JOINT ARRANGEMENTS

IFRS 11 JOINT ARRANGEMENTS

IAS 28 INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
IFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES
Learning Objectives
1. Define a joint arrangement and state its characteristics.
2. Differentiate between a joint operation and a joint venture.
3. Account for joint operations.
4. Describe the accounting requirements for joint ventures.
5. Compare full PFRS and PFRS for SMEs.
Core Principle
The core principle of IFRS 11 is that a party to a joint
arrangement determines the type of joint
arrangement in which it is involved by assessing its
rights and obligations and accounts for those rights
and obligations in accordance with the type of joint
arrangement.
Key definitions
Joint arrangements – an arrangement in which two or more parties have joint
control.
Joint control – the contractually agreed upon 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 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.
Joint venture – a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement.
Key definitions
Joint venturer – a party to a joint venture that has joint control of that
joint venture.
Joint operator - a party to a joint operation that has joint control of
that joint operation.
Party to a joint arrangement – an entity that participates in a joint
arrangement regardless of whether that entity has a joint control of
the arrangement.
Separate vehicle – a separately identifiable financial structure,
including separate legal entities or entities recognized by statute,
regardless of whether those entities have a legal personality.
Objectives and Scope
PFRS 11 Joint Arrangements prescribes the principles for
financial reporting by parties to a joint arrangement. This
standard shall be applied by all parties to a joint
arrangement.

Joint arrangement is an arrangement in which two or more

parties have joint control.
Characteristics of Joint Arrangement
• The parties are bound by a contractual arrangement
• The contractual arrangement gives two or more of those
parties joint control of the arrangement.

A joint arrangement is either

• a joint operation
• a joint venture
Contractual Arrangement
The existence of contractual agreement for sharing of joint
control over an investee distinguishes interests in joint
arrangements from other investments such as investment
measured at fair value (PFRS 9), investments in associate
(PAS 28) and investment in subsidiary (PFRS 3 and PFRS 10).
The contractual arrangement is usually in
writing and deals with such matters as:
• The activity, duration and reporting obligations of the joint
arrangement;
• The appointment of the board of directors or equivalent
governing body of the joint arrangement and the voting
rights of the parties;
• Capital contributions by the parties; and
• The sharing by the parties of the output, income, expenses
or results of the joint arrangement
Joint Control
PFRS 11 defines joint control as “ 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.”
In contrast with significant influence and control, joint control is
obtained by an investor through contractual agreement with fellow
investors.
Significant influence is the power to participate in the financial and
operating policy decisions of an economic activity but is not control
or joint control over those policies.
Joint Control
Control is the power to govern the financial and operating policies of
an economic activity so as to obtain benefits from it.
Joint control exists when all of the parties to the contractual
arrangement act collectively (or together) in directing the activities
that significantly affect the returns of the arrangement.
However, an arrangement can still be considered a joint arrangement
even if not all of the parties have joint control of the arrangement.
 Nature of Type of Investment Interest in voting Applicable reporting Accounting
Relationship with rights of investee standard Treatment for
Investee Investment
Regular investor Investment in FVPL Less than 20% PFRS 9 Fair value
or FVOCI
Significant influence Investment in 20% to 50% PAS 28 Equity method
associate
Control Investment in 51% to 100% PFRS 3 and PFRS Consolidation*
subsidiary 10

Joint Control a. Joint operation Contractually PFRS 11 and other Recognize own
agreed relevant PFRSs assets, liabilities,
revenues and
expenses plus
share in the assets,
liabilities, revenues
and expenses in the
joint operation
b. Joint venture PFRS 11 and PAS Equity method
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Structure of Joint Arrangement
Joint arrangements not structured through a separate vehicle
⮚Joint operation

Joint arrangements structured through a separate vehicle

⮚Joint operation or Joint venture
◦ Legal form of the separate vehicle
◦ Contractual terms and conditions
◦ Other facts and circumstances
 Not structured through a Structured through a
separate vehicle * separate vehicle * 14
Assessment
of the parties’
Assess the parties’ rights and obligations rights and
arising from the arrangement 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 and Accounting for an
the parties’
expenses in accordance with the contractual investment using the rights and
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.
 15

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
liabilities? Yes
No
Other Is the arrangement designed so:
a) Its activities primarily aim to provide
parties with an output, and Yes
(b) It depends on the parties for settling
liabilities?
No
Joint Venture
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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

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Objective
17

• 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.
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Requirements
18

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

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18
 Joint arrangements and associates 19

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

* for individually-material joint ventures and associates

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Judgements and estimates

• 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
• 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
• 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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23
Significant influence continued

• 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
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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25
Equity method
• Recognise the investment initially at cost, then adjusting for the
post-acquisition change in the investor’s share of net assets of the
associate or joint venture.
• Presentation:
• a one-line entry in the statement of comprehensive income ‘investor’s share of the
associate or joint venture’s 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 .
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Example
equity method

On 1/3/20X1 A buys 30% of B for 300,000 (assume no implicit goodwill & fair
value adjustments).

