Chapter One

Joint Arrangement (IFRS 11)

% age of ownership Accounting Methods Influence
exerted o
0-20% Cost Method ( FV Method) (Joint Ventures) Passive

20-50% Equity Method ( Associate) Significant

More than 50% Consolidation ( Parent (Mommy) & Subsidiariy (Kids) Control

2
List of Applicable Standards
Topic List Standards
Joint Arrangement IFRS 11

Investment in Associates and Joint Ventures IAS 28

Disclosure of Interest in Other Entities IFRS 12

3
Investment
• An entity may conduct its business through strategic
investments in other entities.
• IFRS broadly distinguishes three types of such strategic
investment:
the reporting entities controls the investee company
the reporting entities jointly control the investee company
with one or more third parties; and
the reporting entities has significant influence over
investee company
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Determining the accounting for interests in other entities
(Interaction of IFRS 10, 11, 12 and IAS 28)

Outright control?

Yes No

Consolidation (IFRS 10) Joint control?

Yes No

Determine type of joint Significant influence?

arrangement (IFRS 11)
Yes No

Joint Operation Joint Venture

Financial asset
Account for assets, liabilities, Equity accounting accounting
revenues and expenses (IFRS 11) (IAS 28) (IAS 39/IFRS 9)

IFRS 12 IFRS 7
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©2013 Grant Thornton International Ltd. All rights reserved. 4
Degree of influence over ‘investees’ & the relevant IFRS standards

Degree of influence IFRS accounting

Unilateral Control Account for investment according to IFRS 10( Consolidated Financial
Statements)
Joint operation: Account for assets and liabilities using IFRS 11 Joint
Joint control (joint Arrangements.
arrangements) Joint venture: Account for investment using the equity method in
accordance with IAS 28 (Investments in Associates and Joint Ventures)
Significant influence Account for investment using the equity method in accordance with IAS
28
Less than significant Account for investment using the fair value model in accordance with
IFRS 9 (Financial Instruments)
Introduction

Objective Scope
• The objective of this IFRS (IFRS • This IFRS shall be applied by
11) is to establish principles for all entities that are a party to
financial reporting by entities that a joint arrangement
have an interest in arrangements
that are controlled jointly (i.e.
joint arrangements).
Effective for annual periods beginning on or
after 1 January 2013. Early application is
permitted.
Joint arrangements
• A joint arrangement is an arrangement of which two or
more parties have joint control. (IFRS 11-4)
• A joint arrangement has the following characteristics:
 The parties are bound by a contractual arrangement
 The contractual arrangement gives two or more of those
parties joint control of the arrangement
• A joint arrangement is either a joint operation or a joint
venture (IFRS 11-6)
Joint Control
• Joint control is 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.
• An entity that is a party to an arrangement shall assess whether the contractual
arrangement gives all the parties, or a group of the parties, control of the arrangement
collectively.
• In a joint arrangement, no single party controls the arrangement on its own. A party
with joint control of an arrangement can prevent any of the other parties, or a group of
the parties, from controlling the arrangement. (IFRS 11-10)
Who appoints Major capital
the Board expenditures
and key Acquiring/
Appointing Disposing
management Board subsidiaries
personnel? members

Relevant
Activities
Selling/
buying determining
goods and funding
services
Dividend and Who can
remuneration
decisions change the
strategic
direction of
the entity?
Unanimous Consent
• Unanimous Consent means that every party of the joint arrangement
must agree with (or at least does not object to) the decision and no one
can block it.
• The requirement for unanimous consent means that any party with joint
control of the arrangement can prevent any of the other parties, or a
group of the parties, from making unilateral decisions (about the
relevant activities) without its consent.
 Assessing unanimous consent
• Example: Imagine 3 joint venturer: Company X has a share of 50% in a joint venture,
companies Y and Z have shares of 25% each. Let’s say that the contract specifies that to
make important decisions, at least 75% must agree. What does that mean?
• Well, although X can veto or block any decisions by Y and Z (in other words, Y and Z do
not have enough voting power to decide against X’s decision), X does not have a control,
because to make a decision, X still needs the support of either Y or Z.
• In this example, collective control is present, but you still need to assess whether X, Y &
Z need to decide unanimously (all of them must agree) or not. That would be written in the
contract, for example.
• In our above example, if the contract says it simply: 75% of voting power is enough
to make all decisions, then there is NO unanimous consent, because just 2 parties
are sufficient to present (X and either Y or Z).
 Contractual Agreements of Joint arrangement
 The contractual arrangement is usually in writing.
 The agreements usually specifies the following
 The purpose, activity or duration of the arrangement;
 How members of the board of directors or other governing body are
appointed;
 The decision-making process;
 The capital or other contributions required;
 How parties share assets, liabilities, revenue, expenditure or the profit or loss.
 Why joint arrangements?
• The creation of joint arrangements ( corporation ,Plc or partnership joint
ventures) is very common in projects that typically:
• Require significant funding
• Involve significant project risk
• Require collaboration among investors to share expertise and resources.
• Has the following benefits:
 Capital needed can be raised .
 Transfer of technology and knowhow.
 Provide raw materials for the Joint Arrangement .
 Marketing of the Joint Arrangement products .
Assessing the presence of joint control
Examples of Assessing the presence of joint control

