ifrs 11joint arrangements - unibg 11.pdf · converge ifrs and us gaap. page 4 joint arrangements...

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

Background and objectives

► Eliminate accounting policy choice to account for jointlycontrolled entities using proportionate consolidation

► Structure is no longer the only determinant ofclassification

► Converge IFRS and US GAAP

Joint arrangements

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

A joint arrangement is an arrangement over which two ormore parties have joint control

Joint arrangementsJoint control

► Control: the investor is exposed, or has rights, to variablereturns from its involvement with the investee and has theability to affect those returns through its power over theinvestee

► Relevant activities: the activities of the arrangement thatsignificantly affect the investee’s returns

► Unanimous consent: no single party controls the arrangementand two or more parties must agree to share control

Joint control is the contractually agreed sharing of control of anarrangement , which exists only when the decisions about therelevant activities require the unanimous consent of the partiessharing control

Joint arrangementsJoint control – Example

► Two investors form an investee to develop and market amedical 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

Joint arrangementsJoint control

Does the contractual arrangement giveall the parties (or a group of the parties)control of the arrangement collectively?

Do the decisions about the relevantactivities require the unanimous consentof all the parties that collectively control

the arrangement?

Joint Arrangement

Outside the scopeof IFRS 11(not a joint

arrangement)

No

No

Yes

Yes

Joint operation

Joint venture

Joint arrangementsJoint control - Examples

Example 1 Example 2 Example 3Requirement 75% vote to direct

relevant activities75% vote to directrelevant activities

Majority vote todirect relevantactivities

Party A 50% 50% 35%Party B 30% 25% 35%Party C 20% 25% Widely dispersedConclusion Even though A

can block anydecision, A doesnot control B,because A needsB to agree = jointcontrol betweenA and B.

No control (orjoint control)because multiplecombinationscould be used toreach agreement

No control (orjoint control)because multiplecombinationscould be used toreach agreement

Joint arrangementsUnit of account

Masteragreement

Manufacturing

Country A:unlimited partnership

joint operation

Country B:limited partnership

joint venture

Distribution

Country C:unlimited partnership

joint operation

Country D:limited partnership

joint venture

Classification of a joint arrangement

Legal form ofthe separatevehicle

Jointoperation

Joint venture

Does the legal form of the separate vehiclegive the parties rights to the assets, andobligations for liabilities, relating to thearrangement?

Do the contractual terms of the arrangementspecify that the parties have rights to theassets, and obligations for the liabilities,relating to the arrangement?

Is the arrangement designed so that• The parties have rights to substantially all of

the economic benefits of the JA?• The JA depends on the parties on a

continuous basis for settling the liabilities?

Contractualterms of thearrangement

Other facts &circumstances

No

No

No

Yes

Yes

Yes

Classification of a joint arrangementLegal form

► Separate vehicle: A separately identifiable financial structure, includingseparate legal entities or entities recognised by statute, regardless ofwhether those entities have a legal personality

Joint Operations Joint VenturesParties have rights to the assets andobligations for the liabilities of thearrangement

Parties have rights to the net assetsof the arrangement

Without a separate vehicle, the jointarrangement is a joint operation

To be a joint venture, there must be aseparate vehicle

The legal form of the separate vehicledoes not confer separation between theparties and the separate vehicle (e.g.,general partnership)

The legal form of the separate vehiclecauses it to be considered in its ownright (e.g., corporation)

► Legal form is no longer the sole factor, but is still very important inclassifying a joint arrangement

Classification of a joint arrangementLegal 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 manufacturingprocesses

► 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

Classification of a joint arrangementExamples of contractual terms

Joint Operations Joint VenturesAssets •Share all interests in the assets

in a specified proportion•Hold assets of the arrangementas tenants in common in aspecified proportion

•Have rights to all of theeconomic benefits generatedby the assets

Do not have interests (i.e., norights, title, or ownership) in theassets of the arrangement

Liabilities •Share all liabilities, obligations,costs and expenses in aspecified proportion

•Have liabilities for claims raisedby third parties or to customersof the arrangement

•Are not liable for the debts andobligations of the arrangement

•Liabilities to the arrangement donot exceed the parties’investment in the arrangement

•Creditors do not have anyrecourse against any party in fordebts or obligations

Classification of a joint arrangementContractual terms - Example

(Continued)► Fact pattern:

► A and B modify the features of C through their contractualarrangement so that each has an interest in the assets of C andeach 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