B’s 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 A’s 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

• Equity accounting for an associate’s 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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28
Equity method continued

• 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 venture’s year end differs from the
investor’s 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

• Goodwill forms part of the investment in associate or joint venture

• Therefore, the goodwill is tested for impairment as part of a single asset—the 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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Investment in Joint ventures

Presentation in the statement of financial position

◦ Investments ----- equity method ------ non-current assets

However, when such investments are classified as held for

sale in accordance with PFRS 5 (Non-current assets held for
sale and Discontinued operations), they are presented as
current assets.
Transactions between the Venturer
and the Joint Venture
• Sale of inventory
• Sale of depreciable/ non-depreciable assets
Downstream sale
Venturer (seller) --------> Joint venture (buyer)
Upstream sale
Joint venture (seller) ----------> Venturer (buyer)
Core Concept: The share in profit or loss of the joint venture is recognized only to the extent of
unrelated investors’ interests in the joint venture.
Downstream – eliminate entire unrealized profit
Upstream – eliminate investor’s share in the unrealized profit
Comparison to the IFRS for SMEs
The main differences between IAS 28 and Section
14 Investments in Associates and Section 15
Investments in Joint Ventures is in an investor’s
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 ventures—the equity method, the cost model and
the fair value model. A different model can be used for associates as compared to
joint ventures

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Comparison of Full PFRS 11 and PFRS for SMEs
PFRS 11 PFRS for SMEs
Joint Arrangements Joint Ventures
Types Types
∙ Joint Operation ∙ Jointly controlled operation
- Line by line accounting ∙ Jointly controlled assets
- Line by line accounting

∙ Joint Venture ∙ Jointly controlled entity

- Equity method - Cost model
- Fair value model
- Equity model
Comparison of Full PFRS and PFRS for
SMEs
Full PFRS PFRS for SMEs
Investment in Jointly ∙ Equity method ∙ Equity method
controlled entity ∙ Cost model
∙ Fair value model

Under equity method, ∙ Does not allow ∙ Implicit goodwill be

treatment of goodwill amortization of systematically
goodwill amortized over its
expected useful life
Joint venture (PFRS for SMEs)
A joint venture is a contractual arrangement whereby two
or more parties undertake an economic activity which is
subject to joint control.
According to PAS 31, if there is no contractual arrangement
to establish the joint control, the investments are not
deemed to be joint ventures.
Forms of Joint Venture (PAS 31)
• Jointly controlled operations – it involves the use of the assets and
other resources of the ventures rather than the establishment of a
corporation, partnership or other entity, or a financial structure that
is separate from the venturer themselves.
• Jointly controlled assets – the assets are used to obtain benefits for
the venturers.
• Jointly controlled entities – which involves the establishment of a
corporation, partnership or other entity in which each venturer has
an interest.
•
No Separate Set of Books is maintained for the Joint
Venture for jointly controlled assets and jointly
controlled operations
Joint Venture Profit or Loss
The following should be considered in computing profit or
loss:
• If the joint venture is completed, the balance of the Joint Venture
account represents the profit or loss. A credit balance represents
profit and a debit balance represents loss.
• If the joint venture is uncompleted, meaning there are still unsold
merchandise, the profit or loss is squeeze figure between the
balance of the Joint Venture account and the profit distribution
and the cost of unsold merchandise (the required debit balance
of the Joint Venture account after profit or loss distribution.
Cash Settlement
This is the cash due to or from the participant upon
completion of the Joint Venture undertaking.
The following should be observed:
• The participants balances are initially determined
• If there is a credit balance in the participant’s account, he
or she will receive cash equal to his or her credit balance
• If there is a debit balance in the participant’s account he
or she will pay cash equal to his or her debit balance
Accounting for Investment in JCE
Cost Method Equity Method Fair Value Method
Initial cost Acquisition cost Acquisition cost Acquisition cost
including transaction including transaction excluding transaction
cost cost cost

Published quotation Use Fair value method Use Fair value method
price is available
Published quotation Use Cost method Use cost method
price is NOT available
At each reporting date At cost less any Adjusted balance for At fair value with
impairment loss post acquisition changes in fair value
change in the recognized in profit or
venture’s share in loss
profit or loss and other
comprehensive
income less any
impairment loss
Transaction COST EQUITY FAIR VALUE

Original investment Investment* Investment* Investment

*transaction price including
transaction cost
Additional investment
Withdrawal (may give rise to
gain or loss on disposal)
Cash or other account Cash or other account Expense
Cash or other account
Investment* Investment* Investment
Cash or other account Cash or other account Expense
Cash or other account
Cash or other account Cash or other account Cash or other account
Investment Investment Investment

Dividends declared by investee Cash or other account Cash or other account Cash or other account
Dividend income Investment Dividend income

Share in the net income of No entry Investment No entry

investee Investment income

Share in the net loss of No entry Investment loss No entry

investee Investment

Change in fair value at No entry No entry Investment

reporting date Increase in FV

Decrease in FV
Investment

Impairment loss Impairment loss Impairment loss No entry

Investment Investment
End of Presentation