• Ex- 1 Assume that three parties (X, Y & Z) establish an

arrangement: X has 50 per cent of the voting rights in the
arrangement, Y has 30 per cent and Z has 20 per cent. The
contractual arrangement between X, Y and Z specifies that
at least 75 per cent of the voting rights are required to
make decisions about the relevant activities of the
arrangement.
Required: Assess whether the agreement gives all of the parties
control of the arrangement collectively
Examples of Assessing the presence of joint control
• Solutions:
• Even though X can block any decision, it does not control
the arrangement because it needs the agreement of Y. 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 X and Y have joint control of the
arrangement because decisions about the relevant activities
of the arrangement cannot be made without both X and Y
agreeing.
Examples of Assessing the presence of joint control

• Ex-2 Assume an arrangement has three parties: A has 50

per cent of the voting rights in the arrangement and B and
C each have 25 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.
• Required: Assess whether the agreement gives all of the
parties control of the arrangement collectively
Examples of Assessing the presence of joint control

• Solutions:
• Even though A can block any decision, it does not control the
arrangement because it needs the agreement of either B or C. In this
example, A, B and C collectively control the arrangement. However,
there is more than one combination of parties that can agree to reach
75 per cent of the voting rights (i.e. either A and B or A and C). In
such a situation, to be a joint arrangement the contractual
arrangement between the parties would need to specify which
combination of the parties is required to agree unanimously to
decisions about the relevant activities of the arrangement.
Examples of Assessing the presence of joint control

• Ex-3 Assume an arrangement in which A and B each have

35 per cent of the voting rights in the arrangement with
the remaining 30 per cent being widely dispersed. Decisions
about the relevant activities require approval by a majority
of the voting rights
• Required: Assess whether the agreement gives all of the
parties control of the arrangement collectively
Examples of Assessing the presence of joint control

• Solutions:
• A and B have joint control of the arrangement only if the contractual
arrangement specifies that decisions about the relevant activities of the
arrangement require both A and B agreeing.
Joint Operation or Joint Ventures
Joint Operation or Joint Ventures
• Joint arrangements are classified as either joint operations or joint ventures:
• 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. Those parties are called joint
operators. [IFRS 11:15]
• A joint venture is 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 venturer. [IFRS 11:16].
• It used equity method
Joint Operation or Joint Ventures
Classification of joint arrangements
• Determining the classification of joint arrangements can be set out as a four
step process, as shown below.
Step 1–Is the joint arrangement structured through a separate vehicle?
• A separate vehicle is a separately identifiable financial structure, including
separate legal entities or entities recognised by statute, regardless of whether
those entities have a legal personality
• The most common forms of vehicle used to structure joint arrangements are
• limited liability companies,
• partnerships,
• corporations,
• associations and
• trusts.
• Each of these is a separately identifiable financial structure, having separately
identifiable assets, liabilities, revenues, expenses, financial arrangements and
financial records, and would be a separate vehicle.
Joint arrangements not structured through a separate vehicle:

• An arrangement that is not structured through a separate vehicle is a

joint operation.
• The parties in the joint arrangement determine the rights to the assets and
obligations for the liabilities among the parties. Much upstream activity in the
oil and gas industry, for example, takes place in undivided interest working
arrangements where the parties share joint control, fund development and
operations, and take away their share of the production.
Example – Joint arrangement with no separate vehicle

• Company C and D agree to manufacture mobile phones together, Company C

focusing on the electronics and Company D on the physical product. Each
company is responsible for their own specific tasks and each using their own
assets and incurring their own liabilities. The contractual arrangement in place
also specifies how the revenues and expenses that are common to the two
companies are to be shared among them.

