all interests in the assets Do not have interests (i.e., no
in a specified proportion rights, title, or ownership) in the
•Hold assets of the arrangement assets of the arrangement
as tenants in common in a
specified proportion
•Have rights to all of the
economic benefits generated
by the assets
Liabilities •Share all liabilities, obligations, •Are not liable for the debts and
costs and expenses in a obligations of the arrangement
specified proportion •Liabilities to the arrangement do
•Have liabilities for claims raised not exceed the parties’
by third parties or to customers investment in the arrangement
of the arrangement •Creditors do not have any
recourse against any party in for
debts or obligations

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Classification of a joint arrangement
Contractual terms - Example

(Continued)
► Fact pattern:
► A and B modify the features of C through their contractual
arrangement so that each has an interest in the assets of C and
each is liable for the liabilities of C in a specified proportion
► Analysis:
► Legal form of the separate vehicle indicates that the parties have
rights to the net assets of the arrangement
► However, contractual modifications to the features of C cause the
arrangement to be a joint operation

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Classification of a joint arrangement
Facts and circumstances

► Facts and circumstances might indicate a joint operation if

they result in the parties having:
► Rights to the assets
► Obligations for the liabilities
► Examples:
► Restrictions on customers
► Commitments to purchase all the output produced
► Expectations to fund losses
► Consider purpose and design
► Commitment upon default or guarantee is not
determinative of being a joint operation

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Classification of a joint arrangement
Facts and circumstances - Example

(Continued)
► Fact pattern:
► A and B agreed to purchase all the output produced by C in a ratio
of 50:50
► C cannot sell any of the output to third parties, unless this is
approved by A and B (expected to be uncommon)
► Price of the output sold is designed to cover expenses incurred by
C (intended to operate at break-even level)
► Analysis:
► Joint operation

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Accounting treatment

Joint Ventures
Jointly controlled Jointly controlled Jointly controlled
IAS 31

operations assets entities

Recognise its assets, liabilities,
expenses, and its share of
income
Recognise its assets, liabilities,
Equity method or proportionate
revenue, and expenses, and/or
consolidation
its relative shares thereof

Joint Arrangements
Joint operations Joint ventures
IFRS 11

The parties with joint control have The parties with joint control have
rights to the assets and obligations rights to the net assets of the
for the liabilities of the arrangement arrangement.

Recognise its assets, liabilities,

revenue, and expenses, and/or Equity method
its relative shares thereof

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Accounting treatment
Proportionate consolidation vs. joint operation

► When is accounting for a joint operation the same as

‘proportionate consolidation’?
► Equal rights to all assets all liabilities – probably same
► Rights to a specified percentage of certain assets and differing
rights (and percentages) to other assets, and different obligations
for various liabilities – likely to be a difference
► Nature of assets and liabilities might change
► Assets - same nature as recognised by joint operator OR (for
example) reimbursement right?
► Liabilities - same nature as recognised by joint operator OR (for
example) cash due to joint operation?

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Accounting treatment
Parties without joint control

► Joint operation:
► Account for rights to assets, and obligations for liabilities, relating
to the joint operation (same as accounting by a joint operator)
► Or, if no rights or obligations, account for interest in joint operation
according to applicable IFRS
► Joint venture:
► Financial instrument – IFRS 9
► Significant influence – use equity method (same as joint venturer)

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Continuous assessment

► Reassess if change in:

► Joint control
► Type of joint arrangement
► Legal form
► Contractual terms
► Facts and circumstances

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Transition
Proportionate consolidation to the equity method

► Effective 1 January 2013

► Recognise investment in the joint venture for earliest
period presented
► Measure investment as the aggregate of the carrying
amounts of the assets and liabilities that were previously
proportionately consolidated
► Including any goodwill arising from acquisition
► Investment becomes ‘deemed cost’ for equity method
► Test the investment for impairment
► Disclose aggregated assets and liabilities

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Transition
Equity method to joint operation

► Effective 1 January 2013

► Derecognise the equity method investment for earliest
period presented (“A”)
► Recognise share of assets and liabilities, including
goodwill that formed part of the carrying amount of the
equity method investment (“B”)
► Any difference between above:
► If B > A, first reduce goodwill, then retained earnings
► If A > B, recognise in retained earnings
► Disclose reconciliation

