February 2012
The financial statements of many mining companies could look very different in the future as
a result of the changes to the accounting for joint arrangements (formerly joint ventures).This
could affect key performance measures and ratios for companies in the sector, which raises the
question of how such changes should be communicated to investors and other stakeholders.
Assessing the effect of the new requirements for your company may take significant time and
judgement. The number and variety of joint arrangements in the mining sector means that
planning for transition in advance of the 1January 2013 effective date is of particular importance.
Key questions that you should consider asking yourself
Question
Considerations
I proportionately
consolidate jointly
controlled entities what
will the changes mean for
my financial statements?
The option to proportionately consolidate has been eliminated. Assuming that there is no
change to the classification of arrangements, a change from proportionate consolidation to
equity accounting will affect virtually all financial statement line items, notably decreasing
revenue, gross assets and gross liabilities. If the joint venture has tax expense, then transition
will also decrease profit before tax. See page 3.
The change to the definitions of different types of arrangements may mean that some jointly
controlled entities will be accounted for on a line-by-line basis under the newstandard.
In summary, arrangements in which you have joint control and individual rights/obligations to
the underlying individual assets and liabilities will be accounted for on a line-by-line basis. If the
rights are to net assets, then equity accounting will apply. However, the process for assessing
these rights follows a series of tests, and analysis of the detail of the legal and contractual
arrangements, as well as the substance of those arrangements, will be required. This will require
judgement and could well be time-consuming if you have a number of arrangements. See page 5.
In this case, individual balances in the financial statements will change. For example, the
operating profit of the arrangement will form part of your total operating profit. See page 3.
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The differences between the joint arrangement classification and accounting models of the existing IAS31 and the new IFRS11
can be illustrated as follows.
Key
JCO/JCA: Jointly controlled operation/jointly controlled asset
JCE: Jointly controlled entity
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Communication
The effect of changes to the financial statements on debt
and remuneration agreements and performance measures
should be assessed. If this is expected to be significant,
then you will need to consider the timing and form of
communications with lenders, shareholders, analysts,
employees and other stakeholders.
In some cases, you may wish to consider re-negotiating
existing contracts to take into account the effect
oftransition.
Systems
Depending on whether equity accounting was already
applied in preparing the financial statements, consolidation
systems may need to be updated to reflect the new
accounting approach.
Joint control
The first step will be to consider recent changes to the
definition of control. Joint control exists when there is a
contractual agreement that decisions about the relevant
activities require the unanimous consent of the parties. The
need for a contract to confer joint control is not new. However,
the definition of control has changed as a result of IFRS10
Consolidated Financial Statements, which is applicable from
the same date as IFRS11.
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2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Structure
The structure of the arrangement is the first factor to be
considered in assessing the type of arrangement, but it is not
the sole determining factor. If an arrangement is structured
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Example
A separate vehicle, entity X, undertakes exploration, development and production activity. The main feature of Xs legal form
is that X (and not the parties) has the rights to the assets and obligations for the liabilities relating to the arrangement.
The contractual agreement between X and the parties specifies that the rights and obligations arising from the joint
arrangements activities are shared among the parties in proportion to their holding in X, and in particular that the parties
share the rights and obligations arising from the exploration and development permits granted to X, the production obtained
and all related costs.
Costs incurred in relation to all work programmes are covered by cash calls on the parties, and in the event that a party fails
to meet its monetary obligations, the other party is required to contribute to X the amount in default; that amount will be
considered debt owed by the defaulting party to the other party.
In this case, the legal form provides the separate vehicle alone with rights to the assets and obligations for the liabilities;
therefore, there is an initial indication that the arrangement is a joint venture. However, as the contractual arrangement
explicitly provides the parties with rights to assets and obligations for liabilities, that initial indication is reversed and the joint
arrangement is determined to be a joint operation.
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Joint venturers
Joint operators
Recognises its own assets, liabilities and transactions, including its share of those incurred jointly.
Other parties to a
joint venture
Other parties to a
joint operation
Recognises its own assets, liabilities and transactions, including its share of those incurred jointly, if
it has rights to the assets and obligations for the liabilities.
Otherwise, it accounts for its interest in accordance with the IFRS applicable to that interest, e.g.
IAS 28 (2011) or IFRS 9/IAS 39, as the case may be.
2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
2012 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved.
Publication name: Impact on mining companies: changes to joint venture accounting
Publication number: 120314
Publication date: February 2012
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