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Comments from ACCA
January 2008

ACCA is pleased to have this opportunity to comment on the Exposure Draft (ED) on joint arrangements which was considered by ACCA's Financial Reporting Committee . I am writing to give you their views.

Overall comments

The principal objective of the ED is to enhance the financial reporting of those activities currently under the scope of IAS31 Interests in Joint Ventures . The ED aims to do this by

• shifting the focus of the accounting for joint arrangements from the legal form in which the activity takes place to the contractual rights and obligations agreed to by the parties.
• Increasing the comparability of financial statements through the elimination of the choice when accounting for interests in jointly controlled entities. If the venturers in a joint arrangement only have a right to a share of the outcome of the activities their net interest in the arrangement will be recognised using the equity method only, rather than having the option to also use proportionate consolidation to account for the arrangement.
• Proposing new requirements for disclosing information about joint arrangements, subsidiaries, and associates, including a description of the nature of joint arrangements and summarised financial information relating to an entity's interests in joint ventures.

We fully support the objectives of the Board to improve the representation of joint arrangements that an entity provides in its financial statements. We believe that the focus on contractual rights and obligations will provide a more realistic reflection of the joint arrangement in the financial reports of the parties involved. This coupled with the additional disclosure requirements help to achieve that aim.

Whilst we are also in general, supportive of the elimination of options in accounting standards, we believe there should be sound justification for this before an option is deemed preferable. As we state in our response to question 3, a detailed review of the benefits and weaknesses of the equity method would have been appropriate before this method was wholly accepted, and therefore we do not agree with the Board's decision not to include this in the scope of this ED.

Similarly, the ED is seen as part of the short term convergence project with FASB. Whilst we agree that the elimination of proportionate consolidation seems to achieve this end, we note that US GAAP retains exemptions for certain industries to continue to use this approach.

ACCA responses to specific questions raised by IASB

Q1. Do you agree with the proposal to change the way joint arrangements are described? If not, why?

We have no issues with the Board in proposing to use ‘joint arrangements' rather than joint ventures to describe the overall joint activities of venturers, and retaining the term ‘joint venture' for describing joint arrangements that are subject to joint control.

The emphasis on shared decision making rather than joint control for joint arrangements is appropriate in the context of the definition of control in IAS27.

However, we believe that the current wording of the ED still leaves uncertainty around entities that participate in joint arrangements but who do not participate in shared decision-making (which the ED defines as ‘ decisions that require the consent of all of the parties to a joint arrangement ’). It is therefore unclear whether minority participants in joint arrangements where decisions are made by a contractually agreed majority will be within the scope of any resulting standard.

Q2. Do you agree that a party to a joint arrangement should recognise its contractual rights and obligations relating to the arrangement? If so, do you think that the proposals in the exposure draft are consistent with and meet this objective? If not, why? What would be more appropriate?

The current accounting for joint arrangements follows the legal form in which the activities take place and can depend on whether a separate legal entity is established for the joint arrangement. For example, a net interest in a joint arrangement is recognised when the equity method is used even if the parties have contractual rights and obligations relating to individual assets and liabilities of a joint arrangement.

We agree in principle with the Board that this may not always reflect the contractual rights and obligations agreed to by the parties. Shifting the focus to these rights and obligations acknowledges that the legal form is only one of the factors to be considered, and will provide a more realistic reflection of the joint arrangement in the financial reports of the parties involved.

However, we have concerns regarding the actual terminology used in the ED. Specifically, in relation to contractual ‘rights' and ‘obligations', we believe that reference should also be made to the assets and liabilities arising from the entity's rights and obligations. The ED only refers to assets and liabilities in the context of the definition of joint operations (paragraph 9). By adding appropriate references to assets and liabilities, the definitions would be more consistent with the Framework.

Q3. Do you agree that proportionate consolidation should be eliminated, bearing in mind that a party would recognise assets, liabilities, income and expenses if it has contractual rights and obligations relating to individual assets and liabilities of a joint arrangement? If not, why?

In principle we agree with the Board's general approach of eliminating options when setting standards, wherever possible. However we strongly believe that in order to do this it is imperative that the Board fully consider the merits of each option before a preference is made, or indeed whether the removal of an option is an improvement to the actual standard.

In the context of the ED, we would agree with the Board's view on eliminating the current option under IAS 31 of proportionate consolidation for joint arrangements as set out in paragraphs BC8 to BC10. Together with the benefits of increased comparability and the enhanced disclosure requirements, the use of the equity method is more supportable.

However, we note that the use of proportionate consolidation is prevalent in a number of jurisdictions around the world, and therefore believe that its elimination as an option should be supported by an evaluation of the merits (and weaknesses) of equity accounting.

Q4. Do you agree with the disclosures proposed for this draft IFRS? Are there any additional disclosures relating to joint arrangements that would be useful for users of financial statements?

Currently it can be difficult to view the nature and extent of an entity's operations that it conducts through joint arrangements. As such we believe that the proposals by the Board to enhance these disclosures in general should increase comparability and provide constructive information for users.

There is one disclosure proposal we do not believe is necessarily appropriate for joint ventures. This is the requirement under Paragraph 39(c) to disclose the reason for the joint venture using a different date or different period than the venturer. This disclosure requirement is appropriate for other investment types where the reporting entity has the ability to control the investment's reporting dates, and therefore any disparity in dates or periods could be more significant. In a joint venture, the venturer may not have the ability to prescribe a reporting date, and therefore this does not provide useful information.

Q5. Do you agree with the proposal to restore to IAS 27 and IAS 28 the requirements to disclose a list and description of significant subsidiaries and associates? If not, why?

As the proposals in the ED require the use of the equity method to account for interests in joint ventures, similar to IAS28 and the accounting for associates, we agree that disclosure requirements for joint ventures should be aligned to those for associates in IAS28. This will provide more consistent disclosure requirements across the range of investment types. We further accept the Board's views as set out in BC23 that these requirements will meet the needs of users of financial statements.

Q6. Do you agree that it is more useful to users if an entity discloses current and non-current assets and liabilities of associates than that it is if the entity discloses total assets and liabilities? If not, why?

We believe that this additional information would not be an undue burden on entities and would offer enhanced information for users. We would therefore not have any issues with accepting these proposals.

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