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Consequential amendments

► IAS 28 Investments in Associates and Joint Ventures

► Defines significant influence
► Describes the equity method of accounting
► Associates over which reporting has significant influence
► Joint ventures (as newly defined) over which an entity has joint control
► Incorporates SIC-13 (contribution of non-monetary asset to a JV)
► No remeasurement if interest changes from associate to joint
venture (or vice versa)

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Disclosures

► For individually material joint arrangements:

► Nature of the relationship with the joint arrangement
► Proportion of the ownership interest vs. voting shares
► For individually material joint ventures:
► Method of accounting
► Summarised financial information
► Fair value of (if quoted market price is available)
► Aggregate information for immaterial JVs
► Summarised financial information is also required if the
fair value option is used

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IFRS 11 Joint Arrangements
Appendix - Examples
Appendix – list of examples

► Example 1 – Construction
► Example 2 – Real estate
► Example 3 – Manufacturing & distribution
► Example 4 – Bank
► Example 5 – Oil & gas
► Example 6 – Liquefied natural gas

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Example 1 – Construction
Fact pattern

► A and B enter into a contract to design and construct a

road for a government
► A and B set up Z to conduct the arrangement
► Z enters into the contract with the government
► However, the legal form of Z is such that A and B have rights to the
assets and liabilities for the obligations of Z based on their
participation shares
► Profit or loss resulting from the arrangement is shared by A and B
based on their participation shares
► A and B assign an operator, who will be an employee of either A or
B, activities executed on a ‘no gain or loss’ basis

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Example 1 – Construction
Analysis

► Joint operation
► Separate vehicle – Yes (Z)
► Legal form – Does not confer separation between A and B and the
separate vehicle (Z), because assets and liabilities in Z are A and
B’s assets and liabilities
► Terms – A and B have rights to the assets, and obligations for the
liabilities, relating to Z
► Facts & circumstances – Do not need to be considered, because
legal form and terms indicate joint operation
► Accounting – A and B each recognise their share of the assets,
liabilities, revenue and expenses based on their participation share
in Z

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Example 2 – Real estate
Fact pattern

► A and B (real estate companies) enter into a contract to

acquire and operate a shopping centre
► A and B set up X to own the shopping centre
► Legal form of X is such that X has rights to the assets and liabilities
for the obligations (not A and B)
► Activities include: rental of retail units, managing the car park,
maintaining the centre and its equipment (such as lifts), and building
the reputation and customer base
► The parties are not liable for the debts or liabilities of X (liability
limited to unpaid capital contribution)
► A and B have the right to sell or pledge interests in X
► A and B receive share of the net rental income

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Example 2 – Real estate
Analysis

► Joint venture
► Separate vehicle – Yes (X)
► Legal form – Confers separation between A and B and
the separate vehicle (X); that is, the assets and
liabilities in X are not A and B’s assets and liabilities
► Terms – A and B have rights to the net assets of X
► Facts & circumstances – None that indicate that A and
B have rights to substantially all the economic benefits
of the assets relating to the arrangement, or obligations
for the liabilities relating to the arrangement
► Accounting – Account for interests in X using equity
method
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Example 3 – Manufacturing & distribution
Fact pattern

► A and B enter into a contract to manufacture and distribute

a product in a framework agreement
► Manufacturing activity:
► Separate vehicle (M)
► M’s legal form causes confers separation between A and B and M
(assets and liabilities of M are its own)
► A and B committed to purchasing all of the whole production in
accordance with their ownership in M
► A and B subsequently sell the product to another joint
arrangement, established exclusively for distribution
► A and B do not have rights to the assets or obligations for the
liabilities relating to the manufacturing activity

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Example 3 – Manufacturing & distribution
Fact pattern

► Distribution activity:
► Separate vehicle (D)
► D’s legal form causes confers separation between A and B and D
(assets and liabilities of D are its own)
► D orders its requirements for the product from A and B according to
the needs of the different markets where the distribution
arrangement sells the product
► A and B do not have rights to the assets and obligations for the
liabilities relating to the distribution activity

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Example 3 – Manufacturing & distribution
Fact pattern

► Framework agreement also establishes:

► M will produce product to meet the requirements for that the
distribution arrangement places on A and B;
► M will sell product to A and B at a price that covers all production
costs incurred
► A and B sell the product to D at a price agreed by A and B
► Any cash shortages incurred by M will be financed by A and B in
accordance with their ownership interests in M

