ifrs 11 and 12 cpd september 2013

© IFRS Foundation 1

IFRS 11 Joint Arrangements

CB

and related disclosures in IFRS 12

September 2013

Disclaimer and allowed use 2

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IFRS 11 Joint Arrangements 3

REPLACES

IAS 31 & SIC-13

PERIODS STARTING 1 Jan 2013 PART OF

PACKAGE OF STANDARDS:IFRSs 10, 11, & 12 , and IASs 27 & 28

© IFRS Foundation

Contents

• Introduction• Scope• Joint Arrangement - Joint Control

- Contractual Arrangement

• Classification of joint arrangement• Accounting treatment• Disclosure• Transition provisions• Future developments• Summary © IFRS Foundation

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Introduction

Objective of general purpose financial reporting - to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.

In order to meet this objective IFRS 11 establishes principles to help entity’s reflect their interests in joint arrangements in their financial statements.

5

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Introduction

Principle:

A party to a joint arrangement recognises its rights and obligations arising from the arrangement

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Introduction

IFRS 11: Principle-based accounting for joint arrangements

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Enhances verifiability, understandability, consistency and comparability

When parties have rights to the assets and obligations for the liabilities, account for those assets and liabilities directlyJOINT OPERATION

When parties have rights only to the net assets, account as an investment using the equity methodJOINT VENTURE

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Scope

IFRS 11 Joint Arrangements must be applied by all entities that are a party to a joint arrangement.

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What is a joint arrangement?

E and F run complementary businesses:- E sells bathroom suites- F is a plumber fitting bathroom suitesActivity 1E advertises F’s website on its own website, andF advertises E’s website on its own website.

?

Activity 2E and F together approach a builder that is refurbishing a block of flats and agree to supply and fit the bathroom suites for each flat in the block.

?

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A joint arrangement is an arrangement in which :– the parties are bound by a contractual

arrangement; and– the contractual arrangement gives two or more

of those parties joint control of the arrangement.

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E and F run complementary businesses:- E sells bathroom suites- F is a plumber fitting bathroom suitesActivity 1E advertises F’s website on its own website, andF advertises E’s website on its own website.

Activity 2E and F together approach a builder that is refurbishing a block of flats and agree to supply and fit the bathroom suites for each flat in the block.

?

11

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Joint control

Joint control is:• the contractually agreed sharing of control of an

arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

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Joint control? 13

A B C

D

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Joint control? 14

A B C

D

33.33% 33.33% 33.34%

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Joint control? 15

A B C

D

50% 30% 20%

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Joint control defined

IFRS 11 defines joint control as:• The contractually agreed sharing of control of an

arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

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Those activities that significantly affect the returns of the arrangement

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Assessing joint control 17

Does the contractual arrangement give the parties

control collectively?

Do decisions about the relevant activities require the unanimous consent of all the parties, or of a

group of the parties, that collectively control the arrangement?

Arrangement is jointly controlled: a joint arrangement.

Not in IFRS 11

No

No

Yes

Yes

Do decisions for relevant activities require unanimous consent of the parties that

collectively control?

Not in IFRS 11

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Interaction of IFRS 11 with other standards 18

Control (IFRS 10)

Significant influence (IAS 28)

Joint Control (IFRS 11)

Investment (IFRS 9 (or IAS 39) & IFRSs 7&13)

Disclosures(IFRS 12)

© IFRS Foundation

Interaction of IFRS 11 with other Standards

noyes

yes no

noJoint VentureJoint Operation

19Control alone?

Consolidation in accordance with IFRS 10 Joint control?

Define type of joint arrangement in accordance with IFRS 11

Significant influence?

Account for assets, liabilities, revenues and expenses

Disclosures in accordance with IFRS 12

Account for an investment in accordance with IAS 28



yes

IFRS 9 (or IAS 39)

19

Disclosures in accordance with IFRSs 7 and 13

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20

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Contractual arrangement

Sets out the enforceable terms upon which the parties participate in the activity. Generally deals with matters such as:

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Purpose, activity & duration of joint arrangement

How members of Board of Directors or other governing body are appointed

Decision-making process (which matters, voting rights & level of support)

Capital or other contributions

How assets, liabilities, revenues, expenses, or profit or loss are shared

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22

© IFRS Foundation

Types of joint arrangement 23

Joint operations

Joint ventures

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Joint operation or joint venture? 24

A B

C

50% 50%

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Structured through an entity

Not structured through an entity

Jointly controlled operations

Jointly controlled

assetsJointly controlled entities

Accounting for assets, liabilities, revenues and expenses in

accordance with the contractual arrangements

Proportionate consolidation

Equity method

option

IAS 31

Structure of the joint arrangement The structure of the arrangement is the only driver for the accounting

When arrangements are structured in entities, preparers have an accounting option

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© IFRS Foundation

IFRS 11 26

Parties to a joint arrangement recognise theirrights and obligations arising from

the arrangement

Principle-based accounting for joint arrangements

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IFRS 11 27

Parties that have rights to the assets and obligations for the liabilities relating to the arrangement are parties to a JOINT OPERATION

