Joint Arrangements FeedbackstatementMay2011

7/31/2019 Joint Arrangements FeedbackstatementMay2011

1/28

IFRS 11Joint Arrangements

Project Summary and Feedback Statement

May 2011


2/28

2 | IFRS 11Joint Arrangements | May 2011

At a glance

We, the International AccountingStandards Board (IASB), issuedIFRS 11Joint Arrangements in May 2011.IFRS 11 establishes principles or thefnancial reporting by parties to a jointarrangement. IFRS 11 supersedes IAS 31

Interests in Joint Ventures andSIC-13JointlyControlled EntitiesNon-Monetary Contributions

by Venturers.

IFRS 11 is eective rom 1 January 2013.Early application is permitted.

The project ormed part o theMemorandum o Understanding (MoU)

between the US national standard-setter,

the Financial Accounting StandardsBoard (FASB), and the IASB. Even thoughthe initial goal o the project was to ocuson convergence dierences that could beresolved in a relatively short time,our frst concern was to improve the

accounting or joint arrangements whiletaking into consideration convergencematters in our deliberations.

IFRS 11 improves the accounting or jointarrangements by introducing a principle-

based approach that requires a partyto a joint arrangement to recognise itsrights and obligations arising rom thearrangement. Such a principle-basedapproach will provide users with greaterclarity about an entitys involvementin its joint arrangements by increasingthe verifability, comparability andunderstandability o the reporting o

these arrangements.

As part o the joint ventures project, wedeveloped disclosure requirements to allowusers to gain a better understanding o thenature, extent and fnancial eects o theactivities that an entity carries out through

joint arrangements. The disclosurerequirements or joint arrangements have

been placed in IFRS 12Disclosure of Interestsin Other Entities. IFRS 12 is a comprehensivedisclosure standard or subsidiaries,

joint arrangements, associates andunconsolidated structured entities.

We issued IFRS 11 at the same time asIFRS 10 Consolidated Financial Statements,

IFRS 12 and the amended IAS 27Separate

Financial Statements and IAS 28 Investmentsin Associates and Joint Ventures.


3/28

IFRS 11Joint Arrangements| May 2011 | 3

yes

yes

yes

Joint

operation

no

no

no

Joint

venture

Dene type ofjoint arrangement

in accordance with IFRS 11

Disclosures in accordancewith IFRS 12



Interaction between IFRSs 10, 11, 12 and IAS 28

Control alone?

Consolidation in accordancewith IFRS 10

Account for assets, liabilities,revenues and expenses

Account for an investmentin accordance with IAS 28

Joint control?

Signicantinuence?

IFRS 9


4/28

4 | IFRS 11Joint Arrangements| May 2011

When undertaking this project,

we were mainly concerned withremedying two aspects o IAS 31

that we considered impedimentsto high quality reporting o joint

arrangements.

The structure of the arrangement was the only driver

for the accounting

The accounting requirements in IAS 31 may not have

always reected the rights and obligations o the

parties arising rom the arrangements in which they

were involved.

Accounting option for jointly controlled

entities (JCEs)

IAS 31 gave entities a choice to apply either

proportionate consolidation or the equity method

to all o their JCEs.

Why we undertook the project

These two aspects o IAS 31 could create situations

where:

arrangements that entitle the parties to similar

rights and obligations are accounted or dierently

and, conversely,

arrangements that entitle the parties to dierent

rights and obligations are accounted or similarly.

We observed examples o this in practice.


5/28


option

The weaknesses o IAS 31

The structure o thearrangement was the only

driver or the accounting; thistogether with the existence

o an accounting option or

jointly controlled entitiesresultedin inconsistenciesin the accounting.

Structure of the joint arrangements

Not structured

through an entityStructured through an entity

Jointlycontrolled

operations

Proportionateconsolidation

Jointly controlled entitiesJointly

controlled

assets

Equity methodAccounting for assets,

liabilities, revenues and expenses

in accordance with the contractual arrangement


6/28


The application o the principle results in parties

having:

Rights to the assets and obligations for the

liabilities relating to the arrangement. These are

parties tojoint operations. A joint operator accounts

or assets, liabilities and corresponding revenues

and expenses arising rom the arrangement. Rights to the net assets o the arrangement. These

are parties tojoint ventures. A joint venturer accounts

or an investmentin the arrangement using the

equity method.