As determined in IFRS 11:B16, this type of arrangement with no separate vehicle will be
determined as a joint operation.
Joint arrangements structured through a separate vehicle:

• A joint arrangement that is structured through a separate vehicle is either a

joint venture or a joint operation depending on the parties’ rights and
obligations relating to the arrangement.
• The parties need to assess whether the legal form of the separate vehicle,
the terms of the contractual arrangement and, when relevant, any other
facts and circumstances give them:
• rights to the assets and obligations for the liabilities relating to the
arrangement (that is, joint operation); or
• rights to net assets of the arrangement (that is, joint venture).
Joint arrangements structured through a separate vehicle:

Example 1:
• Two construction companies set up a separate vehicle and have a
contractual arrangement which states that they both have rights to the
assets, and obligations for the liabilities, relating to the arrangement
that is conducted through the separate vehicle.

It is a joint operation.
Joint arrangements structured through a separate vehicle:
Example 2:
• Two real estate companies set up a separate vehicle for the purpose of
acquiring and operating a shopping center. The contractual arrangement
between the parties establishes joint control of the activities that are conducted
in the separate vehicle. The main feature of the separate entity’s legal form is
that the entity, not the parties, has rights to the assets, and obligations for the
liabilities, relating to the arrangement. These activities include the rental of the
retail units, managing the car park, maintaining the center and its equipment,
such as lifts, and building the reputation and customer base for the center as a
whole. The terms of the contractual arrangement establish that the parties only
have rights to the net assets of the separate entity.
The arrangement is a joint venture.
Joint arrangements structured through a separate vehicle:
Example 3:
• Two banks agreed to combine their corporate, investment banking, asset
management and services activities by establishing a separate vehicle. Both
parties expect the arrangement to benefit them in different ways. One bank believes
that the arrangement could enable it to achieve its strategic plans to increase its
size, offering an opportunity to exploit its full potential for organic growth through an
enlarged offering of products and services. The other expects the arrangement to
reinforce its offering in financial savings and market products. The legal form sets up
the separate vehicle to be considered in its own right (i.e. the assets and liabilities
held in the separate vehicle are the assets and liabilities of the separate
vehicle and not the assets and liabilities of the parties). Although there is an
irrevocable agreement under which, even in the event of a dispute, both banks
agree to provide the necessary funds in equal amount and, if required, jointly and
severally, to ensure that the separate entity complies with the applicable legislation
and banking regulations, this is not by itself a determinant that the parties have an
obligation for the liabilities of the separate entity
the arrangement is a joint venture.
Joint arrangements structured through a separate vehicle:
Example 4:
• A company owns an undeveloped gas field that contains substantial gas
resources. They determine that the gas field will only be economically
viable if the gas is sold to customers overseas. Therefore, a liquefied
natural gas facility is required to liquefy the gas so that it can be
transported overseas. The company enters into a joint arrangement with
another company in order to develop and operate the gas field and the
LNG facility. Under that arrangement, a new separate vehicle is set up.
The contractual arrangement doesn’t specify whether either party has
rights to the assets, or obligations for the liabilities of the separate entity,
but they establish that the parties have rights to the net assets of the
separate entity.
The arrangement is a joint venture.
Joint arrangements structured through a separate vehicle:
Example 5:
Assume that two parties structure a joint arrangement in an incorporated
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
arrangement ensures that the parties operate the facility that produces the
materials to the quantity and quality specifications of the parties.
Assessment of the relevant facts and circumstances indicate that the
arrangement is a:

The arrangement is a joint venture.

Step 2 – Does the legal form of the separate vehicle confer upon the parties direct
rights to assets and obligations for liabilities relating to the arrangement?