A joint operator accounts for its assets, liabilities and corresponding revenues and expenses arising from the arrangement

Parties that have rights to the net assets of the arrangement are parties to a JOINT VENTURE

A joint venturer accounts for an investment in the arrangement using the equity method

© IFRS Foundation


A B

C

50% 50%

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Car manufacturer

Car manufacturer

Enginemanufacturer

Joint operation

Accounting for assets, liabilities, revenues and expenses in accordance with the

contractual arrangement

Not structured through a separate vehicle

29Classification and Accounting 29

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A Car

manufacturer

BCar

manufacturer

C Engine

manufacturer

50% 50%

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Assess the parties’ rights and obligations arising from the arrangement by considering:

(a) the legal form of the separate vehicle (b) the terms of the contractual arrangement,

and, if relevant, (c) other facts and circumstances

Joint operation Joint venture

Assessment of the parties’ rights and obligations

Accounting for assets, liabilities, revenues and expenses in accordance with the contractual

arrangement

Accounting for an investment using the

equity method

Not structured through a separate vehicle *

Structured through a separate vehicle *

Parties have rights to the net assets

Parties have rights to the assets and obligations for the liabilities

Accounting reflects the parties’ rights and obligations

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31Classification and Accounting 31

Structured through a separate vehicle: assessment of rights and obligations 32

Does the legal form give the parties rights to the assets and obligations for the liabilities?

Joint venture

Joint operation

Yes

Yes

No

Does the contractual arrangement specify that the parties, not vehicle, have rights to the assets and

obligations for the liabilities?

Do other facts & circumstances give the parties rights to the assets and obligations for the

liabilities?

Yes

No

No

© IFRS Foundation


A Car

manufacturer

BCar

manufacturer

C Engine

manufacturer

50% 50%

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Example 1: Construction and real estate

• Separate vehicle, C, formed, over which two parties,A and B, have joint control:

• the purpose of the joint arrangement is to construct and sell houses to the public

• the contractual terms do not give A and B rights to the assets or obligations for the liabilities of C

• contributed equity by A and B is sufficient to buy the land

• debt finance is raised for the construction• sales proceeds will be used to repay external debt

and remaining profit is distributed to A and B

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© IFRS Foundation

Example 2: Pharmaceutical

• A pharmaceutical manufacturer (X) established a viral research centre (RC) at a university:

• X determined the sole and unalterable purpose of RC being to research and develop immunisation and cures for viruses that cause human suffering

• RC is owned and staffed by the university • All costs of establishing and running RC are paid by the

university from the proceeds of a grant from X • The budget for the research centre is approved by X yearly in

advance • A benefits from the research centre by association with the

university and through exclusive right to patent any immunisations and cures developed

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© IFRS Foundation

Example 1: Construction and real estate

• Separate vehicle, C, is formed, over which two parties,A and B, have joint control:

• the purpose of the Joint Arrangement is to construct and sell houses to the public

• the contractual terms do not give A and B rights to the assets or obligations for the liabilities of C

• contributed equity by A and B is sufficient to buy the land• debt finance is raised for the construction• sales proceeds will be used to repay external debt and

remaining profit is distributed to A and B• parties provide guarantee to financier

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A’s financial statementsStatement of profit or loss (Extract) CURevenue Cost of sales Gross profit Net operating expenses Profit before finance costs Finance costs Profit before taxation

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© IFRS Foundation

A’s financial statements: Joint operationStatement of profit or loss (Extract) CURevenue 150,000Cost of sales 115,000Gross profit 35,000Net operating expenses 6,000Profit before finance costs 29,000Finance costs 4,000Profit before taxation 25,000

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© IFRS Foundation

A’s financial statements: Joint ventureStatement of profit or loss (Extract) CURevenue Cost of sales Gross profit Net operating expenses Profit before finance costs Finance costs Share of profit of joint venture 25,000Profit before taxation 25,000

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A’s financial statements

Statement of financial position (Extract) CU

Non-current assets 400,000Current assets Current liabilities Non-current liabilities Net assets 400,000

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A’s financial statements: Joint operation


Non-current assetsCurrent assets 635,000Current liabilities (85,000)Non-current liabilities (125,000)Net assets 425,000

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A’s financial statements: Joint venture


Non-current assets 425,000Current assets Current liabilities Non-current liabilities Net assets 425,000

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Transactions with joint arrangement 43

A B

C House builder

50% 50%

© IFRS Foundation

A sells bricks to C

B buys two houses from C

Differences between IFRS 11 & IAS 31

IFRS 11

• Classification in accordance with rights and obligations

• No choice in accounting

IAS 31

• Classification in accordance with legal form

• Choice of accounting for JVs

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© IFRS Foundation

Meeting the objective 45

Control (IFRS 10)

Significant influence (IAS 28)

Joint Control (IFRS 11)

Investment (IFRS 9 (or IAS 39) & IFRSs 7&13)

Disclosures(IFRS 12)

© IFRS Foundation

IFRS 12: Disclosure of Interests in Other Entities

• Applies to entities that have an interest in a subsidiary, a joint arrangement, an associate and/or an unconsolidated structured entity.

