International Financial Reporting Standards

Accounting for
joint arrangements
and associates
Joint World Bank and IFRS Foundation train the
trainers workshop hosted by the ECCB,
30 April to 4 May 2012

The views expressed in this presentation are those of the

presenter, not necessarily those of the IASB or IFRS Foundation.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

IFRS 11
Joint Arrangements

The views expressed in this presentation are those of the

presenter,
not necessarily those of the IASB or IFRS Foundation
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction 3

IFRS 11 Joint Arrangements establishes principles for

financial reporting by parties to a joint arrangement.
The standard must be applied by all entities who are
party to a joint arrangement.

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Principle 4

IFRS 11 establishes a principle-based approach for the

accounting for joint arrangements:

Parties to a joint arrangement recognise their

rights and obligations arising from
the arrangement, regardless of its structure or legal form

Information about those rights and obligations assists users to

better assess the prospects for future net cash inflows to the
entity which is useful in making decisions about providing
resources to the entity.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Application of the principle 5

Parties that have rights to the assets and obligations for

the liabilities relating to the arrangement are parties to a
joint operation.
A joint operator accounts for assets, liabilities and
corresponding revenues and expenses arising from the
arrangement.
Parties that have rights to the net assets of the
arrangement are parties to a joint venture.
A joint venturer accounts for an investment in the
arrangement using the equity method.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

 Classification 6

Not structured through a Structured through a

separate vehicle * separate vehicle *
Assessment
of the parties
Assess the parties rights and
obligations arising from the arrangement
rights and
by considering: obligations
(a) the legal form of the separate vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances

Parties have rights to the assets Parties have rights

and obligations for the liabilities to the net assets

Joint operation Joint venture

Accounting
reflects
Accounting for assets, liabilities, revenues Accounting for an
the parties
and expenses in accordance with the investment using the rights and
contractual arrangements equity method obligations
(*): 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.
 Separate vehicles 7

Legal form Do the parties have rights to the assets

and obligations for the liabilities? Yes

No
Contractual Do the parties have contractual rights to

Joint Operation
terms the assets, and obligations for the Yes
liabilities?
No
Other Is the arrangement designed so:
a) Its activities primarily aim to provide Yes
parties with an output, and
(b) It depends on the parties for settling
liabilities?
No
Joint Venture
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Example:
Construction and real estate 8

A separate vehicle is established, over which two

parties have joint control.
The purpose of the Joint Arrangement is to construct
and sell residential units to the public
Neither the legal form nor the contractual terms give
the parties rights to the assets or obligations for the
liabilities of the arrangement
Contributed equity by the parties is sufficient to buy
the land and raise debt finance for the construction
Sales proceeds will be used to repay external debt
and remaining profit is distributed to parties
Parties provide guarantee to financier
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Example:
Mining 9

A and B jointly establish a corporation D over which

they have joint control to process the ore from the mine
C
A & B have agreed to the following:
A & B will purchase all the output produced by D in a
ratio of 60:40 (in proportion to ownership interest in D)
D cannot sell the output to third parties
Price of the output is set by A and B at a level to cover
production and admin costs (i.e. D breaks even)

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs 10

Some of the differences between Section 15

Investments in Joint Ventures of the IFRS for SMEs and
IFRS 11 include:
Section 15 has different methods of accounting for jointly
controlled entities to full IFRSs. The IFRS for SMEs
permits use of the equity method, cost or the fair value
model.
If the equity method is used, any implicit goodwill is
systematically amortised over its expected useful life
full IFRS does not allow amortisation of goodwill.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Evaluating the differences 11

The rules in Section 15 require fewer judgements

The principle-based approach in IFRS 11
enhances verifiability and understandability
the accounting in IFRS 11 reflects more faithfully the economic
phenomena that it purports to represent
improves consistency
it provides the same accounting outcome for each type of joint
arrangement
increases comparability among financial statements
it will enable users to identify and understand similarities in,
and differences between, different arrangements

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates 12

Assessing whether the parties, or a group of parties,

have joint control of an arrangement (see IFRS 10 for
judgements about control).
Determining whether the joint arrangement is a joint
operation or a joint venture requires consideration of the
structure and legal form of the arrangement, the terms
agreed and when relevant other facts and
circumstances.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

International Financial Reporting Standards

IFRS 12
Disclosure of Interests in
Other Entities

The views expressed in this presentation are those of the

presenter,
not necessarily those of the IASB or IFRS Foundation
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Objective 14

The IFRS requires an entity to disclose information that

enables users of financial statements 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.
That evaluation assists users in making decisions about
providing resources to the entity.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Requirements 15

Disclosures
significant judgements and assumptions made
information about interests in:
subsidiaries
joint arrangements and associates
unconsolidated structured entities
any additional information that is necessary to meet the
disclosure objective
Strike a balance between overburdening financial statements
with excessive detail and obscuring information as a result of
too much aggregation

15
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Joint arrangements and associates 16

