IFRS 11: rights and obligations
IFRS 11, Joint Arrangements, provides for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. The standard addresses inconsistencies in the reporting of joint arrangements by requiring a single method to account for interests in jointly controlled entities.
A joint arrangement is one where two or more parties contractually agree to share control. Joint control exists only when the decisions about activities that significantly affect the returns of an arrangement require the unanimous consent of the parties sharing control.
All parties to a joint arrangement should recognise their rights and obligations arising from the arrangement. The structure and form of the arrangement is only one of the factors in assessing each party’s rights and obligations; the terms and conditions agreed by the parties and other relevant facts and circumstances should also be considered.
Joint arrangements are either joint operations or joint ventures. A joint operation gives the parties direct rights to the assets and the liabilities of the arrangement; those parties are called joint operators. A joint operator will recognise its interest based on its direct rights and obligations rather than on its participation interest.
A joint operator needs to recognise:
- its assets, including its share of any assets held jointly
- its liabilities, including its share of any liabilities incurred jointly
- its revenue from the sale of its share of the output of the joint operation
- its share of the revenue from the sale of the output by the joint operation, and
- its expenses, including its share of any expenses incurred jointly.
A joint venturer, on the other hand, recognises its interest as an investment and accounts for that investment using the equity method in accordance with IAS 28, Investments in Associates and Joint Ventures, unless it is exempt from applying the equity method.
A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in accordance with IFRS 9, Financial Instruments. However, if it has significant influence over the joint venture, it must account for it in accordance with IAS 28.
Accordingly, a joint venture gives the parties rights to the net assets and profit or loss of the venture. A joint venturer does not have rights to individual assets or obligations for individual liabilities of the joint venture.
Entities can no longer account for an interest in a joint venture using the proportionate consolidation method but must use the equity method. Entities will need to assess their arrangements to determine whether they have invested in a joint operation or a joint venture on adoption of the new standard.
Also, some entities that previously equity-accounted their investments may need to account for their share of assets and liabilities now that there is less focus on the structure of the arrangement.
The transition provisions of IFRS 11 require entities to apply the new rules at the start of the earliest period presented on adoption. Entities in mining, extraction, oil and gas, and real estate and construction, where joint arrangements are common, might feel the biggest impact.
IFRS 12: disclosures
FRS 12, Disclosure of Interests in Other Entities, sets out the required disclosures for entities reporting under the two new standards, IFRS 10 and IFRS 11. It replaces the disclosure requirements currently found in IAS 28. The new standard requires entities to disclose information that helps users evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, associates, joint arrangements and unconsolidated structured entities.
To meet this objective, disclosures are required in the following areas:
a) Significant judgments and assumptions used by the entity in determining that it controls another entity, has joint control of an arrangement or exerts significant influence over another entity, and the type of joint arrangement when the arrangement has been structured through a separate vehicle.
b) The entity’s interests in subsidiaries, in order to allow users to understand, for example, the composition of the group or to evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle liabilities, of the group.
c) The entity’s interests in joint arrangements and associates, so users can evaluate, for example, the nature, extent and financial effects of its interests in joint arrangements and associates, and the nature of, and changes in, risks associated with its interests in joint ventures and associates.
d) The entity’s interests in unconsolidated structured entities.
The objective of IFRS 12 is for an entity to disclose information that helps users of its financial statements evaluate the nature of it's involvement with other entities and the effects of that involvement on its financial position. IFRS 12 is likely to increase the amount of information in financial statements about an entity’s relationships with the other parties.
The new standards are effective for annual periods beginning on or after 1 January 2013. Earlier application is permitted if the entire package of standards is adopted at the same time.
Graham Holt is an examiner for ACCA and executive head of the accounting and finance division at Manchester Metropolitan University Business School