4. Associates and Joint Arrangements

International Financial Reporting Standards

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

Accounting for joint arrangements

and associatesJoint World Bank and IFRS Foundation ‘train the

trainers’ workshop hosted by the ECCB, 30 April to 4 May 2012


The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation

IFRS 11Joint Arrangements


Introduction

• IFRS 11 Joint Arrangements establishes principles for financial reporting by parties to a joint arrangement.

• The standard must be applied by all entities who are party to a joint arrangement.

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Principle

IFRS 11 establishes a principle-based approach for the accounting for joint arrangements:

Parties to a joint arrangement recognise theirrights and obligations arising from

the arrangement, regardless of its structure or legal form

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Information about those rights and obligations assists users to better assess the prospects for future net cash inflows to the

entity which is useful in making decisions about providing resources to the entity.


• Parties that have rights to the assets and obligations for the liabilities relating to the arrangement are parties to a joint operation.

• A joint operator accounts for assets, liabilities and corresponding revenues and expenses arising from the arrangement.

• Parties that have rights to the net assets of the arrangement are parties to a joint venture.

• A joint venturer accounts for an investment in the arrangement using the equity method.

5Application of the principle


Assess the parties’ rights and obligations arising from the arrangement

by considering:

(a) the legal form of the separate vehicle (b) the terms of the contractual

arrangement, and, if relevant, (c) other facts and circumstances

Joint operation Joint venture

Assessment of the parties’ rights and obligations

Accounting for assets, liabilities, revenues and expenses in accordance with the

contractual arrangements

Accounting for an investment using the

equity method

Not structured through a separate vehicle *

Structured through a separate vehicle *

Parties have rights to the net assets

Parties have rights to the assets and obligations for the liabilities

Accounting reflects the parties’ rights and obligations

(*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognised bystatute, regardless of whether those entities have a legal personality.

6Classification

Separate vehicles

Contractual terms

Other

Legal formYes

Yes

No

No

No

Yes

Joint Venture

Join

t O

pera

tion

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Do the parties have rights to the assets and obligations for the liabilities?

Do the parties have contractual rights to the assets, and obligations for the

liabilities?

Is the arrangement designed so:a) Its activities primarily aim to provide

parties with an output, and (b) It depends on the parties for settling

liabilities?


• A separate vehicle is established, over which two parties have joint control.

• The purpose of the Joint Arrangement is to construct and sell residential units to the public

• Neither the legal form nor the contractual terms give the parties rights to the assets or obligations for the liabilities of the arrangement

• Contributed equity by the parties is sufficient to buy the land and raise debt finance for the construction

• Sales proceeds will be used to repay external debt and remaining profit is distributed to parties

• Parties provide guarantee to financier

Example: Construction and real estate 8


• A and B jointly establish a corporation D over which they have joint control to process the ore from the mine C

• A & B have agreed to the following:• A & B will purchase all the output produced by D in a

ratio of 60:40 (in proportion to ownership interest in D)• D cannot sell the output to third parties• Price of the output is set by A and B at a level to cover

production and admin costs (i.e. D breaks even)

Example: Mining 9


• Some of the differences between Section 15 Investments in Joint Ventures of the IFRS for SMEs and IFRS 11 include:

• Section 15 has different methods of accounting for jointly controlled entities to full IFRSs. The IFRS for SMEs permits use of the equity method, cost or the fair value model.

• If the equity method is used, any implicit goodwill is systematically amortised over its expected useful life—full IFRS does not allow amortisation of goodwill.

10Comparison to the IFRS for SMEs


Evaluating the differences

The rules in Section 15 require fewer judgementsThe principle-based approach in IFRS 11• enhances verifiability and understandability

• the accounting in IFRS 11 reflects more faithfully the economic phenomena that it purports to represent

• improves consistency • it provides the same accounting outcome for each type of joint

arrangement

• increases comparability among financial statements • it will enable users to identify and understand similarities in,

and differences between, different arrangements

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• Assessing whether the parties, or a group of parties, have joint control of an arrangement (see IFRS 10 for judgements about control).

• Determining whether the joint arrangement is a joint operation or a joint venture requires consideration of the structure and legal form of the arrangement, the terms agreed and when relevant other facts and circumstances.

12Judgements and estimates




IFRS 12Disclosure of Interests in

Other Entities


• 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.

14Objective


15Requirements

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

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Strike a balance between overburdening financial statements with excessive detail and obscuring information as a result of

too much aggregation


16Joint arrangements and associates

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

fundsNature 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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• 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





IAS 28Investments in Associates

and Joint Ventures


• 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

19Scope and introduction


• 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)

20Significant influence


• 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.

21Significant influence continued


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.

22Measurement


• 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.

23Equity method


Exampleequity 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 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

25Equity 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



• 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



• 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

28Comparison to the IFRS for SMEs


• If an SME elects the equity method, the IFRS for SMEs requires that implicit goodwill be systematically amortised throughout its expected useful life (see paragraph 14.8(c))—full IFRS does not allow amortisation of goodwill

29Comparison to the IFRS for SMEs continued


• Investors must exercise judgement in the context of all available information to determine whether they have significant influence over an investee.

• There is no exemption from equity accounting when severe long-term restrictions impair the associate’s ability to transfer funds to the investor.

• However, the investor should consider whether such restrictions, taken with other factors, indicate that the investor does not have significant influence



© 2012 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

31Questions or comments?Expressions of individual views by members of the IASB and its staff are encouraged.

The views expressed in this presentation are those of the presenter.

Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

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© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

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The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace.The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.

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© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

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4. Associates and Joint Arrangements