BBFA3044 Advanced Accounting Practice CHAPTER 3 IFRS11 Joint Arrangements

CHAPTER 3
IFRS 11 / MFRS 11 Joint Arrangements
1.0 Objective

To establish principles for financial reporting by entities that have an interest in arrangements
that are controlled jointly (i.e. joint arrangements).

2.0 Definitions
Joint arrangement. An arrangement of which two or more parties have joint control.

Joint control. 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.

Illustration 1

Assume that three parties establish an arrangement: A has 50 per cent of the voting rights in the
arrangement, B has 30 per cent and C has 20 per cent. The contractual arrangement between A,
B and C specifies that at least 75 per cent of the voting rights are required to make decisions
about the relevant activities of the arrangement. Even though A can block any decision, it does
not control the arrangement because it needs the agreement of B. The terms of their contractual
arrangement requiring at least 75 per cent of the voting rights to make decisions about the
relevant activities imply that A and B have joint control of the arrangement because decisions
about the relevant activities of the arrangement cannot be made without both A and B agreeing.

3.0 Two types of joint arrangement

IFRS 11 classes joint arrangements as either joint ventures or joint operations.

(a) Joint operation. 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. Those parties are called joint operators.
(b) Joint venture. A joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called
joint venturers.

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BBFA3044 Advanced Accounting Practice CHAPTER 3 IFRS11 Joint Arrangements

4.0 Distinguish between joint venture and joint operation

Joint arrangements not structured through a separate vehicle

Joint arrangements structured through a separate vehicle

Whether a party is a joint operator or a joint venturer depends on the party’s rights to the assets,
and obligations for the liabilities, relating to the arrangement that are held in the separate
vehicle.

In order to ascertain the classification, the parties to the arrangement need to assess whether the terms of the
contractual arrangement give them:
(a) rights to the assets, and obligations for the liabilities, in relation to the arrangement (the
arrangement is a joint operation) or
(b) rights to the net assets of the arrangement (the arrangement is a joint venture)

Illustration 2

Assume that two parties structure a joint arrangement in an incorporated entity. Each party has a
50 per cent ownership interest in the incorporated entity. The incorporation enables the
separation of the entity from its owners and as a consequence the assets and liabilities held in
the entity are the assets and liabilities of the incorporated entity. In such a case, the
assessment of the rights and obligations conferred upon the parties by the legal form of the
separate vehicle indicates that the parties have rights to the net assets of the arrangement. The
terms of the contractual arrangement do not specify that the parties have rights to the assets,
or obligations for the liabilities, of the joint arrangement. Therefore, it is a joint venture.

However, the parties modify the features of the corporation through their contractual
arrangement so that each has an interest in the assets of the incorporated entity and each is
liable for the liabilities of the incorporated entity in a specified proportion. Such contractual
modifications to the features of a corporation can cause an arrangement to be a joint operation.

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BBFA3044 Advanced Accounting Practice CHAPTER 3 IFRS11 Joint Arrangements

5.0 Accounting treatment for joint arrangements

There are two different methods of accounting treatment for interests in joint arrangements,
depending on the type of the arrangement:

Accounting for Joint Arrangements (IFRS 11)

Joint venture Joint operation

Equity method (Chapter 7) Line by line method

Accounting for interest in joint venture

IFRS 11 require joint ventures to be accounted for using the equity method in the consolidated
financial statements (exactly the same way as for associates)

Accounting for interest in joint operation

IFRS 11 requires that a joint operator recognises line-by-line the following in relation to its
interest in a joint operation:
(a) Its assets, including its share of any assets held jointly;
(b) Its liabilities, including its share of any liabilities incurred jointly;
(c) Its revenue from the sale of its share of the output arising from the joint operation;
(d) Its share of the revenue from the sale of the output by the joint operation; and
(e) Its expenses, including its share of any expenses incurred jointly.

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BBFA3044 Advanced Accounting Practice CHAPTER 3 IFRS11 Joint Arrangements

Illustration 3

ABM Mining entered into an arrangement with another entity, Delta Mining and the national
Government to extract coal from a surface mine. Under the terms of the agreement, ABM
Mining and Delta Mining are entitled to 40% each of revenue from selling the coal with the
remainder allocated to the government. Machinery is purchased by each investor (ie ABM
Mining and Delta Mining) as necessary. The machinery will remain as the property of each
investor. All costs (including depreciation) are shared in the same proportions as the revenue.

During the first accounting period where the arrangement existed, 460,000 tons of coal were
extracted by ABM and sold at an average market price of RM120 per ton. 540,000 tons were
extracted and sold by Delta at an average price of RM118 per ton. All coal extracted was sold
before the year end.

Required:

Discuss, with suitable computations, the accounting treatment of the above arrangement in ABM
Mining’s financial statements during the first accounting period.

Solution:

The relationship among the three parties qualifies as a joint arrangement as decisions have to
made unanimously. It appears that each party has direct rights to the assets of the arrangement,
illustrated by the ownership of machinery. Similarly, each party has obligations for the
liabilities as all costs are shared in the same proportions as the revenue. Consequently, the
arrangement should be accounted for as a joint operation.

Total revenue earned by the operation in the period is RM118.92 million ((460,000 x RM120 +
540,000 x RM118)). ABM’s share of this revenue recognised in its own financial statements is
40%, i.e. RM47,568,000. The remainder of the revenue ABM collects of RM7,632,000 (460,000
x RM120) – RM47,568,000) is recognised as a liability (in the joint operation account),
representing amounts owed to the national government.

ABM will record the machinery it purchased in full in its own financial statements. 40% of
the depreciation will be charged to cost of sales and the remainder recognised as a receivable
balance (in the joint operation account). The same treatment will apply to other joint costs
incurred by ABM. ABM is also required to recognise a 40% share of costs incurred by the
other operators and a corresponding liability (in the joint operation account).