Chapter 2

JOINT ARRANGEMENTS

Introduction

One of the new standards issued by International Accounting Standards Board (IASB) in May
2011 to take effect for annual periods beginning on or after 1 January 2013 was IFRS 11 Joint
Arrangements, which establishes principles for financial reporting by parties to a joint arrangement.

This IFRS 11 supersedes IAS 31 Interest in Joint Ventures and SIC-13 Jointly Controlled Entities —
Nonmonetary Contributions by Venturers; and shall be applied by all entities that are a party to a joint
arrangement. The primary goal behind this new standard was to arrive at an accounting treatment which
accurately reflects the true nature of the economic interest held by an entity. The scope of the standard is
substantively aligned with IAS 31 but is defined with new terms. For example, IAS 31 used the term "joint
venture" to capture jointly controlled arrangement and the term "joint venture" was replaced by the term
"joint arrangement" in IFRS 11. In some cases, IFRS 11 uses some of the same terms as IAS 31 but
with different meanings. Thus there may be some confusion whether IFRS 11 is a significant
change from IAS 31. For example, whereas IAS 31 identified three forms of joint ventures where there is
joint control, such as: 1.) Jointly controlled operations; 2.) Jointly controlled assets; and 3.) Jointly
controlled entities, IFRS 11 addresses two forms of joint arrangements, such as: 1.) Joint operations; and 2.)
Joint ventures.

JOINT ARRANGEMENTS

A joint arrangement is an arrangement of which two or more parties have joint control. As with IAS
31, IFRS 11 addresses arrangements where two or more entities come together for a specific reason and
share control. In the most cases, the terms of the arrangement will be set out in form of a written contract or equivalent,
which indicates the purpose and activity of the joint arrangement and the joint decision making
processes. The IFRS defines joint control as the contractually agreed sharing of control of an
arrangement, which exists only when decisions about the relevant activities (i.e. activities that
significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing
control. IFRS 11 paragraph 5 provides that a joint arrangement has the following characteristics:
1. The parties are bound by a contractual arrangement.
2. The contractual arrangement gives two or more of those parties joint control of the
arrangement.

TYPES OF JOINT ARRANGEMENTS

IFRS 11 Joint arrangement provides that an entity shall determine the type of joint arrangement in which
it is involved. The-standard addresses only two types of joint arrangements; such as: 1.) Joint Operations;
and 2.) Joint Ventures.
The classification of a joint arrangement as a joint operation or a joint venture depends upon the
rights and obligations of the parties to the arrangement. In IAS 31 Interest in Joint Ventures, the classification
was triggered by: 1.) The structure of the arrangements; and 2.) When structured in a legal entity,
the choice between proportionate consolidation and the equity method. Whereas in IFRS 11
Joint Arrangements, the classification of the arrangements will require entities to apply judgment
when assessing their rights and obligations arising from the arrangements. In doing so, an entity should
consider the following: 1.) The structure and legal form of the arrangement; 2.) The terms agreed by
the parties in the contractual arrangements; and 3.) When relevant, other facts and circumstances. Other
facts and circumstances include consideration of whether the parties designed the arrangement so that its
trade is substantially only with its parties (i.e. the parties have rights to substantially all the
economic benefits of the assets placed in the separate vehicle), with the result that the arrangement
continuously depends on the parties for setting the liabilities relating to the activity conducted through
the arrangement.

Joint Operations

A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have
rights to the assets, and obligations for the liabilities, relating to the arrangement, as in all of these
situations:
1. When the arrangements are NOT structured through a separate vehicle (i.e. the arrangements
are structured through a contractual arrangement only).

(Notethata separatevehicle isthelegalentityestablishedforpurposesofthejointarrangement.)

2. Whenthearrangementsarestructuredthroughseparatevehicles,thearrangementswillbejointoperationswhen:

a. The legal form ofthe separate vehicle doesnotcause the vehicle to beconsidered in itsown right(i.e. the assets and
liabilitiesplacedintheseparate vehiclearetheassetsandliabilitiesofthepartiesandnottheassetsandliabilitiesofthe
separatevehicle).

b. Thearrangementisstructuredinaseparatevehiclethatcanbeconsideredinitsownrightbutthetermsagreedbythe
partiesintheircontractualarrangementmodifythefeaturesofthelegalformandcausetheassetsandliabilitiesheldin
theseparatetobetheparties'assetsandliabilities.

c. Even though the legal form and the termsofthe contractual arrangement do notconfer on the partiesrights to the
assetsandobligationsfortheliabilities,thearrangementhasbeendesignedinsuchawaythatthepartieshaverightsto
substantially all the economic benefits of the assets placed in the separate vehicle. In addition, the arrangement is
continuously dependent on the parties for settling the liabilities relating to the activity conducted through the
arrangement.