The new IFRS: accounting that reects the parties

rights and obligations

IFRS 11 is an improvement on IAS 31because it establishes a clear principle

that is applicable to the accounting orall joint arrangements.

The principle in IFRS 11 is that a party to a joint

arrangement recognises its rights and obligations

arising rom the arrangement.

The application o this principle:

enhances veriability and understandability because

the accounting reects more aithully the

economic phenomena that it purports to represent

(ie a partys rights and obligations arising rom

the arrangements);

enhances consistency because it provides the

same accounting outcome or each type o joint

arrangement; and

increases comparability among fnancial statements

because it will enable users to identiy and

understand similarities in, and dierences between,

similar arrangements.


7/28


IFRS 11

Not structured through a separate vehicle * Structured through a separate vehicle*

consider the legal orm consider the terms o the contractual

arrangement and, i relevant, other actsand circumstances

Accounting for assets, liabilities, revenues and expenses

in accordance with the contractual ar rangementEquity method

Joint operation Joint venture

The classifcation o a joint

arrangement is determined byassessing the rights and obligations

o the parties arising romthat arrangement.

* A separate vehicle is a separately identifable fnancial structure,including separate legal entities or entities recognised by statute,regardless o whether those entities have a legal personality.


8/28


When developing IFRS 10 andIFRS 11 we identifed an opportunity

to integrate and make consistentthe disclosure requirements or

subsidiaries, joint arrangements,

associates and unconsolidatedstructured entities and to presentthose requirements in a single IFRS:IFRS 12.

The disclosure requirements or joint arrangements

in IFRS 12 aim to include inormation that helps users

o fnancial statements to evaluate the nature, extent

and fnancial eects o an entitys interests in joint

arrangements, and the nature o the risks associated

with those interests.

The new disclosure requirements

The ollowing disclosure requirements in IFRS 12 aim

to ulfl this objective:

A list o joint arrangements that are material or the

entity, including a description o the nature o the

entitys relationship with its joint arrangements.

Summarised fnancial inormation on an individual

basis or those joint ventures that are material to theentity. This disclosure requirement will enable users

to understand the net debt position o the joint

ventures and will give them inormation to

help them value the entitys investments in

joint ventures.


9/28


Due process and outreach activities

In 2003 we added to our agenda aproject to improve the accounting

or joint arrangements by replacingIAS 31 Interests in Joint Ventures and

SIC-13 Jointly Controlled Entities-Non

Monetary Contributionsby Venturers witha new IFRS. National standard-settersrom Australia, Malaysia andNew Zealand undertook the initial

research on the project.

Development o IFRS 11

We wanted to eliminate the choice o accounting

or jointly controlled entities in IAS 31 and to

clariy the defnitions o the dierent types o joint

arrangements in order to improve consistency in

application. Given the narrow scope o the project,

we decided not to publish a discussion paper or set upa working group.

We published the exposure drat ED 9Joint

Arrangements in September 2007, with a our-month

comment period. Eleven o the thirteen Board

members at that time approved the exposure drat or

publication. Two Board members abstained in view o

their recent appointment to the Board. We received

111 comment letters in response to our proposals.

The IASB technical sta presented a comment letter

analysis to the Board at our meeting in April 2008.

We decided to delay urther deliberations to align

the deliberations with those on exposure drat

ED 10 Consolidated Financial Statements and to give

priority to the pressing issues related to the global

fnancial crisis. The time was put to good use by

undertaking a wide range o consultation activitiesthat provided us with evidence that the new IFRS

on joint arrangements was necessary and that the

accounting model being introduced was both sensible

and workable. We discussed additional issues at

public Board meetings in 2009 and 2010.

We considered changes we had made rom the

exposure drat and decided that it was not necessary

to re-expose any aspects o the proposals. The main

changes included the addition o application guidance

to assist entities in the classifcation o their jointarrangements, adjustments to terminology used and

the number o types o joint arrangements narrowed

rom three to two.