Nature, extent and financial effects of interests in joint

arrangements and associates, eg*
List and nature of interests
Quantitative financial information
Unrecognised 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

16
Judgements and estimates 17

An entity must disclose information about significant

judgements and assumptions it has made in
determining
joint control (see IFRS 11) of an arrangement or
significant influence (see IAS 28) over an entity
type of joint arrangement when the arrangement has
been structured through a separate vehicle

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International Financial Reporting Standards

IAS 28
Investments in Associates
and Joint Ventures

The views expressed in this presentation are those of the

presenter,
not necessarily those of the IASB or IFRS Foundation
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Scope and introduction 19

IAS 28 must be applied by all entities that are investors

with joint control of, or significant influence in an
investee.
An associate is any entity over which the investor has
significant influence.
A joint venture is joint arrangement whereby the parties
have joint control of the arrangement.
the contractually agreed sharing of control of an
arrangement

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Significant influence 20

Significant influence is the power to participate in the

financial and operating policy decisions of the investee.
significant influence is not control (which indicates a
subsidiary)
significant influence is not joint control (which indicates
an interest in a joint arrangement)

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Significant influence continued 21

Significant influence is usually evidenced in one or more

of the following ways:
representation on the board of directors;
participation in policy making, including decisions
about dividends;
a close relationship involving transactions between
investor and investee;
interchange of managerial personnel; or
provision of essential technical information.

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Measurement 22

Measurement rule
Associates and joint ventures are accounted for using
the equity method.

Exemptions from the equity method

Entity is a parent and the scope exemption in paragraph
4(a) of IFRS 10
A venture capital organisation or similar entity can elect
to measure its investments in associates or joint
ventures at fair value through profit or loss in
accordance with IFRS 9.

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Equity method 23

Recognise the investment initially at cost, then adjusting

for the post-acquisition change in the investors share of
net assets of the associate or joint venture.
Presentation:
a one-line entry in the statement of comprehensive
income investors share of the associate or joint
ventures profit or loss and a separate line item for other
comprehensive income.
a one-line item in the statement of financial position
Investment in associate or joint venture.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Example
equity method 24

On 1/3/20X1 A buys 30% of B for 300,000 (assume no

implicit goodwill & fair value adjustments).
Bs profit = 80,000 for the year ended 31/12/20X1
(including 66,667 from March to Dec). On 31/12/20X1
B declared a dividend of 100,000.
At 31/12/20X1 the recoverable amount of As
investment in B = 290,000 (ie fair value 293,000 less
costs to sell 3,000).
No published price quotation for B.

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Equity method continued 25

Equity accounting for an associates losses continues

until the investment is reduced to zero.
Additional losses may be recognised 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

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Equity method continued 26

The investment includes not only shares in the

associate, but also some non-equity interests such as
some long-term receivables.
Uniform accounting policies should be used
If the associate or joint ventures year end differs from
the investors adjustments must be made for significant
transactions that occurred between the dates
Difference in year-ends may not exceed three months

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Equity method continued 27

Goodwill forms part of the investment in associate or

joint venture
Therefore, the goodwill is tested for impairment as part
of a single assetthe investment
Application of the equity method is discontinued when:
The investment becomes a subsidiary
Significant influence or joint control of the investment is
lost
IFRS 9 application to interest retained (if any)
Profit or loss on disposal

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Comparison to the IFRS for SMEs 28

The main differences between IAS 28 and Section 14

Investments in Associates and Section 15 Investments
in Joint Ventures is in an investors primary financial
statements are:
full IFRSs require investments in associates and joint
ventures to be accounted for using the equity method
the IFRS for SMEs requires an entity to elect one of
three models to account for its investment in associates
and joint venturesthe equity method, the cost model
and the fair value model. A different model can be used
for associates as compared to joint ventures

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Comparison to the IFRS for SMEs
continued 29

If an SME elects the equity method, the IFRS for SMEs

requires that implicit goodwill be systematically
amortised throughout its expected useful life (see
paragraph 14.8(c))full IFRS does not allow
amortisation of goodwill

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Judgements and estimates 30

Investors must exercise judgement in the context of all

available information to determine whether they have
significant influence over an investee.
There is no exemption from equity accounting when
severe long-term restrictions impair the associates
ability to transfer funds to the investor.
However, the investor should consider whether such
restrictions, taken with other factors, indicate that the
investor does not have significant influence

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Questions or comments? 3131

Expressions of individual views

by members of the IASB and its
staff are encouraged.

The views expressed in this

presentation are those of the
presenter.

Official positions of the IASB on

accounting matters are
determined only after extensive
due process and deliberation.

IFRS Foundation
2012 | 30 Cannon Street
IFRS Foundation | LondonStreet
| 30 Cannon EC4M 6XH | UK. EC4M
| London www.ifrs.org
6XH | UK | www.ifrs.org
 32

The requirements are set out in International Financial

Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.

2011
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