Eachpartytothejointoperation,whoarecalledjointoperators,recognizesitsshareoftheassets,liabilities,revenuesandexpensesofthe
joint arrangements. The share is P- determined based on the rights and obligations of each party as set out in the contractual terms,
rather than automatically basingthe recognition of all assets, liabilities, revenuesand expenseson the ownership interest thatthe entity
hasinthejointoperation.ThejointoperatorisrequiredtoapplythecorrespondingIFRStoeachfinancialstatementelementrecognized.
Joint operations are accounted for in the same manner in the separate statements as in the consolidated financial statement (i.e., the
investorrecognizes,directlyitsshare-ofassets,liabilities,revenues,andexpense/0relatedtothejointoperations).

JointVentures

Ajointventureisajointarrangementwherebythepartiesthathavejointcontrolofthearrangementhaverightstothenetassetsofthe
arrangement. Those parties are called joint venturers. Joint ventures are arrangements structured in separate vehicles that have the
followingfeatures:
a. Thelegalformoftheseparatevehicleandcontractualtermsagreedbythepartiesdonotconferonthepartiesrightstothe
assetsandobligationsfortheliabilitiesoftheactivitiescarriedout;and
b. Theyhavebeendesignedtohaveatradeontheirown,whichmakesthemfacedirectlytherisksarisingfromactivitiessuch
as,demand,creditorinventoryrisk.

OneoftheprimaryreasonsfortheissuanceofIFRS11,JointArrangements, wasto increasecomparabilitywithinIFRSbyremovingthe

choicefor jointlycontrolled entitiesto useproportionateconsolidation method.Instead,IFRS 11requiresajointventure to recognize an
investmentandtheuseoftheequitymethodofaccountingunderIAS28(revised2011),InvestmentinAssociatesandJointVenturesfor
interestinjointventures,therebyeliminatingtheproportionateconsolidationmethod.ThisalsoconvergeswithUSGAAP,whichrequires
the equity method for joint ventures. Under the equity method (IAS 28), the investment is recognized initially at cost, and then the
carryingamountisadjusted to recognize the investor'sshare of profitor lossofthe investee afterthatdate.Adjustmentsto the carrying
amountmaybenecessaryfordistributionreceived orthroughchangesininvestor'sinterestin the investee orchangesarising fromthe
revaluationofproperty,plantandequipment.

JointOperationVsJointVenture

As discussed earlier, the principles set out in IFRS 11 provides that joint operation is, where a party has the rights to the assets and
obligations for the liabilities of a joint ., arrangement have an,' arrangement; while joint venture is where the parties to the joint
arrangementhaveaninteresttothenetassets(investment).

It is expected that it will be uncommon for a party to have the rights and obligations relating to a joint arrangement when a separate
vehicleispartofthearrangement.ASeparatevehicleisaseparateidentifiablefinancialstructure,includingseparatelegalentitiesorentities
recognizedbystatute,regardlessofwhetherthoseentitieshavealegalpersonality.Basedonthisdefinition,theterm"separatevehicle"is
intended to be broader than a “separate legal entity". The most common form of vehicle used to structure joint arrangements are
limitedliabilitycompanies,partnerships,corporations,associationsandtrusts.

Theexistenceofaseparatevehicleisanecessarybutnotasufficientconditionforajointarrangementtobeconsideredajointventure.In
theabsenceofaseparatevehicle,IFRS11clearlyprovidesthatthepartiestothejointarrangementwhohavedirectrightsandobligations
totheassetsandliabilitiesofthearrangementwillbeclassifiedasajointoperation.However,inanarrangementwithaseparatevehicle,
allrelevantfactsandcircumstancesshouldbeconsideredindeterminingwhetherthepartiestothearrangementhaverightstothenet
assetsofthearrangement.

Previousdiscussionstoclassifyajointarrangementwhetherasjointoperationsorjointventuremaybesimplifiedbyusingthefollowing
fourstepsprocess:

Step1: Isthejointarrangementstructuredthroughaseparatevehicle?
 No: AnarrangementthatisNOTstructuredthroughaseparatevehicleisa jointoperation.
Yes: A joint arrangement that is structured through a separate vehicle is either a joint venture or joint operation
depending on the parties' rights and obligations relating to the arrangement. The parties need to assess
whether the legalform of the separate vehicle.thetermsof the contractualarrangement andwhen relevant
anyotherfactsandcircumstancesprovidethepartieseitherrightstotheassetsandobligationsfortheliabilities
relatingtothearrangement(jointoperation)orrightstonetassetsofthearrangement(jointventure).