10/28


Outreach and feld testing

We undertook extensive outreach between April 2008

and May 2009, including discussions with the IFRS

Advisory Council. Although ormal public hearings

were not held, we met more than 40 respondents to

the exposure drat who shared actual examples and

contractual documentation to test the applicationo the proposals in the exposure drat. We also met

other interested parties, including preparers rom a

variety o industries and geographical locations, user

groups and national standard-setters. We attended

quarterly public meetings with the oil and gas

industry and gave presentations at IFRS conerences

and world standard-setters meetings.

O particular help to us was the openness with

which constituents shared examples o their joint

arrangement contracts. Reviewing these contracts

with the parties gave us comort that we understood

joint arrangements in a wide range o industries

(eg construction, oil and gas, mining, real estate,

environmental services, aerospace and deence,

telecoms, banking and energy).

We discussed the contractual inormation with these

respondents and assessed with them the classifcation

o their arrangements and the impact that the new

requirements would have upon their corresponding

accounting. This provided us with additional input

that helped us fnalise the application guidance and

illustrative examples that accompany the standard,

most o which were based on actual contractual

arrangements.

We analysed the comment letters and considered

these comments, along with the eedback received in

all other outreach activities, as the basis or our public

discussions or the development o the IFRS. As the

eedback statement shows, respondents raised some

concerns relating to the need or urther clarifcations

and guidance in the fnal IFRS.

We listened to these concerns and as a result

simplifed the types o joint arrangement, provided

a clearer defnition o the dierent types o joint

arrangement based on the rights and obligations that

the parties have, and provided additional guidance

and examples to assist preparers in the classifcation

o their arrangements on the basis o their rights and

obligations and the clarifcation o the accounting or

parties to a joint operation.

IFRS 11 was supported by all Board members.


11/28


Activities carried out with preparers when developing IFRS 11

Analysis of contractual information

We contacted respondents to the exposure drat and other constituents to understand their concerns on the

proposals. We analysed contractual inormation shared by preparers, we discussed the main terms o those

contracts and drated illustrative examples that were urther discussed and analysed with selected Board

members in small group meetings.

Sharing of draft documents and analysis and consideration of feedback received

Our outreach activities helped us in the development o the requirements and application guidance

remarkably. A drat o the requirements and application guidance was circulated to a selection o preparers

rom a variety o industries and geographical locations or their eedback during the development phase and

at a later stage beore balloting the documents.

Compilation of comments received from the analysis of contractual information with preparers, analysis

of comment letters and comments received from circulation of draft documents were incorporated into

the nal IFRS.


12/28


Feedback received rom investors

When developing IFRS 12 we contacted the user

community to ensure that we considered their

inormation needs. This included users that

responded to the exposure drat, users that orm our

Analyst Representative Group, national standard-

setters users groups as well as users participating inround tables and other user-specifc outreach activities

undertaken as part o the consolidation project.

Users told us on many occasions that they were

interested in detailed disclosures about an entitys

interests in other entities that are not consolidated

but in which the entity has a signifcant shareholding,

or is actively involved in the operations o the

entity, or both. Users also considered the disclosure

requirements in the proposals to be insufcient

to assess basic aspects when valuing material

joint ventures such as the joint ventures net debt

position, proftability and operating cash ows. Such

supplementary disclosures would allow them to assess

the value o these investments more accurately and

would also allow them to separate the fnancial resultso consolidated entities or to combine the results o

unconsolidated entities, depending on the purpose o

their analysis.

Feedback rom other constituents

We also involved national standard-setters and

accounting frms in our process. Their comments

contributed to the refnement and drating o the

requirements.

IFRS 11 will be subject to a post-implementation

review two years ater it has become mandatory. We

will also continue inormal consultations throughout

the implementation o the new IFRS.


13/28

Feedback statement

As a result o the inormationreceived in our consultation process,

the contents o the fnal IFRS havechanged in some respects, and have

been clarifed in others.

The sections that ollow provide a more detailed

explanation o the main matters raised with us and

how we responded, including:

Elimination o proportionate consolidation

Accounting driven by the parties rights and

obligations

Classifcation and accounting or joint arrangements

Convergence with US GAAP

Disclosure requirements


14/28


Elimination o proportionate consolidation

Respondents comments

Many respondents were against the elimination o

proportionate consolidation because, compared with

the equity method, they believed that:

proportionate consolidation provided a better

reection o the economic substance o thearrangements; and

the elimination o proportionate consolidation

would represent a loss o meaningul and useul

inormation or users o fnancial statements.