Classification of a joint arrangementFacts and circumstances

► Facts and circumstances might indicate a joint operation ifthey 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

Classification of a joint arrangementFacts and circumstances - Example

(Continued)► Fact pattern:

► A and B agreed to purchase all the output produced by C in a ratioof 50:50

► C cannot sell any of the output to third parties, unless this isapproved by A and B (expected to be uncommon)

► Price of the output sold is designed to cover expenses incurred byC (intended to operate at break-even level)

► Analysis:► Joint operation

Accounting treatmentIA

S31

IFR

S11

Jointly controlledentities

Jointly controlledassets

Jointly controlledoperations

Joint venturesThe parties with joint control have

rights to the net assets of thearrangement.

Joint operationsThe parties with joint control have

rights to the assets and obligationsfor the liabilities of the arrangement

Join

tVen

ture

sJo

intA

rran

gem

ents

Recognise its assets, liabilities,expenses, and its share of

income

Recognise its assets, liabilities,revenue, and expenses, and/or

its relative shares thereof

Equity method or proportionateconsolidation

Recognise its assets, liabilities,revenue, and expenses, and/or

its relative shares thereofEquity method

Accounting treatmentProportionate 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 obligationsfor 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?

Accounting treatmentParties 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)

Continuous assessment

► Reassess if change in:► Joint control► Type of joint arrangement

► Legal form► Contractual terms► Facts and circumstances

TransitionProportionate 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 previouslyproportionately consolidated► Including any goodwill arising from acquisition► Investment becomes ‘deemed cost’ for equity method

► Test the investment for impairment► Disclose aggregated assets and liabilities

TransitionEquity 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 theequity 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

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)

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

IFRS 11 Joint ArrangementsAppendix - 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

Example 1 – ConstructionFact pattern

► A and B enter into a contract to design and construct aroad 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 theirparticipation shares

► Profit or loss resulting from the arrangement is shared by A and Bbased on their participation shares

► A and B assign an operator, who will be an employee of either A orB, activities executed on a ‘no gain or loss’ basis

Example 1 – ConstructionAnalysis

► 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 andB’s assets and liabilities

► Terms – A and B have rights to the assets, and obligations for theliabilities, relating to Z

► Facts & circumstances – Do not need to be considered, becauselegal 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 sharein Z

Example 2 – Real estateFact pattern

► A and B (real estate companies) enter into a contract toacquire 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 buildingthe reputation and customer base

► The parties are not liable for the debts or liabilities of X (liabilitylimited 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

Example 2 – Real estateAnalysis

► Joint venture► Separate vehicle – Yes (X)► Legal form – Confers separation between A and B and

the separate vehicle (X); that is, the assets andliabilities 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 benefitsof the assets relating to the arrangement, or obligationsfor the liabilities relating to the arrangement

► Accounting – Account for interests in X using equitymethod

Example 3 – Manufacturing & distributionFact pattern

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


► 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 distributionarrangement sells the product

► A and B do not have rights to the assets and obligations for theliabilities relating to the distribution activity


► 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

Example 3 – Manufacturing & distributionAnalysis

Manufacturing: Joint operation Distribution: Joint VentureSeparatevehicle

Yes – M Yes – D

Legal form Confers separation between A andB and separate vehicle M

Confers separation between A andB and separate vehicle D

Contractualterms

Assets and liabilities in M are notA and B’s assets and liabilities

Assets and liabilities in D are not Aand B’s assets and liabilities

Other factsandcircum-stances

• A and B purchase all of theproduction, and therefore all theeconomic benefits of M• Exclusive dependence of M on Aand B for cash flows (sale ofproduct and funding) indicate Aand B have an obligation for theliabilities of M

None that indicate that A and Bhave rights to substantially all theeconomic benefits of the assetsrelating to D, or obligations for theliabilities relating to D

Example 3 – Manufacturing & distributionVariation

► 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

Example 4 – BankingFact pattern

► A and B agree to combine their corporate, investmentbanking, 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 withlegislation and banking regulations

Example 4 – BankingAnalysis

► 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 Aand 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

Example 5 – Oil & gasFact 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 thenbecomes a debt between A and B

Example 5 – Oil & gasAnalysis

► 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, becauselegal 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 sharein H

Example 6 – Liquefied natural gasFact pattern

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

Example 6 – Liquefied natural gasAnalysis

► 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

ifrs 11joint arrangements - unibg 11.pdf · converge ifrs and us gaap. page 4 joint arrangements...

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