Step2: Doesthe legal form of the separate vehicle give the parties rights to the assets, and obligationsto the liabilities,
relatingtothearrangement?
Yes: If the legal structure is such that the parties have rights to assets and are obligated for the liabilities with no
limitations, the legal entity does not create separation between the parties and the arrangement. Therefore,
thisisa jointoperation.
No: Basically,aseparatevehiclethatdoesnotallowthepartiesrightstoassetsandobligationsforliabilitiesrelatingto
the arrangement indicates that it is a joint venture. However, the contractual termsbetween the parties and,
when relevant, other facts and circumstances can override the legal form. Thus, more information must be
obtainedthroughthenextquestion(Step3).

Step3: Dothetermsofthecontractualarrangementspecifythattheparties]haverightstotheassets,andobligations
fortheliabilities,relatingtothearrangement?
Yes: When the parties might enter into contractual arrangement that modify the legal form of the arrangement
and create different rights and obligations (i.e., the contractual terms give the parties rights to assets and
obligationsforliabilities),thearrangementisajointoperation.
No: When a separate vehicle is used and the terms of the contractual arrangement do not indicate that the joint
arrangement is a joint operation, the parties should consider any other relevant facts and circumstances in
determiningthetypeofarrangement.

Step4: Doother factsandcircumstancesleadtorightsto assetsandobligationsforliabilitiesbeingconferreduponthe

partiestothearrangement?
Yes: When the parties designed the arrangement so that its activities primarily aim to provide the parties with an
output (i.e., the parties have rights to all of the economic benefits generated by the assets in the separate
vehicle), and it depends on the parties on a continuous basis for settling the liabilities relating to the activity
conductedthroughthearrangement(i.e.,thepartiesarerequiredtofundthesettlementoftheliabilitiesofthe
jointarrangementbecausethearrangementisexclusivelydependentonthepartiesforthe generationofcash
flows),thisarrangementisa jointoperation.
No: When other facts and circumstances provides that the joint arrangement will sell output to the third parties
becausethejointarrangementwouldassumedemand,inventoryandcreditrisks, this jointarrangementisa
jointventure.

ACCOUNTINGFORSMALLANDMEDIUM-SIZEDENTITIES(SMEs)

Section15, InvestmentinJointVentures,appliestoaccountingforjointventuresinconsolidatedfinancialstatementsandinthefinancial
statementsofaninvestorthatisnotaparentbutthathasaventurer'sinterestinoneormorejointventures.
Ajointventureisacontractualarrangementwherebytwoormorepartiesundertakeaneconomicactivitythatissubjecttojointcontrol.
A joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and
operating decisions relating to the activity require the unanimous consent of the parties sharing control. When an investor in a joint
venturedoesnothavejointcontrol,thatinvestmentshallbeaccountedinaccordancewithSection 11 BasicFinancialInstruments,or,ifit
hassignificantinfluenceinthejointventure,inaccordancewithSection14, InvestmentsinAssociates.

Jointventurescantaketheformof:
1. Jointlycontrolledoperations

Forjointlycontrolledoperations,theventureshouldrecognizeassetsthatcontrolsandliabilitiesitincursaswellasitsshareof
incomeearnedandexpensesthatareincurred.

2. Jointlycontrolledassets

Forjointlycontrolledassets,theventureshouldrecognizeitsshareoftheassetsandliabilitiesitincursaswellasincomeitearns
andexpensesthatareincurred.

3. Jointlycontrolledentities
Forinvestmentinjointlycontrolledentities,thereisanoptionfortheventuretouse:

 Costmodel

Under the cost model, a venture shall measure its investment, other than those for which there is a published price
quotation, at cost le any accumulated impairment losses. If there is a published Price quotation, the fair value model
shall be used. Under this model/ the investor shall recognize distributions received from the investment as income
without regard to whether the distributions are from accumulated profits of the jointly controlled entity arising from
beforeorafterthedateofacquisition.

 Equitymethod

A venture shall measure its investment in jointly controlled entities by the equity method using the procedures in
IFRS/PFRSforSMEs, Section14, InvestmentsinAssociates,paragraph14.8, EquityMethod (substituting“jointcontrol
“wherethatparagraphrefersto"significantinfluence.".

 Fairvaluemodel

Underthismethod,theinvestmentinajointlycontrolledentityisrecognizedinitiallyattransactionprice,excludingany
transactioncosts.