Some respondents commented that the accounting

or joint control and signifcant inuence will

be the same. These respondents perceived this to

be inappropriate because they saw joint control as

involving a higher degree o management involvement

and inuence on business decisions, which theaccounting would no longer reect.

In addition, some respondents said that the exposure

drat did not oer compelling arguments to support

the view that equity accounting is conceptually the best

method to account or joint ventures and to support

the elimination o proportionate consolidation.

Our response

We think that the economic substance o the

arrangements is defned by the rights and obligations

assumed by the parties when carrying out the activity

o the arrangement. The recognition o the rights and

obligations o the parties to the joint arrangement is

the principle in IFRS 11.

In the case o an interest in a joint venture, none o

the individual venturers has control o the activities

o the venture. They have joint control and must act

together to direct the activities o the venture.

In such cases the parties have rights to the net assets

o the arrangement. The equity method is a way o

accounting or such an interest.

IFRS 11 eliminates proportionate consolidation as

a method to account or joint arrangements.

This is the most controversial change brought

about by the new IFRS.


15/28


Not all jointly controlled entities will be classifed

by IFRS 11 as joint ventures. Some jointly controlled

entities will be classifed as joint operations because

o the parties related rights and obligations.

The requirement to account or an interest in a joint

venture using the equity method does not purport

to assert that joint control and signifcant inuencerepresent the same type o involvement. The

dierences in disclosure requirements or interests

in joint ventures and associates reect this.

The disclosure requirements included in IFRS 12

improve the quality o the inormation provided to

users. This is because entities are required to provide

summarised fnancial inormation in greater detail or

each o their individually material joint ventures. The

new disclosure requirements will help users to gain a

better understanding o the magnitude and relevance

o the activities that entities undertake through their

joint ventures.


16/28



Many respondents agreed with the approach being

proposed, but questioned whether, as proposed,

the principle would capture the substance o the

arrangements and its ability to be applied in practice.

This is because accounting or contractual rights and

obligations was perceived by some respondents as

being more complicated than the requirements

in IAS 31.

Our response

IFRS 11 introduces a principle or the accounting

or joint arrangements. By aligning the accounting

to the parties rights and obligations arising rom

their arrangements, the accounting is capturing the

underlying substance o the arrangements.

Applying a principle-based approach will require

entities to perorm an assessment to identiy what

are their rights and obligations relating to the

arrangements. We think that in the majority o cases,

the assessment will not be burdensome.

Accounting driven by the parties rights and obligations

The accounting or joint arrangements ollows a

principle-based approach. The application o a

principle provides the same accounting or each

type o interest in a joint arrangement.

The accounting or joint arrangements required

by IFRS 11 reects the rights and obligationsarising rom the arrangement. In contrast,

IAS 31 provided a ree choice between

proportionate consolidation and the equity

method. IFRS 11 thus promotes greater

comparability and ocuses on the economic and

contractual nature o the investment.


17/28


The types o joint arrangement in which the

parties are involved will be determined by the

application o the principles in IFRS 11.

The exposure drat classifed joint arrangements

into three typesjoint operations, joint assets

and joint ventures.

Classifcation and accounting or joint arrangements


Many respondents believed that there was a lack o

clarity in the descriptions or the dierent types o

joint arrangement provided in the proposals.

Some respondents stated that it is not immediately

evident to them, rom the proposals, how the dierenttypes o joint arrangements interact.

A ew respondents stated that the proposals should

clearly explain the dierence between a joint asset

and an asset held by a jointly controlled entity.

Our response

We defned the dierent types o joint arrangement

(ie joint operations and joint ventures), rather than

providing descriptions and examples that would

not succeed in illustrating a specifc type o joint

arrangement.

In IFRS 11 we have delineated joint arrangements to

reer to an activity that is jointly controlled by two or

more parties. The classifcation o joint arrangements

will depend upon the parties rights and obligations

arising rom the activity undertaken under joint

control. The IFRS clarifes that sometimes the parties

might establish dierent types o joint arrangement

to deal with dierent activities related to, or example,

a ramework agreement, or which the parties have

dierent rights and obligations.

