Joint ventures to joint arrangements

By Colin Parker FCA and Carmen Ridley CA

Executive summary

AASB 11 Joint Arrangements replaces AASB 131 Interests in Joint Ventures (July 2004) and SIC-13 Jointly Controlled Entities – Non-monetary Contributions by Venturers (July 2004). The requirements in SIC-13 and any guidance relating to the equity method for joint ventures have been included as consequential amendments to AASB 128 Investments in Associates and Joint Ventures.

The revisions ensure that the form of the arrangement is no longer the primary determinant of the accounting treatment and that accounting choice has been eliminated for interests in jointly controlled entities. There are now only two forms of joint arrangement, a ‘joint operation’ and a ‘joint venture’
The option of accounting for jointly controlled entities using proportionate consolidation has been removed; now only equity accounting applies
Contractual rights are the driver for accounting by participants in joint arrangements. The focus is on the contractual rights and obligations that are created by the arrangement, rather than whether the arrangement is of a particular form. Participants should account separately for rights to share the net results or outcome of the arrangement’s operations and any right they hold, such as rights of use
The exemption in AASB 131 Interests in Joint Ventures from applying the equity method to an investment in a joint venture held by a venture capital entity and like entities has been moved to the revised AASB 128 Investments in Associates and Joint Ventures
An entity must apply AASB 11 retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors
The disclosure requirements are now addressed in AASB 12 Disclosure of interest in other entities and are more extensive
The effective date of AASB 11 and AASB 12 is 1 January 2013. For December balancers, comparative amounts are required for 31 December 2012 and a third balance sheet for 31 December 2011.

AASB 11/IFRS 11 Joint Arrangements is concerned principally with remedying two aspects of AASB 131 Interests in Joint Ventures that were an impediment to high quality reporting of joint arrangements: that the form of the arrangement was the primary determinant of the accounting, and that a choice of accounting treatment existed for interests in jointly controlled entities.

The objective of AASB 11 is to establish principles for financial reporting by entities that have an interest in arrangements that are controlled jointly (ie joint arrangements). To meet this objective, joint control is defined, and an entity that is a party to a joint arrangement is required to determine the type of joint arrangement in which it is involved. This requires an assessment of its rights and obligations and accounting for them in accordance with that type of joint arrangement.

Such an approach provides investors with greater clarity about an entity’s involvement in its joint arrangements by increasing the consistency, transparency and comparability of the reporting of these arrangements. It does so by addressing principally two aspects of IAS 31 Interests in Joint Ventures: the structure of an arrangement will no longer be the most significant factor in determining the accounting, and the accounting option is eliminated. IFRS 11 Joint Arrangements formed part of the IASB/FASB’s short-term project to reduce the differences between IFRS and US GAAP.

Scope

AASB 11 must be applied by all entities that are a party to a joint arrangement; one where there is an arrangement by which two or more parties has joint control A joint arrangement has two limbs: a contractual arrangement that binds the parties; and gives two or more of those parties joint control of the arrangement. 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.

‘Relevant activities’ is a new term, and is defined in AASB 10 Consolidated Financial Statements (August 2011) as activities that significantly affect the returns of an arrangement. Professional judgement is required when assessing what constitutes relevant activities (AASB 10 provides some examples).

A joint arrangement is either a joint operation or a joint venture. A joint operation is where the parties have joint control of the arrangement and have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is where the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Recognition and measurement

An entity is required to determine the type of joint arrangement in which it is involved with the classification dependent on the rights and obligations of the parties to the arrangement.

A joint operator (a party to a joint operation that has joint control of that joint operation) must recognise in relation to its interest in a joint operation: 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 arising from 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 operator must account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the Standards applicable to the particular assets, liabilities, revenues and expenses.

Parties to a joint operation that do not share joint control must follow the accounting of a joint venture operator where the party has the rights to assets and obligation for the liabilities. Where the parties do not have such rights or obligations, they account for their interest in accordance with other applicable accounting standards.

A joint venturer must recognise its interest in a joint venture as an investment, and account for that investment using the equity method in accordance with AASB 128 Investments in Associates and Joint Ventures (August 2011) unless the entity is exempt from applying the equity method as specifi ed in that Standard.

Disclosure

The disclosure requirements for joint arrangements are contained in a new ‘warehouse’ standard AASB 12 Disclosure of interest in other entities. Its objective is the disclosure of information that helps financial statement readers to evaluate the nature, risks and financial effects associated with the entity’s interests in subsidiaries, joint arrangements and unconsolidated structured entities. Reporting entities should also disclose any additional information to meet this objective.

Broadly, the following disclosures are required for an entity’s involvement with a joint arrangement:

Significant judgements and assumptions made in determining whether there is joint control and the type of joint arrangement
The nature, extent and financial effects of an entity’s interest in joint arrangements, including the nature and effect of contractual relationships with other investors with joint control of, or significant influence over, joint arrangements, and
The nature of, and changes in, the risks associated with its interests in joint arrangements.

The financial information to be disclosed for individual joint arrangements is far more extensive than that required under AASB 131. Preparers will have to be particularly mindful of the application of materiality, and also the AASB 12 disclosure objective.

Action items

The following action items may assist with the implementation of AASB 11 Joint Arrangements:

Gain a thorough understanding of AASB 11, relevant AASB 12 disclosures, and AASB 10 requirements regarding ‘relevant activities’
Organise training and advice on interpretation matters
Perform a thorough analysis of the agreement, and pay particular attention to ‘relevant activities’ in the definition of joint control
Identify system modifi cations that are required to address the change in guidance and to provide the necessary information for the new disclosure requirements
When transitioning from proportionate consolidation to equity accounting, perform impairment testing
Determine opening balances at 1 January 2012 for 31 December year ends
Consider the merits of early adoption
Inform governance of the results from the diagnostic assessment
Revise internal accounting policies
Seek the input of the external auditor on revised policies and procedures
Inform stakeholders on a timely basis
Determine disclosures for ‘issued but not yet operative’, and
Update the financial reporting template for changes in accounting policies and disclosures.

Conclusion

Determining whether the joint arrangement is either a joint operation or a joint venture is complex, and depends on the rights and the obligations of the parties to the arrangement. This classification requires identification and assessment of the structure, legal form, contractual arrangements and other facts and circumstances – an area of significant judgment. It is expected most jointly controlled entities under AASB 131 will be classified as joint ventures under AASB 11, while some of those arrangements will be classified as joint operations.

The benefits to users of financial statements include: an entity would be required to recognise only those assets that it controls and only those liabilities that are present obligations; the removal of an optional accounting treatment improves comparability; enhanced disclosures will assist user understanding; and AASB11/IFRS 11 achieves convergence in principle with US GAAP.

Colin Parker FCA: GAAP consulting (www.gaap.com.au) Member of AASB 2006-2009 and co author of CCH’s The Reduced Disclosure: a practical guide to implementation.

Carmen Ridley CA: GAAP consulting (www.gaap.com.au). Co author of CCH’s The Reduced Disclosure: a practical guide to implementation and recent appointee to the AASB.

Article last updated 7 February 2012