• The second step in determining the classification is to assess the rights and
obligations arising from the legal form of the separate vehicle.
• Joint arrangements are established through many different legal structures,
including limited liability companies, unlimited liability companies, limited liability
partnerships, general partnerships and unincorporated entities. Each of these legal
structures exposes the parties to a different set of rights and obligations.
• If the legal structure is such that the parties have rights to assets and are
obligated for the liabilities, it is a joint operation because the legal entity does
not create separation between the parties and the arrangement.
• The key question is – can the separate vehicle or legal entity be considered in its
own right – that is, are the assets and liabilities held in the separate vehicle those of
the separate vehicle, or are they the assets and liabilities of the parties?
Indicators in contractual arrangements – Joint operations
• Rights to assets:
• The parties share all interests (for example, rights, title or ownership) in the assets in a
specified proportion − either in proportion to the parties’ ownership interest in the arrangement
or in proportion to the activity carried out through the arrangement.
• Obligations for liabilities
• The parties share all liabilities, obligations, costs and expenses in a specified proportion as in
the case of rights to assets.
• Revenues and expenses:
• The contractual arrangement usually establishes the allocation of revenues and expenses on
the basis of the relative contribution or consumption of each party to the joint arrangement. For
example, the contractual arrangement might establish that revenues and expenses are
allocated on the basis of the capacity that each party uses in a plant operated jointly, which
could differ from their ownership interest in the joint arrangement.
Indicators in contractual arrangements – Joint Ventures
• Rights to assets
• The assets and rights owned by the arrangement are those of the arrangement; the
parties do not have any direct interests in the title or ownership of these assets.
• Obligations for liabilities:
• The contractual terms establish that the arrangement is liable for the debts and
obligations of the arrangement and that the parties are only liable to the extent of
unpaid capital. Further, the creditors of the joint arrangement do not have rights of
recourse against the parties.
• Revenues and expenses:
• The parties share in the net cash flows and net profits of the arrangement in proportion
to their shareholding.
Considerations when assessing ‘other facts and circumstances’
• Some or all of the following characteristics might indicate that a joint arrangement in
a legal entity should be classified as a joint operation:
• The joint arrangement may be prohibited from selling any of its output to third
parties.
• The parties have uninterrupted access to the output.
• There is likely to be a binding obligation on the parties to purchase
substantially all of the output.
• The demand, inventory and credit risks relating to the activities of the
arrangement are passed on to the parties and do not rest with the
arrangement.
• The output or services are priced to cover the costs of the arrangement
and not expected to generate significant net income.
• The arrangement is unlikely to have any third party borrowings without
guarantees or take-or-pay arrangements with the parties.
Scenarios - 1
Scenarios
The arrangement manufactures seats for automobiles. Both parties are in the business
of assembly and sale of automobiles. Both are obligated to take output in proportion to
their shareholding. The price of the seats is set by the parties at a level such that the
arrangement operates at breakeven. The arrangement is prohibited from selling the
seats to third parties
Analysis:
The design of the arrangement is to provide all its output to the parties. It is dependent
on the parties for its cash flows to ensure continuity of operations. The parties get
substantially all the economic benefits from the assets of the arrangement.
Classification:
Joint operation
Scenarios - 2
Scenarios
The joint arrangement produces a commodity such as oil which is readily
saleable in the market. The parties are obligated to buy their share of the
output
Analysis:
The parties are obliged to take their share of the output and in turn fund the
operations of the joint activity. The fact that the product is readily saleable
becomes less relevant because there is an obligation on the arrangement to sell
all of its output to the parties.
Classification:
Likely to be a joint operation
Scenarios - 2
Scenarios
Two parties set up an arrangement to manufacture a product. The product is sold to
third parties. Per the contractual terms: (a) all the gross cash proceeds from revenue of
the arrangement are transferred to the parties on a monthly basis in proportion of
their shareholding; (b) The parties agree to reimburse the arrangement for all its costs
in proportion of their shareholding based on cash calls.
Analysis:
The purpose and design of the arrangement is not to provide all of its output to the
parties. The arrangement is selling the product to third parties and generating its own
cash flows. Transferring gross proceeds of revenues to the parties and making cash
calls for incurring its costs does not indicate that the parties have rights to assets and
obligations for liabilities of the arrangement. It is merely a funding mechanism. It is no
different from the parties having an interest in the net results of the arrangement
Classification:
Likely to be a joint venture
Accounting for Joint Operation
• MULU has a 30% share of a joint operation, a natural gas station. The following
information relates to the joint arrangement activities:
• The natural gas station cost ETB 15 million to construct and was completed on 1
January 2015. Its useful life is estimated at 10 years.
• In the year, gas with a direct cost of ETB 22 million was sold for ETB 30 million.
Additionally, the joint arrangement incurred operating costs of ETB 1.5 million during
the year.
• Assets, liabilities, revenue and costs are apportioned on the basis of the shareholding
• MULU has only contributed and accounted for its share of the construction cost,
paying ETB 6 million. The revenue and costs are receivable and payable by the other
joint operator who settles amounts outstanding with MULU after the year-end (31
December 2015
• Show how MULU would account for the above in its consolidated financial statements for
the year ended 31 December 2015.
Revenue (30,000,000 * 0.3) 9,000,000
CGS (22,000,000 * 0.3) (6,600,000)
Operating expenses (1,500,000 * 0.3) (450,000)
Depreciation expense ( 15,000,000/10)* 0.3 (450,000)
Net Income 1,500,000
Statement of Financial Position
PPE @ Cost = 15,000,000 * 0.3 4,500,000
Less: Accumulated Depreciation 450,000
Net PPE 4,050,000
Account Receivable 1,500,000