The exposure drat did not include application

guidance addressing the classifcation o joint

arrangements. IFRS 11 includes guidance to assist

entities in the classifcation o their arrangements.

Entities will be required to assess their rights and


18/28


obligations by considering the structure o the

arrangement, the legal orm o the separate vehicle in

which the arrangement might have been structured,

the terms o the contractual arrangements and, when

relevant, other acts and circumstances.

During the development o the IFRS we decided to

simpliy the types o joint arrangement presented

by IFRS 11 (ie joint operations and joint ventures)

and align them with the two possible accounting

outcomes that can arise rom the recognition o the

parties rights and obligations (ie parties to a joint

operation recognise assets, liabilities, revenues and

expenses, wheras parties to a joint venture recognise

an investment accounted or using the equity

method).


19/28


We added the joint ventures project to our

agenda as a part o the project to reduce

dierences between IFRSs and US GAAP.

Although we kept convergence in mind, our

main ocus was on addressing the weaknesses

identifed in IAS 31. As well as addressing these

weaknesses the result is that we have removed

some dierences between IFRSs and US GAAP.

Convergence with US GAAP


Some respondents questioned whether the proposals

would achieve urther convergence with US GAAP.

Respondents said that the proposals in exposure drat

would not reduce dierences between IFRSs and

US GAAP but could lead to new dierences.

One o the comments made most requently was that

EITF-Issue No. 00-1Investor Balance Sheet and Income

Statement Display under the Equity Method for Investments

in Certain Partnerships and Other Ventures permits the

use o proportionate gross fnancial statement

presentation or unincorporated legal entities in the

construction and extractive industries where there is a

long-standing practice o using it. These respondents

believed that the proposals to eliminate proportionate

consolidation rom IFRSs would create divergence

or those arrangements that met the defnition o ajoint venture under the proposals, but that under

US GAAP would be permitted to be proportionately

consolidated.

In addition, some respondents stated that dierences

would still exist or those arrangements that involve

the establishment o a legal entity. In those cases,

the equity method would be applied under US GAAP,

while the assessment o the parties rights and

obligations in accordance with the proposals might

lead to these arrangements being joint operations

or which the accounting would be the recognition

o assets, liabilities, revenues and expenses.


20/28


21/28



Most respondents supported the alignment between

the disclosure requirements or joint ventures and

associates.

Some respondents perceived the increase in

disclosure requirements in the exposure drat asbeing a consequence o the removal o proportionate

consolidation. These respondents believed that

important operating inormation was being relegated

to the notes, rendering the fnancial statements

less relevant to users. Some o these respondents

advocated requiring or joint ventures more extensive

disclosure requirements (eg disclosure o revenues,

expenses, assets and liabilities using the same

classifcations as are used in the main fnancial

statements).

Users in particular highlighted the need to provide

inormation to allow them to obtain a better

understanding o the net debt position o those

investments, their proftability and inormation on

other items such as dividends paid, cash ow and

tax allocation.

Our response

We developed the disclosure requirements or joint

arrangements and associates by considering that the

disclosure requirements or these two types o interest

could share a common disclosure objectiveto disclose

inormation that helps users o fnancial statements to

evaluate the nature, extent and fnancial eects o an

entitys interests in joint arrangements and associates,

and the nature o the risks associated with those

interests.

IFRS 12 expands and improves the disclosure

requirements or joint ventures to help users o

fnancial statements to understand better the eect o

material joint ventures on the activities o an entity.

For example, the new requirements will enable users

to assess the net debt position, the proftability and a

rough estimation o the operating cash ows or eachjoint venture that is material to the entity.

When developing IFRS 10 and IFRS 11 we

identifed an opportunity to integrate and

make consistent the disclosure requirements

or subsidiaries, joint arrangements, associates

and unconsolidated structured entities and to

present those requirements in a single IFRS.

The exposure drat on joint arrangements hadalready proposed to align the disclosures o joint

ventures and associates more closely.

IFRS 12 requires an entity to disclose inormation

that helps users to evaluate the nature, extent

and fnancial eects o its interests in joint

arrangements and associates, including the

nature and eects o its relationship with

the other parties or investors in the joint

arrangements and associates and the nature

o the risks associated with those interests.

