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IFRS 11 establishes principles for financial reporting by entities that have an interest in

arrangements that are controlled jointly (joint arrangements).

A joint arrangement is an arrangement of which two or more parties have joint control. Joint
control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities (ie activities that significantly affect the returns of the
arrangement) require the unanimous consent of the parties sharing control.

IFRS 11 classifies joint arrangements into two types—joint operations and joint ventures:

in a joint operation, the parties that have joint control of the arrangement (joint operators) have
rights to particular assets, and obligations for particular liabilities, relating to the arrangement; and
in a joint venture, the parties that have joint control of the arrangement (joint venturers) have
rights to the net assets of the arrangement.
IFRS 11 requires a joint operator to recognise and measure its share of the assets and liabilities
(and recognise the related revenues and expenses) in accordance with IFRS Standards applicable
to the particular assets, liabilities, revenues and expenses.

A joint venturer accounts for its interest in the joint venture using the equity method (see IAS 28).
http://www.ifrs.org/issued-standards/list-of-standards/ifrs-11-joint-arrangements/

Joint venture or joint operation? What is joint control? How to account for joint arrangements?

In our consolidation series, we have already covered investments in subsidiaries (IFRS 3 and IFRS
10), associates (IAS 28) and other financial instruments.

Today, we’ll take a look at the investments in joint arrangements which can be either joint venture
or joint operation.

These investments are covered by the standard IFRS 11 Joint Arrangements.

IFRS 11 is relatively new standard. It was issued in 2011 and it is effective for all reporting
periods starting 1 January 2013 or later.

IFRS 11 replaced the older rules in IAS 31 Interests in Joint Ventures and interpretation SIC-13
Non-monetary contributions by venturers. As a result, IAS 31 and SIC-13 are no longer valid.

What is the objective of IFRS 11?

The objective of IFRS 11 Joint Arrangements is to establish principles for financial reporting by
entities that have an interest in arrangements that are controlled jointly (i.e. joint arrangements).
To meet this objective, IFRS 11:

Defines joint control;


Requires determining the type of joint arrangement; and
Account for the interest in a joint arrangement based on the type.

What is joint control and how to detect it?

Standard IFRS 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.

Let’s break it down. There are 3 basic elements of joint control:

Contractual arrangement
Please note that here, contractual arrangement must be present – often in writing in the form of
contract or some documented decisions of the parties involved. Sometimes law or other statutory
mechanisms are sufficient to create contractual arrangement.

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Sharing of control
This condition or element is met when all parties, or group of parties, considered collectively, are
able to direct the relevant decisions of the arrangement.

In other words – no single party can decide on its own.

Let me give you an example:

Imagine 3 joint venturers: Company Large has a share of 50% in a joint venture, companies
Medium and Regular have shares of 25% each. Let’s say that the contract specifies that to make
important decisions, at least 75% must agree.

What does that mean?

Well, although Large can veto or block any decisions by Medium and Regular (in other words,
Medium and Regular do not have enough voting power to decide against Large’s decision), Large
does not have a control, because to make a decision, Large still needs the support of either
Medium or Regular.
In this example, collective control is present, but you still need to assess whether Large, Medium
and Regular need to decide unanimously (all of them must agree) or not. That would be written in
the contract, for example.

Unanimous consent
Unanimous consent means that every party of the joint arrangement must agree with (or at least
does not object to) the decision and no one can block it.

In our above example, if the contract says it simply: 75% of voting power is enough to make all
decisions, then there is NO unanimous consent, because just 2 parties are sufficient to present
(Large and either Medium or Regular).

When you are assessing the presence of joint control, this chart might help:
Classify your joint arrangement

Once the investor acquires an interest in joint arrangement, then she must classify this
arrangement correctly and apply the appropriate accounting method.

There are 2 types of joint arrangements:

Joint venture
In a joint venture, the parties having joint control have rights to the net assets of the arrangement.
These parties are called “joint venturers”.