At each reporting date, a venture shall measure its investment at fair value, with changes in fair value recognized in
profitorloss.WhereitisimpracticabletomeasurefairvaluereliablywithoutunduecostLoreffort,thecostmodelshall
beused.
MULTIPLECHOICEQUESTIONS

PROB.2-1(IFRS)

Itisanarrangementofwhichtwoormorepartieshavejointcontrol.
a. Jointarrangement
b. Jointundertaking
c. Jointoperation
d. Jointventure

PROB.2-2(IFRS)

It is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activitiesrequiretheunanimousconsentofthepartiessharingcontrol.
a. Jointcontrol
b. Jointundertaking
c. Jointoperation
d. Jointventure

PROB.2-3(IFRS)

Itisajointarrangementwherebythepartiesthathavejointcontrolofthe.to the arrangement.arrangementhaverightsto

theassets,andobligationsfortheliabilities,relatingtothearrangement.
a. Jointcontrol
b. Jointundertaking
c. Jointoperation
d. Jointventure

PROB.2-4(IFRS)

Itisapartytoajointoperationthathasjointcontrolofthatjointoperation.
a. Jointcontroller
b. Jointundertaker
c. Jointoperator
d. Jointventurer

PROB.2-5(IFRS)

It isa joint arrangementwhereby the partiesthat haw, jointcontrol of the anangement have rights to the netassetsof the
arrangement.
a. Jointcontrol
b. Jointundertaking
c. Jointoperation
d. Jointventure
PROB.2-6(IFRS)

Itisapartytoajointventurethathasjointcontrolofthatjointventure.
a. Jointcontroller
b. Jointundertaker
c. Jointoperator
d. Jointventure

PROB.2-7(IFRS)

Itisanentitythatparticipatesinajointarrangement,regardlessofwhetherthatentityhasjointcontrolofthearrangement.
a. Partner
b. Partytoajointarrangement
c. Jointoperator
d. Jointventure

PROB.2-8(IFRS)

It isa separatelyidentifiable financial structure,includingseparate legal entitiesorentitiesrecognized bystatute, regardlessof

whetherthoseentitieshavelegalpersonality.
a. Separatevehicle
b. Partytoajointarrangement
c. Jointoperator
d. Jointventure

PROB.2-9(IFRS)

Whichofthefollowingisacharacteristicofajointarrangement?
a. Thepartiesareboundbyacontractualarrangementonly.
b. Thecontractualarrangementgivestwoormorepartiesjointcontroloverthearrangementonly.
c. Thepartiesareboundbyacontractualarrangernentandthecontractual1arrangementgivestwoormorepartiesjoint
controloverthearrangement.
d. Ajointarrangementisneitherajointoperationnorjointventure.

PROB.2-10(IFRS)

AccordingtoIFRS11,JointArrangement,whatisthemethodofaccountingforinvestmentinjointventure?
a. Proportionateconsolidationmethod
b. Costmethod
c. Equitymethod
d. Fairvaluemethod

PROB.2-11(IFRS)
 IFRS 11, Joint Arrangement, provides that the classification of the arrangements rights d will require entities to apply
judgmentwhenassessingtheirobligationsarisingfromthearrangementbyconsideringthefollowingexcept
a. Thetermsagreedbythepartiesinthecontractualarrangements.
b. Thestructureandlegalformofthearrangement.
c. Whenstructuredinalegalentity,thechoicebetweenproportionateconsolidationandtheequitymethod.
d. Whenrelevant,otherfactsandcircumstances.

PROB.2-12(1FRS)

IFRS 11, Joint Arrangement, provides that a joint operator shall recognize following, in relation to its interest in a joint
operation,except

a. Itsexpenses,includingitsshareofanyexpensesincurredjointly.
b. Itsliabilities,includingitsshareofanyliabilitiesincurredjointly.
c. Itsinterestasaninvestmentusingtheequitymethod.
d. Itsassets,includingitsshareofanyassetsheldjointly.

PROB.2-13(FinancialAccountingbyDeegan)

Ajointarrangementthatisnotstructuredthroughaseparatevehicleiscalled:
a. Ajointventure
b. Ajointoperation
c. Anexpensejointventureorajointoperation
d. Apartnership

PROB.2-14(FinancialAccountingbyDeegan)

WhichofthefollowingstatementsisinaccordancewithIFRS11,JointArrangement?
a. Investors in jointly controlled entitiesaccountfor their investment under equity method if their ownership percentage
exceeds20%.
b. The existence of a contractual arrangement distinguishes joint arrangements from investments in associates in which
theinvestorhassignificantinfluence.
c. The contractual arrangement establishes joint control over the arrangement in such a way no single venturer is in a
positiontocontroltheactivityunilaterally.
d. Activitiesthathavenocontractualarrangement'toestablishjointcontrolbutinsubstancehaveestablishedjointcontrol
areconsideredjointventuresforthepurposesofIFRS11.