Disclosure requirements


22/28


The claims that proportionate consolidation provides

more inormation about interests in a joint venture

are misleading. Proportionate consolidation o joint

ventures would mix revenues, expenses, assets and

liabilities that are controlled by an investor with

those that cannot be managed without the consent

o other joint venturers. Just as IAS 31 does now,

we would have required the same disclosures aboutjoint ventures i proportionate consolidation was

required so that users could identiy the activities and

resources not controlled by the reporting entity.


23/28


Joint arrangement activity

Joint arrangements are an important orm o inter-

organisational co-operation. However, over the last

20 years the number o international joint

arrangement transactions worldwide has allen rom

a high o around 8,000 deals in 1995 to ewer than

1,000 in 2009. This contraction in joint arrangementactivity has been attributed mainly to the

liberalisation o oreign investment regimes in various

host countries, but also reportedly to managerial

ailure and rustration with that type o arrangement.

Current practice

There is signifcant diversity in how jointly controlled

entities are accounted or under IAS 31. Approximately

hal o those with an interest in a jointly controlled

entity apply the equity method with the other hal

applying proportionate consolidation. This split is

common within countries, with a ew exceptions.French and Spanish companies predominantly use

proportionate consolidation whereas Australasian

and South Arican entities apply the equity method.

This diversity justifes the project to replace IAS 31

and helps explain the main sources o comment

letters. O the preparers who sent us comment

letters, most are currently applying proportionate

consolidation.

Eect Analysis

Financial statement eect

Entities required to change rom proportionate

consolidation to the equity method when IFRS 11

takes eect will, generally, report lower amounts or

assets and liabilities (although the net investment

in joint ventures remains unaected) and lower

revenues and expenses (although net income remainsunaected).

We analysed the fnancial statements o entities that

sent us comment letters. Around 15 per cent o the

comment letters we received were rom the energy

sector. For those respondents, the median revenues

rom jointly controlled entities were 16 per cent o

total revenue. Some o those respondents will not

be permitted to include revenues rom activities

arising rom jointly controlled entities when IFRS

11 takes eect. Others will continue to report suchrevenues because IFRS 11 will classiy these activities as

joint operations. The likely eect or respondents rom

the ood and beverages sector is much smaller, with

median revenue rom jointly controlled entities being

around 3 per cent o total revenue.


24/28


A more complete eect analysis

is provided in additional

documentation, which is available

on our website.

Costs and benefts

Our assessment is that IFRS 11 will bring signifcant

and sustained improvements to the reporting o joint

arrangement activity. The principles or classiying

joint arrangements in IFRS 11 reect the underlying

economics o the arrangements and the disclosure

requirements will help provide users with betterinormation about joint arrangement activities.

The most signifcant costs or preparers will occur

at transition when they are required to assess the

classifcation o their joint arrangements. They will

also incur costs explaining changes to their reports

to those who use the fnancial statements. However,

our assessment is that the signifcant improvements

in terms o comparability and transparency outweigh

those costs.


25/28


Notes


26/28


Notes


27/28


Important inormation

This Project Summary and Feedback Statement has been compiled by the sta o the

IFRS Foundation or the convenience o interested parties.

The views expressed within this document are those o the sta who prepared the

document. They do not purport to represent the views o the IASB and should not be

considered as authoritative. Comments made in relation to the application o IFRSs or US

GAAP do not purport to be acceptable or unacceptable application o IFRSs or US GAAP.

Ofcial pronouncements o the IASB are available in electronic orm to eIFRS subscribers.

Printed editions o IFRSs are available or ordering rom the IASB website at www.irs.org.


28/28

Printed on 100 per cent recycled paper

100%

Publications Department

Telephone: +44 (0)20 7332 2730 | Fax: +44 (0)20 7332 2749

Email: [email protected]

International Accounting Standards Board (IASB)

The IASB is the independent standard-setting body of the IFRS Foundation

30 Cannon Street | London EC4M 6XH | United Kingdom

Telephone: +44 (0)20 7246 6410 | Fax: +44 (0)20 7246 6411

Email: [email protected] | Web: www.irs.org

Documents

Joint Arrangements FeedbackstatementMay2011