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IFRS 11 Joint Arrangements

Definition:

A joint arrangement (allow parties to share risks and costs; access to new technology
and markets) is an arrangement of which two or more parties have joint control.

• Arrangement - contractual arrangement where parties are bound by, and if there
are any changes in the arrangement, reassessment of joint control is needed.

• Two or more parties – not all parties involved in the joint arrangement need to have
joint control over the arrangement, ie three parties are involved where only two
have joint control over the arrangement is also within the scope.

• Joint – unanimous consent of those parties with joint controls, ie no single party can
dominate the relevant activities

• Control – has power instrument to direct relevant activities which significantly

affect the returns of the arrangements.

(IFRS 11 para 4-13)

Example:

Under the joint arrangement, A, B and C have 50%, 30% and 20% shareholdings. Decisions
about relevant activities require at least 75% voting shares.

Required:

Who have joint control over the arrangement?

Answer:

• A and B have joint control over the arrangement as A+B shareholdings = 80% > 75%.

• However, A and C or B and C do not have joint control over the arrangement as the
combination shareholdings is less than 75%.
Classification of joint arrangements:

Structured through a
seperate vehicle?

No Yes

Could be
Joint operation Joint operation
Joint venture

Joint operation:

• A joint arrangement to parties agreeing the output, revenue, operating costs are
shared. For example, in the joint arrangement regarding the factory, brand
belongs to party A, production facility belongs to party B etc.

• Each joint operator should account for its share of joint asset, liabilities, income and
expenses according to the joint arrangement (not necessarily per their
shareholdings.)

• If an incorporated entity is set up where all the outputs need to be purchased by

parties in the joint arrangement, ie the new entity’s cash flows depend on party A
 and B – joint operation.

Joint venture:

• This is where a separate vehicle (such as incorporated entity) is set up by two or

more parties with joint control over the arrangement.

• However, parties do not have interests in the asset of the arrangement such as
rights, title or ownership.

• Parties are only liable to their respective obligations.

• Therefore, profits (revenue minus costs) are shared on the basis of each party’s
shareholdings, however, this is not the decisive factor to distinguish a joint
operation and joint venture. The key is to check whether assets belong to different
parties and whether parties need to assume the whole liability from the
arrangement.

Example:

Party A and B set up an incorporated entity C where all C’s output need to be purchased
from party A and B at a ratio of 50:50.

Required:
Whether the arrangement is joint operation or joint venture?

Answer:
• Joint operation.

• Although a vehicle is set up, however, all outputs need to be sold to party A and B, ie
C’s cash flows depend on party A and B.

• Party A and B have all the economic benefits of assets of C.

Accounting treatment:
 Accounting treatment

Joint operation Joint venture

Show the share of assets, Equity accounting in the consolidated

liabilities, income and account, ie growth of business goes
expenses in its account into the group P/L and SOFP, where it’s
added to the cost.

Dr Investment in joint venture

Cr Bank or other non-monetary assets

Dr/Cr Investment in joint venture

Cr/Dr Income or loss from joint venture