MFRS11 Joint Arrangements

MFRS12 Disclosure of Interests in other Entities

MFRS5 Non-current Assets Held For Sale &
Discontinued Operations
 Joint arrangements

Joint arrangement (MFRS 11)

 A joint arrangement is an arrangement of which two
or more parties have joint control. 50%>
 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.
 Joint Arrangements

Joint operations
 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.
Joint ventures – Associate rate
 A joint arrangement whereby the parties that have joint
control of the arrangement have rights to the net
assets of the arrangement.
 Joint Arrangements

Not structured JOINT OPERATION

through a separate Entity considers: (line by line
vehicle  legal form accounting)

 terms of the
contractual
arrangements, and
 other facts and
Structured through JOINT VENTURE
circumstances
a separate vehicle (Equity accounting)
Graphically….
 Illustration 1

 ABM Mining entered into an arrangement with another

entity, Delta Extractive Industries, and the national
government to extract coal from a surface mine.

 Under the terms of the agreement, each of the two entities is

entitled to 40% of the income from selling the coal with the
remainder allocated to the government. Machinery is
purchased by each investor as necessary and all costs
(including depreciation in the case of the machinery which
remains the property of each entity) are shared in the same
proportions as the income.
 Illustration 1 (cont’)
Coal inventories on hand at any point in time belong to the
three parties in the same proportions. All decisions must be
made unanimously by the three parties.

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 $120 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. The price of coal at the year end was RM124 per ton.
Required
Discuss, with suitable computations, the accounting treatment
of the above arrangement in ABM Mining's financial statements
during the first accounting period.
Analysis/Accounting treatment
The relationship between the three parties qualifies as a
joint arrangement as decisions have to be made
unanimously. It appears that each party has direct rights to
the assets of the arrangement, illustrated by the
ownership of coal inventories. Similarly, each party has
obligations for the liabilities as all costs are shared in the
same proportions as the income. Consequently the
arrangement should be accounted for as a joint operation.
Total revenue earned by the operation in the period is
$118.92m ((460,000 × $120) + (540,000 × $118)).
ABM's share of this revenue recognised in its own financial
statements is 40%, ie $47,568,000.
Analysis/Accounting treatment (cont’)

The remainder of the revenue ABM collects of $7,632,000

((460,000 × $120) – $47,568,000) is recognised as a liability (in
the joint operation account), representing the amount 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).
Illustration 2
Illustration 2 (cont’)
Illustration 2 (cont’)
MFRS12 Disclosure of Interest in Other
Entities
Objective: to require entities to disclose information that
enables the user of the financial statements to evaluate:
 the nature of, and risks associated with, interests in other entities
 the effects of those interests on its financial position, financial
performance and cash flows

MFRS12 is required to be applied by an entity that has an

interest in any of the following:
 subsidiaries
  joint arrangements (joint operations or joint ventures)
associates
 unconsolidated structured entities
MFRS5 Non-current Assets Held for Sale
& Discontinued Operations

 Assets (or disposal groups) held for sale are:

 not depreciated;
 measured at the lower of carrying amount and fair value
less costs to sell;
 presented separately in the statement of financial
position.
 
 MFRS 5 - Conditions
 To be classified as held for sale:
 management is committed to a plan to sell the asset is
available for immediate sale
 an active programme to locate a buyer is initiated
 the sale is highly probable, within 12 months of
classification as held for sale
 the asset is being actively marketed for sale at a sales
price reasonable in relation to its fair value
 actions required to complete the plan indicate that it is
unlikely that plan will be significantly changed or
withdrawn
 MFRS5 Classification

 An entity that is committed to a sale involving loss of

control of a subsidiary that qualifies for held-for-sale
classification under MFRS 5 classifies all of the assets
and liabilities of that subsidiary as held for sale, even if
the entity will retain a non-controlling interest in its
former subsidiary after the sale.
 Illustration
 Riana Bhd is a public limited company. It is reviewing certain events
which have occurred since its year end of 31/10/2016. The financial
statements were authorized on 12/12/2016. The following event is
relevant to the financial statements for the year ended 31/10/2016:

 Riana disposed of a wholly owned subsidiary, Rugi Bhd on 10/11/2016 and

made a loss of RM9m on the transaction in the group financial
statements.
 As at 31/10/2016, Riana had no intention of selling the subsidiary which is
material to the group. The directors of Riana have stated that there were
no significant events which have occurred since 31/10/2016 which could
have resulted in a reduction in the value of Rugi.
 The carrying value of the net assets and purchased goodwill of Rugi at
31/10/2016 were RM20m and RM12m respectively. Rugi had made a loss
of RM2m in the period 1/11/2016 to 10/11/2016.
 Illustration
Required:

Discuss the accounting treatment for the above event in

the financial statements of Riana Bhd Group for the year
ended 31 October 2016, taking into account the
implications of events occurring after the end of the
reporting period.
 Illustration: solution
 Disposal of Subsidiary
 Issue : Value of the subsidiary at 31 October 2016?
 The directors have stated that there has been no
significant event since the year end which could have
resulted in the reduction in its value.
 Taken together with the loss on disposal, indicates that
the subsidiary had suffered an impairment at 31
October 2016.
 MFRS110 requires the sale to be treated as an adjusting
event after the reporting period as it provides evidence
of a condition that existed at the end of the reporting
period.
 Illustration: solution
 The assets of Rugi should be written down to their
recoverable amt (which is the eventual sale proceeds)
 The value of net assets and purchased goodwill shld be
reduced by RM11m (loss 9m + 2m)
 MFRS136- Impairment loss shld be allocated to goodwill
first Purchased GW becomes RM1m (12m-11m).
Impairment loss of RM11m  recognised in P/L
 Since there was no intention to sell the subsidiary @
31/10/2016, MFRS5 does not apply. The disposal is
disclosed in the notes to the financial statements in
accordance to MFRS110.