quiz associates and joint arrangements updated

8/12/2019 Quiz Associates and Joint Arrangements Updated

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Case 1Joint Operation or Joint Venture?

A and B (the parties) are two companies in theconstruction industry.

Contractual arrangement to work together for the

purpose of fulfilling a contract with a government for

the design and construction of a road between twocities. The contractual arrangement establishes

joint control.

A and B set up a separate vehicle (Z) through which

to conduct the arrangement.

The main feature of entity Zs legal form is that the

parties, not entity Z, have rights to the assets, and

obligations for the liabilities, of the entity.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


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The contractual arrangement between A and

B additionally establishes that: the rights to all the assets needed to undertake

the activities of the arrangement are shared by

the parties on the basis of their participation in

the arrangement; the parties have several responsibility for all

operating and financial obligations relating to

the activities of the arrangement on the basis of

their participation shares in the arrangement;

and the profit or loss resulting from the activities of

the arrangement is sharedby A and B on the

basis of their participation shares in the

arrangement.

Case 1 continuedJoint Operation or Joint Venture?



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Separate vehicles

Contractual

terms

Other

Legal formYes

Yes

No

No

No

Yes

Joint Venture

JointOpera

tion

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Do the parties have rights to the assetsand obligations for the liabilities?

Do the parties have contractualrights to

the assets, and obligations for theliabilities?

Is the arrangement designed so:

a) Its activities primarily aim to provide

parties with an output, and(b) It depends on the parties for settling

liabilities?



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Separate vehicleJV?

Legal form of the separate vehicle?

Parties have the rights to assets and

liabilities of the separate vehicle

Likely to be ajoint operation




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A and B (the parties) set up a separate vehicle(entity H) and a Joint Operating Agreement (JOA)

to undertake oil and gas exploration, development

and production activities.

The main feature of entity Hs legal form is that itcauses the separate vehicle to be considered in its

own right.

The JOA specifies that the rights and obligations

arising from the exploration, development and

production activities shall be shared (ie the permits,

the production obtained, all costs associated with

the activities, taxes payable, etc).



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Separate vehicles

Contractual

terms

Other

Legal formYes

Yes

No

No

No

Yes

Joint Venture

JointOpera

tion

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liabilities?



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Separate vehicle

Has rights to own assets and liabilties

Contractual rights?

Specifies that rights and obligations shall be shared

by the parties

Link to the objective of a joint operationassets and

liabilities that rightly belong on the entitys statement of

financial position must be recognised




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Banks A and B (the parties) agreed to combine theircorporate, investment banking, asset management

and services activities by establishing a separate

vehicle (bank C).

The main feature of bank Cs legal form is that it

causes the separate vehicle to be considered in its

own right.

Banks A and B each have a 40 per cent ownership

interest in bank C, with the remaining 20 per cent

being listed and widely held.



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Band A and bank B entered into an irrevocable

agreement under which, even in the event of a dispute,

both banks agree to provide the necessary funds in

equal amountsand, if required, jointly and severally,to

ensure that bank C complies with the applicable

legislation and banking regulations, and honours anycommitments made to the banking authorities.

This commitment represents the assumption by each

party of 50 per cent of any funds needed to ensure that

bank C complies with legislation and banking

regulations.

The terms of the contractual arrangement do not

specify that the parties have rights to the assets, or

obligations for the liabilities, of bank C.




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Separate vehicles

Contractual

terms

Other

Legal formYes

Yes

No

No

No

Yes

Joint Venture

JointOpera

tion

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liabilities?



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Separate vehicle

Vehicles assets and liabilities considered in own

right

Specific facts and circumstances Agreement exposes the entities to risk

Extent and probability of exposure?

Likely to be a JV BUT, if not probablesimilar to a financial

guarantee contract (is fee paid by Bank C?)




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Two parties structure a joint arrangement in anincorporated entity (entity C) in which each party has

a 50 per cent ownership interest. The purpose of the

arrangement is to manufacture materials required by

the parties for their own individual manufacturing

processes.

The legal form of entity C (an incorporated entity)

through which the activities are conducted initially

indicates that the assets and liabilities held in entity C

are the assets and liabilities of entity C. The contractual arrangement between the parties

does not specify that the parties have rights to the

assets or obligations for the liabilities of entity C.



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The parties agreed to purchase all the outputproduced by entity C in a ratio of 50:50. Entity C

cannot sell any of the output to third parties, unless

this is approved by the two parties to the

arrangement. Because the purpose of the

arrangement is to provide the parties with output they

require, such sales to third parties are expected to be

uncommon and not material.

The price of the output sold to the parties is set by

both parties at a level that is designed to cover thecosts of production and administrative expenses

incurred by entity C. On the basis of this operating

model, the arrangement is intended to operate at a

break-even level. IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org


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Separate vehicles

Contractual

terms

Other

Legal formYes

Yes

No

No

No

Yes

Joint Venture

JointOpera

tion

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the assets, and obligations for the

liabilities?




liabilities?



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Separate legal entity

Agreement provides rights to underlying assets and

obligation for underlying liabilities

Agreement requires entities to buy production at cost:

Risk is carried by partieshave to pay production

cost

Therefore, vehicle wont be profitable

If lossesrisk borne by entities




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Quiz: Associates, joint ventures and

joint arrangements

Question 1: Which of the following provideevidence to support the existence of

significant influence by an investor?

a. representation on board of directors?b. material transactions between the

investor and the investee?c. interchange of managerial personnel?

d. provision of essential technical info?e. all of the above?


Q


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joint arrangements

Question 1: Which of the following provideevidence to support the existence of

significant influence by an investor?

a. representation on board of directors?b. material transactions between the

investor and the investee?c. interchange of managerial personnel?

d. provision of essential technical info?e. all of the above?


Q i A i j i d


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joint arrangements

Question 2: An investor (that uses fullIFRSs) in a joint venture has joint controlaccounts for that investment using theequity method unless:

a. Investor is a parent and the scopeexemption in paragraph 4(a) of IFRS 10

b. A venture capital organisation or similarentity can elect to measure itsinvestments in associates or joint

ventures at fair value through profit orloss in accordance with IFRS 9.

c. Both a. and b.


Q i A i t j i t t d


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joint arrangements

Question 2: An investor (that uses fullIFRSs) in a joint venture has joint controlaccounts for that investment using theequity method unless:

a. Investor is a parent and the scopeexemption in paragraph 4(a) of IFRS 10

b. A venture capital organisation or similarentity can elect to measure itsinvestments in associates or joint

ventures at fair value through profit orloss in accordance with IFRS 9.

c. Both a. and b.



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21Questions or comments?

Expressions of individual viewsby members of the IASB and its

staff are encouraged.

The views expressed in this

presentation are those of the

presenter.

Official positions of the IASB on

accounting matters are

determined only after extensive

due process and deliberation.



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2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

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The requirements are set out in International FinancialReporting Standards (IFRSs), as issued by the IASB at1 January 2012 with an effective date after 1 January2012 but not the IFRSs they will replace.

The IFRS Foundation, the authors, the presenters andthe publishers do not accept responsibility for losscaused to any person who acts or refrains from actingin reliance on the material in this PowerPointpresentation, whether such loss is caused by

negligence or otherwise.

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IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

quiz associates and joint arrangements updated

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