PROB.2-15(FinancialAccountingbyDeegan)

Aventurerthatrecognizesinitsfinancialstatementstheassetsthatitcontrols,theliabilitiesitincurs,theexpensesthatitincurs
and its share of the income that it earns from the sale of goods or services by the joint venture is prescribed by IFRS 11 for
whichtype(s)ofjointventure(s)?
 a. Jointlycontrolledentities
b. Jointlycontrolledassets
c. Jointoperations
d. Jointlycontrolledassetsandjointlycontrolledoperations

SOLUTIONSANDEXPLANATIONS

PROB.2-1 Suggestedanswer(a)

Thisisthedefinitionofjointarrangement.

PROB.2-2 Suggestedanswer(a)

Thisisthedefinitionofjointcontrol.

PROB.2-3 Suggestedanswer(c)

Thisisthedefinitionofjointoperation.

PROB.2-4 Suggestedanswer(c)

Thisisthedefinitionofjointoperator.

PROB.2-5 Suggestedanswer(d)

Thisisthedefinitionofjointventure.

PROB.2-6 Suggestedanswer(d)

Thisisthedefinitionofjointventure.

PROB.2-7 Suggestedanswer(b)

Thisisthedefinitionofpartytoajointarrangement.

PROB.2-8 Suggestedanswer(a)

Thisisthedefinitionofseparatevehicle.

PROB.2.9 Suggestedanswer(c)

PFRS11providesthefollowingcharacteristicsofajointarrangement:
1.Thepartiesareboundbyacontractualarrangement.
2.ThecontractualarrangementgivestwoormoreofthosePartiesjointcontrolofthearrangement.
PROB.2-10 Suggestedanswer(c)

IFRS 11requires the use of the equity method of accounting for interest injoint ventures thereby eliminating the accounting
policychoiceofproportionateconsolidationmethod.

PROB.2-11Suggestedanswer(c)

Asillustratedinthefourstepsprocess mentionedearlier,the existenceofaseparate vehicleis anecessary butnot asufficient

condition for a joint arrangement to be considered a joint venture. In the absence of a separate vehicle, IFRS 11 clearly
provides that the parties to the joint arrangement who have direct rights and obligations to the assets and liabilities of the
arrangementwillbeclassifiedasajointoperation.However,inanarrangementwithaseparatevehicle,allrelevantfactsand
circumstances shouldbeconsideredindetermining whetherthe parties tothearrangement haverights tothenetassets of
the arrangement. Therefore, the choice between proportionate consolidation and the equity method is not considered
whenmakingtheassessment.

PROB.2-12 Suggestedanswer(c)

IFRS11providesthatajointoperatorshallrecognizethefollowinginrelationtoitsinterestinajointoperation:
I.Itsassets,includingitsshareofanyassetsheldjointly.
2.Itsliabilities,includingitsshareofanyliabilitiesincurredjointly.
3.Itsrevenuefromthesaleofitsshareoftheoutputarisingfromthejointoperation.
4.Itsshareoftherevenuefromthesaleoftheoutputbythejointoperation.
5.Itsexpenses,includingitsshareofanyexpensesincurredjointly.

Therefore,ajointoperatorshouldnotrecognizeitsinterestasaninvestmentusingtheequitymethodinrelationtoitsinterest
inajointoperation.

PROB.2-13 Suggestedanswer(b)jointoperation

IFRS11,paragraphB16statesthatajointarrangementthatisnotstructuredthroughaseparate vehicleisajointoperation.
Insuchcase,thecontractualarrangementestablishestheparties'rightstotheassets,andobligationsfortheliabilities,relating
tothearrangement,andtheparties'rightstothecorrespondingrevenuesandobligationsforthecorrespondingexpenses.

PROB.2-14 Suggestedanswer(c)

IFRS 11, paragraphs 7-13 provides that in joint arrangement, no single party controls the arrangement on its own. The
contractualarrangementgivestwoormoreofthosepartiesjointcontrolofthearrangement.

PROB.2-15 Suggestedanswer(c)

IFRS11,paragraph20statesthatinjointoperations,thepartiesshareallinterestsintheassetsinaspecifiedproportion,share
all liabilities, obligations, costs and expenses in a specified proportion, as in the case of rights to assets. The contractual
arrangement usually establishes the allocation of revenues and expenses on the basis of the relative contribution or
consumptionofeachpartytothejointarrangement.