• Requires an entity to disclose information that enables users of its financial statements to evaluate:

– the nature of, and risks associated with, its interests in other entities; and

– the effects of those interests on its financial position, financial performance and cash flows.

© IFRS Foundation

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IFRS 12: Disclosures about joint arrangements

• Significant judgements and assumptions made by the entity in determining: (i) that it has joint control; and (ii) if structured through a separate vehicle, whether the arrangement is a joint operation or a joint venture.

• Prescribed information aimed at disclosing the :– nature, extent and financial effects of its interests in joint

arrangements , including the nature and effects of its contractual relationship with the other joint venturers and joint operators; and

– nature of, and changes in, the risks associated with its interests in joint ventures.

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Summarised financial informationDisclose in respect of each material joint venture:

Dividends received from the joint venture

Current assets Revenue

Cash and cash equivalents included in current assets

Depreciation and amortisation

Non-current assets Interest income

Current liabilities Interest expense

Current financial liabilities (excl trade & other payables & provisions) included in current liabilities

Income tax expense or income

Non-current liabilities Profit or loss from continuing operations

Non-current financial liabilities (excl trade & other payables & provisions) included in non-current liabilities

Post-tax profit or loss from discontinued operations

Other comprehensive income

Total comprehensive income

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IFRS 11’s transitional provisions CUPPE 1,000 1,000Inventories 100Trade receivables 150Derivatives 100Cash 50 400Trade payables 160S/T borrowings 50 210L/T borrowings 300Provisions 190 490Net assets 700

CU

Inv in JV 700 700

Net assets 700© IFRS Foundation 51

Proportionate consolidation Equity accounting

51

Impairment te

st

IFRS 11’s transitional provisions CUPPE 200 200Inventories 100Trade receivables 150Derivatives 100Cash 50 400Trade payables 160S/T borrowings 50 210L/T borrowings 300Provisions 190 490Net assets (100)

CU

Provisions 100 100Net assets (100)© IFRS Foundation 53


53

If there is a legal or constructive obligation for the CU100:

IFRS 11’s transitional provisions CUPPE 200 200Inventories 100Trade receivables 150Derivatives 100Cash 50 400Trade payables 160S/T borrowings 50 210L/T borrowings 300Provisions 190 490Net assets (100)

CU

Net assets -© IFRS Foundation 54


54

If there is no legal or constructive obligation for the CU100:


CU

Investment 700 700



56

?

IFRS 11’s transitional provisions CUPPE 900 900Inventories 100Trade receivables 150Derivatives 100Cash 50 400Trade payables 160S/T borrowings 50 210L/T borrowings 300Provisions 190 490Net assets 600

CU

Investment 700 700



57

?

Future developments

• ED/2012/7 Acquisition of an Interest in a Joint Operation issued in December 2012.

• Apply the relevant principles on business combinations accounting in IFRS 3 and other IFRSs.

• Amendment to Standard due in the fourth quarter of 2013.

© IFRS Foundation

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Future developments 59

A B C

D

© IFRS Foundation

33.34% 33.33% E

cash

shares

E becomes a party to the contractual

arrangement with A & B

Future developments 60

E B

C

D

© IFRS Foundation

100%

A

A, B & C enter into a contractual arrangement

to run DF

Shares

Shares

Shares

Cash

Cash

Cash

G

F

100%

IFRS 11


62

Enhances verifiability, understandability, consistency and comparability

When parties have rights to the assets and obligations for the liabilities, account for those assets and liabilities directlyJOINT OPERATION

When parties have rights only to the net assets, account as an investment using the equity methodJOINT VENTURE

62

© IFRS Foundation


IFRS 11: The assessments required 63

JOINT ARRANGEMENT

Are the parties bound by a contractual arrangement giving

the parties, or a group of the parties, joint control of the

joint arrangement?

Classification of theJOINT ARRANGEMENT

Analysis of the parties’ rights and obligations arising from

the arrangement

Outside the scope of IFRS 11

Joint Operation

Joint Venture

No

Yes

1st

asse

ssm

ent

2nd

asse

ssm

ent

© IFRS Foundation

Interaction of IFRS 11 with other Standards

noyes

yes no

noJoint VentureJoint Operation

64Control alone?

Consolidation in accordance with IFRS 10 Joint control?

Define type of joint arrangement in accordance with IFRS 11

Significant influence?

Account for assets, liabilities, revenues and expenses


Account for an investment in accordance with IAS 28



yes

IFRS 9 (or IAS 39)

64

Disclosures in accordance with IFRSs 7 and 13

© IFRS Foundation

ifrs 11 and 12 cpd september 2013

Documents

ifrs foundationifrs

scope of ifrs

joint operations

joint ventures

package of standards

revised transitional

versions of ias27

relevant paragraph