IFRS UPDATE 2

February 2012

IFRS 11 - Joint Arrangements

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Introduction
The International Accounting Standards
Board (IASB) recently issued a new
standard, IFRS 11 Joint Arrangements
that is effective for annual periods
beginning on or after 1 January 2013.
IFRS 11 replaces IAS 31 Interests in
Joint Ventures and SIC-13 Jointly
Controlled Entities Non Monetary
Contributions by Venturers. IFRS 11
classifies joint arrangements into two
types being joint operations and joint
ventures whereas IAS 31 identified three
types of joint arrangements being jointly
controlled operations, jointly controlled
assets and jointly controlled entities.
Highlights of IFRS 11
IFRS 11 describes the accounting for a
joint arrangement. The investor will be
required to either apply the equity
method of accounting or recognise, on
a line-by-line basis, its share of the underlying assets, liabilities, revenues and
expenses. The accounting treatment
required will depend on the substance
of the arrangement and the nature of the
investors interest in it. The option to
apply proportionate consolidation has
been removed.

What has changed?

Arrangements which would have been
classified under IAS 31 as jointly
controlled operations or jointly controlled
assets will now be classified as joint
operations and will continue to be
accounted for on a line-by-line basis.
However, those arrangements previously
classified as jointly controlled entities will
now be classified as either joint operations
or joint ventures depending on the
substance of the investors interest (see
Distinguishing a joint operation from a
joint venture below).
If, in substance, they are joint operations
then the investor will recognise its interest
in the underlying assets, liabilities,
revenues and expenses. If, in substance,
they are joint ventures then the equity
method of accounting will be mandatory.
Application of proportionate consolidation
will no longer be permitted.
The diagram below illustrates how IFRS 11
has changed from IAS 31.

Diagram 1
Jointly controlled
operation

Jointly controlled
asset

Jointly controlled
entity

Recognises its assets,

liabilities, revenue and
expenses and its share
of income

Recognises its assets,

liabilities, revenue and
expenses and its share
of income

Proportionate
consolidation or equity
method

From IAS 31

Joint operation

Recognises its assets, liabilities,

revenue and expenses and its share
of income

Joint venture

Equity method

To IFRS 11

IFRS UPDATE 2
February 2012

What is a joint arrangement?

A joint arrangement is an arrangement
over which two or more parties
(investors) have contractually agreed
to share joint control as illustrated in
diagram 2. Joint control only exists
where decisions regarding those
activities that significantly affect the
returns of the arrangement require the
unanimous consent of the parties
sharing control.

Diagram 2
Does the contractual arrangement give all the parties, or a group
of the parties, control of the arrangement collectively?

NO
YES
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?

Outside the
scope of
IFRS 11

NO

YES

Diagram 2 illustrates the key criteria

to be met for an arrangement to be
classified as a joint arrangement.

This is a joint arrangement

*The reference to a group of the parties refers to a situation in which there is a joint control between two
or more parties but other parties to the joint arrangement are passive investors (ie, there are other parties
in the arrangement who do not have joint control). While such investors are technically within the scope of
IFRS 11, they account for their investment in accordance with the relevant standard (eg, IAS 28 if they
have significant influence).

Defining a joint operation

and joint venture
A joint operation exists where jointly
controlling parties have rights to the
assets and obligations for the liabilities
relating to the arrangement.

Diagram 3
Identify all joint arrangements

NO

A joint venture exists where the jointly

controlling parties have rights to the net
assets of the arrangement.

Is the arrangement in a vehicle?

Distinguishing a joint operation

from a joint venture
IFRS 11 classifies joint arrangements
on the basis of the substance of the
arrangement as opposed to simply
their legal form. While it is a necessary
condition for a joint venture to be in a
separate vehicle, contractual and other
arrangements may still give an investor
rights to the assets and obligations for
the liabilities within the vehicle, rather
than only rights to the net assets. In
such cases, the arrangement will,
in substance, be a joint operation.

Does the legal form of the vehicle give the investors direct rights to
assets and obligations for liabilities in relation to the arrangement?

YES
YES

Joint
Operation

NO
YES
Do the terms of the contract for the arrangement give the investors rights
to the assets and obligations for the liabilities for the arrangement?

NO
YES
Do any other factors give the investors of the arrangement the
rights to the assets and obligations for the liabilities?

NO
Joint Venture

The process of distinguishing joint

operations from joint ventures is
illustrated in Diagram 3.

IFRS UPDATE 2
February 2012

Accounting for a joint operation

The parties to a joint operation, including
those without joint control, shall recognise
the assets, liabilities, revenues and
expenses relating to their own interests
in the operation.
Accounting for a joint venture
Those parties with joint control over
a joint venture shall apply the equity
accounting method for their interest in
the net assets of the joint venture. This
results in the presentation of the
investment in the joint venture as a single
line item in the statement of financial
position. The statement of comprehensive

Financial statements

Statement of financial position

income will include the investors share

of the joint ventures profit or loss as a
single line item as well as its share of
the joint ventures other comprehensive
income.
Potential impact on
accounting practices
In practice, many, but not all, jointly
controlled entities under IAS 31 will be
classified as joint ventures under IFRS 11.
All joint arrangements will, therefore,
need to be re-assessed on transition to
IFRS 11. As the classification of a joint
arrangement requires assessment of
the substance of an investors interest

including consideration of related

contractual arrangements and other
facts and circumstances, this is
expected to be an area of judgment
requiring careful consideration.
Furthermore, the transition from
proportionate consolidation, where
previously applied, to the equity method
will affect a number of financial statement
line items, notably decreasing revenue,
gross assets and gross liabilities.
The financial statement changes from
proportionate consolidation to the equity
method are summarised below.

Effects due to accounting change

Reported figures will decline to the extent of the entitys previously recognised share
in the individual assets and liabilities of the joint venture and therefore gross assets
and gross liabilities will decrease.
The investment in the joint venture will be captured in a single line item.

Statement of comprehensive income

Reported figures will decline to the extent of the entitys previously recognised share
of revenue and expenses of the joint venture and therefore total revenue and total
expenses will decrease.
No changes in net income.

Statement of changes in equity

No changes in the statement of changes in equity.

Statement of cash flows

Reported operating, investing and financing cash flow figures will decline to the extent
of the entitys previously recognised share in the cash flows of the joint venture.
Dividends received from joint ventures will be presented as cash flows.

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