IFRS 11 Joint ArrangementsIAS 28 Investments in Associates

and Joint Ventures

Definitions

• Joint Arrangement• An arrangement of which two or more parties have joint control

• Joint Control• The contractually agreed sharing of control of an arrangement

• Decisions about relevant activities require unanimous consent of parties sharing control

• Associate• An entity over which the investor has significant influence

• Significant Influence• The power to participate in the financial and operating policy

decisions of the investee

• Is not control or joint control

Significant influence

• Presumed if an entity holds, directly or indirectly, 20% or more of the voting power of the investee, unless it can be clearly demonstrated that this is not the case

• A substantial or majority ownership by another investor does not preclude an entity from having significant influence.

Significant influence

Indicators of significant influence

• Representation on board

• Participation in decisions relating to material transactions

• Participation in policy-making processes – e.g. participating in decision on dividends policy

• Material transactions

Joint Control

• Collective control

• Parties must act together to direct activities that significantly affect the returns of the 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 from controlling the arrangement

Does not have to be between just 2 parties...

Scenario 1

Three parties establish an arrangement:

• Apollo has 45% of voting rights

• Bacchus has 35% of voting rights

• Circe has 20% of voting rights

The contractual arrangement between the three parties specifies that at least 75% of the voting rights are required to make decisions that significantly affect the returns of the arrangement.

Does the arrangement contain joint control?

Scenario 2

An arrangement is established as follows:

• Apollo has 35% of voting rights

• Bacchus has 35% of voting rights

Remaining 30% of voting rights is widely dispersed among minorities. Decisions that significantly affect the returns of the arrangement require a simple majority of the voting rights (i.e. greater than 50%).

Does the arrangement contain joint control?

Can apply to all parties or a group of parties to an arrangement

• IFRS 11 applies to the parties sharing joint control

• Parties in the arrangement excluded from joint control are outside the scope of IFRS 11

• But could still have significant influence

Changing circumstances…

• Be aware of changes in facts and circumstances!

• If facts and circumstances have changed, reassess whether joint control still exists…

Types of joint arrangements

Joint operation

• 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

• Parties are called ‘joint operators’

Joint venture

• A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement

• Parties are called ‘joint venturers’

Classification of joint arrangements

Separate Vehicle

A separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality.

Changing circumstances…

• Be aware of changes in facts and circumstances!

• If facts and circumstances have changed, reassess whether type of arrangement has changed…

OK, but why is it so important to know what type of joint arrangement I’m dealing with?

Financial statements of a joint operator

• A joint operator recognises the following in relation to its interest in a joint operation:

• The operator’s share of any:

• Assets held jointly

• Liabilities incurred jointly

• Revenue from sale of output by joint operation

• Expenses incurred jointly

• Eliminate own share of any transactions with the joint operation

Financial statements of a joint venturer

A joint venturer recognises its interest in a jointventure as an investment, and applies equity

accounting to the investment.

Proportionate consolidation?

Equity accounting

Scope of IAS 28:

Applies to all investments in joint ventures and associates

Exemption from applying equity accounting

Same as exemption to present consolidated financial statements:

• The entity itself is a subsidiary and all the shareholders approve;

• The parent’s debt and/or equity instruments are not traded in a public market;

• The parent is not in the process of obtaining such a listing;

• The ultimate or intermediate parent produces IFRS FS that are available for public use

and

and

and

Exemption from applying equity accounting

• Investor is a venture capital organisation, mutual fund, unit trust, investment-linked insurance fund or similar entity

• May elect to measure investment in associate or JV at fair value through profit or loss (IFRS 9 or IAS 39)

Application of equity method

Initial recognition

• Initial measurement of investment at cost

• Difference between cost and proportionate share of net fair value of identifiable assets and liabilities acquired:

– Goodwill: included in carrying amount of investment, no amortisation permitted

– Gain on a bargain purchase: recognised as income in profit or loss on acquisition

Application of equity method

Subsequent measurement

• Carrying amount adjusted to recognise investor’s share of profit or loss of investee after acquisition

• Investor’s share of investee’s profit or loss is recognised in investor’s profit or loss

• Also adjust carrying amount for other changes such as proportionate changes in investee’s OCI (e.g. revaluation of PP&E)

• Appropriate adjustments to account for subsequent measurement of investee’s assets / liabilities based on fair value at acquisition (e.g. depreciation of PP&E)

Application of equity method

• Ignore potential voting rights when determining proportionate share of adjustments, unless if potential ownership rights currently give investor access to returns associated with ownership

• Eliminate investor’s share in transactions with investee

Application of equity method

• Reporting date

• Adjustments for effects of significant transactions

• Difference < 3 months!!

• Difference should be same from period to period

• Uniform accounting policies

• May need to adjust investee’s results for differences in accounting policies

Application of equity method

Impairment

• Apply principles in IAS 39 to consider if there are indicators of impairment

• If IAS 39 indicators present, test for impairmentusing principles of IAS 36

• Goodwill not tested separately – entire carrying amount of investment tested as a single asset

• Impairment loss on investment may be reversed in subsequent periods

Disclosure

All disclosures are dealt with in terms of IFRS 12 Disclosure of

Interests in Other Entities

Effective Date

• Standards effective for periods beginning on or after 1 January 2013

• Early adoption allowed, together with IFRS 10, 12 and IAS 27 (amended)

• Specific transitional provisions for Joint Ventures and Joint Operations….

Transitional Provisions

Initial investment (deemed cost) = Aggregate of CA of assets/ liabilities previously proportionately consolidated, plus Goodwill at acquisition (if any)

Joint Ventures: Proportionate consolidation Equity method

Recognise investment in JV at beginning of the immediately

preceding period

Transitional Provisions

Recognise share of each asset and liability, including any goodwill that might have

previously formed part of the investment

Joint Operations: Equity method Accounting for assets and liabilities

Derecognise investment previously equity accounted at beginning of immediately

preceding period

Disclose a reconciliation between investment derecognised and assets & liabilities recognised at the date of

transition

Clarification of transition rules

• ‘Immediately preceding period’

– The annual period immediately preceding the first annual period for which IFRS 11 is applied.

2012 2013

01-01-2012 31-12-201201–01-2013

31-12-2013

Reporting dateEffective date of IFRS 11

First reporting date after initial application of IFRS 11

Account for joint control i.t.o. IFRS 11

Beginning of immediately preceding period

Beginning of immediately preceding period

Evaluate type of investment under IFRS 11

31-12-2011

Required comparatives

• Adjusted comparatives and line-by-line disclosure of quantitative changes in accounting policy only required for annual period immediately preceding the date of initial application, regardless of number of additional comparatives provided.

• Consistent with requirements of amended IAS 1 (2012).

To summarise…

Application of IFRS 11 is retrospective to the beginning of the immediately preceding period,

but transition rules allow for relaxed presentation of comparative information.

3 years’ SFP still required!

Withdrawal of other IFRSs

IFRS 11 supersedes the requirements relating to joint ventures in IAS 31 and SIC 13