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Accounting for a joint Ventures
Accounting for a joint Ventures
• A joint venturer should recognize its interest in a joint venture as an
investment and should account for that investment using the equity method in
accordance with IAS 28 unless the entity is exempted from applying the equity
method
• Under the equity method, on initial recognition the investment in a joint
venture is recognized at cost, and the carrying amount is increased or
decreased to recognize the investor's share of the profit or loss of the investee
after the date of acquisition. The investor's share of the investee's profit or
loss is recognized in the investor's profit or loss. Distributions received from an
investee reduce the carrying amount of the investment.
Equity Method
Initial Investment
Investment in JV....xx
Cash/other assets....Xxx
Net Income
Investment in JV....xx
Income from JV.......xx
Net Loss
Loss from JV........X
Investment in JV......xx
Dividend
Dividend receivable/cash...............XX
Investment in JV......................XX
Equity accounting for a JV 's losses continues until the investment is reduced to zero. Additional losses
may be recognized as a liability if an entity has a legal or constructive obligation or made payments on
behalf of the associate or joint venture Recognition of future share of profits only after share of profits
equals losses.
Example-1
 A Company and B Company each invested interest in AB joint
Br 400,000 for a 50% venture on January 1, 2019.
 At December 31, 2019, AB reported a Net Income of Br 300,000
 December 21, 2019 it declared a dividend of Br 100,000
Solutions
January 1 Investment in AB 400,000
Cash 400,000
December 31 Investment in AB 150,000
Income from AB 150,000
December 21 Dividend Receivable 50,000
Investment in AB 50,000
Example-2
• On 1/3/2014 EEP buys 30% of Entity B for Br 120 million(Assume through this
interest EEP gained Joint control over B).
• Entity B's profit = Br80 million for the year ended 31/12/2014 (including
Br66.67million from March to Dec).
• On 20/12/2014 Entity B declared a dividend of Br100 million.
• The fair value of EEP's share in B at December 31,2014 is Br 115,000,000.00.
• Entity B reported loss of Br400 million for year ended 31/12/2015 and
declared no dividend.
• It also reported profit of Br300 million for year ended 31/12/2016 and declared
no dividend.
Solution
• For EEP personal account
1/3/2014 Investment in B 120,000
Cash 120,000
3112/2014 Investment in B 20,000,000
Income from B 20,000,000
66,666,666.66 * .33
20/12/2014 Dividend Receivable 30,000,000
Investment in B 30,000,000
100,000,000*.3

Loss from B 120,000,000

31/12/2015 Investment in B 110,000,000
Liability to B 10,000,000
(400,000,000 *0.3)
31/12/2016 Investment in B 80,000,000
Liability to B 10,000,000
Income from B 90,000,000
300,000,000 * .33
Disclosures
The IFRS requires an entity to disclose information that enables users of FS to evaluate:
 the nature of, and risks associated with, its interests in other entities; and
 the effects of those interests on its financial position, financial performance and cash flows
 Joint arrangements and associates
 Nature, extent and financial effects of interests in joint arrangements and associates,
 List and nature of interests
 Quantitative financial information
 Unrecognized share of losses of JVs and associates
 Fair value (if published quoted prices available)
 Nature and extent of any significant restrictions on transferring funds
 Nature of, and changes in, the risks associated with the involvement
 Commitments and contingent liabilities