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 Example 3 – Manufacturing & distribution
Analysis

Manufacturing: Joint operation Distribution: Joint Venture

Separate Yes – M Yes – D
vehicle
Legal form Confers separation between A and Confers separation between A and
B and separate vehicle M B and separate vehicle D
Contractual Assets and liabilities in M are not Assets and liabilities in D are not A
terms A and B’s assets and liabilities and B’s assets and liabilities
Other facts • A and B purchase all of the None that indicate that A and B
and production, and therefore all the have rights to substantially all the
circum- economic benefits of M economic benefits of the assets
stances • Exclusive dependence of M on A relating to D, or obligations for the
and B for cash flows (sale of liabilities relating to D
product and funding) indicate A
and B have an obligation for the
liabilities of M

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Example 3 – Manufacturing & distribution
Variation

► Fact pattern
► M also distributes product to other customers
► M also sells product directly to the D
► No fixed proportion of the production of M is committed to be
purchased by, or sold to, D
► Analysis
► Manufacturing: changes to joint venture
► M has own customers and own distribution
► M has inventory and credit risk
► M not dependent on A and B
► Distribution: remains joint venture

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Example 4 – Banking
Fact pattern

► A and B agree to combine their corporate, investment

banking, and asset management
► A and B set up Bank C
► C is publicly listed; A and B each hold 40%
► Legal form of C is such that C has rights to the assets and
liabilities for the obligations (not A and B)
► In the event of dispute, A and B agree to provide funds to ensure C
complies with the applicable legislation and banking regulations,
and honours any commitments made to the banking authorities
► Commitment represents the assumption by A and B of 50% of any
needed funds that would be required to ensure C complies with
legislation and banking regulations

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Example 4 – Banking
Analysis

► Joint venture
► Separate vehicle – Yes (C)
► Legal form – Confers separation between A and B and the
separate vehicle (C); that is, the assets and liabilities in C are not A
and B’s assets and liabilities
► Terms – A and B have rights to the net assets of C
► Facts & circumstances – Commitment does not indicate that A and
B have obligations for the liabilities relating to the arrangement
► Accounting – Account for interests in C using equity method

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Example 5 – Oil & gas
Fact pattern

► A and B agree to undertake oil & gas exploration,

development and production activities
► A and B set up separate vehicle H
► One of the parties is appointed as operator and is responsible for
managing the work programmes
► Rights and obligations of H are shared by A and B:
► Permits, rehabilitation liabilities, royalties, taxes
► Production of H
► Costs associated with work programmes
► Costs are covered by cash calls on A and B
► If A or B fails to satisfy its monetary obligations, the other party is
required to contribute to C the amount in default, which then
becomes a debt between A and B

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Example 5 – Oil & gas
Analysis

► Joint operation
► Separate vehicle – Yes (H)
► Legal form – Confers separation between A and B and the
separate vehicle (H)
► Terms – ‘Overrides’ the legal form
► A and B have rights to the assets of C (rights, production)
► A and B have obligations for the liabilities of C (costs for programmes)
► Facts & circumstances – Do not need to be considered, because
legal form and terms indicate joint operation
► Accounting – A and B each recognise their share of the assets,
liabilities, revenue and expenses based on their participation share
in H

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Example 6 – Liquefied natural gas
Fact pattern

► A and B agree to develop and operate a gas field and a

liquefied natural gas (LNG) facility
► A and B set up separate vehicle C
► Daily management of the gas field and LNG facility will be
undertaken by the staff of B
► C will reimburse B for the costs it incurs in managing
► C is liable for taxes, royalties and liabilities incurred
► A and B have an equal share in the net profits from the activities
and dividends distributed by C
► C enters into a loan
► Recourse to A and B if C defaults during construction of LNG facility
► No recourse to A and B once the LNG facility is in production, because
the cash inflows of C would be sufficient

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Example 6 – Liquefied natural gas
Analysis

► Joint venture
► Separate vehicle – Yes (C)
► Legal form – Confers separation between A and B and the
separate vehicle (C)
► Terms – A and B have rights to the net assets of C
► Facts & circumstances – A and B’s guarantees of the loan does
not indicate that A and B have an obligation for the liabilities of C
► Accounting – Account for interests in C using equity method

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