Joint operation
In a joint operation, the parties having joint control have rights to the assets and obligations for the
liabilities relating to the arrangement. These parties are called “joint operators”.

How to distinguish between joint venture and joint operation

It’s very important to classify the joint arrangement correctly as the accounting method for both
types is different.

The classification depends upon the rights and obligations arising from the joint arrangement.
When assessing the rights and obligations from the joint arrangements, it’s very important to look
at how the joint arrangement is structured, mainly whether the arrangement is structured through
separate vehicle or not.

Separate vehicle is a separately identifiable financial structure, including separate legal entities
(e.g. company) or some entities recognized by a statute (not necessarily having legal personality).
NOT structured through a separate vehicle
When a joint arrangement is NOT structured through a separate vehicle, then the classification is
easy: it is a clear joint operation.

Structured through a separate vehicle


When the joint arrangement is structured through separate vehicle, then it can be either joint
venture or joint operation.

For making your conclusion, you should examine further:

The legal form of joint arrangement;


The terms of the contractual arrangement; and
Other facts and circumstances when relevant.
Let me give you another example:

Imagine companies Medium and Regular invest their money in the separate legal entity, MRJoint.
Medium and Regular have 50% share each.

Is it joint venture or joint operation?

As Medium and Regular established separate vehicle (MRJoint), it can be either joint venture or
joint operation.

Now, what rights and obligations do Medium and Regular have with regard to MRJoint?

If there’s no other contractual arrangement and MRJoint is separated from its owners (meaning
that assets and liabilities in MRJoint belong to MRJoint), then Medium and Regular have interests
in joint venture.

However, if there is some contractual arrangement stating that both Medium and Regular have
interests in the assets of MRJoint and they are liable for the liabilities of MRJoint in a specified
proportion, then it would be joint operation.

My own experience is that once parties establish a separate legal entity (company) with sharing
joint control, then it is a joint venture in most cases.

Accounting for joint arrangements

IFRS 11 sets two different methods of accounting for interests in joint arrangements, depending on
the type of the arrangement:
IFRS 11 Accounting for Joint Arrangements

Accounting for interest in joint venture

IFRS 11 requires accounting for the investment in a joint venture using the equity method
according to IAS 28 Investments in Associates and Joint Ventures.

I have covered the basic principles of the equity method in the article about IAS 28. If you need
more than basics and you wish to actually learn how to apply the equity method, then please
consider subscribing to my premium package the IFRS Kit.

Accounting for interest in joint operation

When an investor classifies its investment as a joint operation, then you should recognize in the
financial statements:

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.
You need to account for these items in line with the appropriate standard, for example – you would
account for a machine provided to joint operation in line with IAS 16 Property, Plant and
Equipment.

Here’s the video with the short summary of IFRS 11 Joint Arrangements:
http://www.ifrsbox.com/ifrs-11-joint-arrangements/

Overview

IFRS 11 Joint Arrangements outlines the accounting by entities that jointly control an
arrangement. Joint control involves the contractually agreed sharing of control and arrangements
subject to joint control are classified as either a joint venture (representing a share of net assets
and equity accounted) or a joint operation (representing rights to assets and obligations for
liabilities, accounted for accordingly).

IFRS 11 was issued in May 2011 and applies to annual reporting periods beginning on or after 1
January 2013.
History of IFRS 11

Date Development Comments


November 2004 Project on joint arrangements added to the IASB's agenda History of the
project
13 September 2007 Exposure Draft ED 9 Joint Arrangements published Comment deadline 11
January 2008
12 May 2011 IFRS 11 Joint Arrangements issued Effective for annual periods beginning on
or after 1 January 2013
28 June 2012 Amended by Consolidated Financial Statements, Joint Arrangements and
Disclosure of Interests in Other Entities: Transition Guidance Effective for annual periods
beginning on or after 1 January 2013
6 May 2014 Amended by Accounting for Acquisitions of Interests in Joint Operations
(Amendments to IFRS 11) Effective for annual periods beginning on or after 1 January 2016
Related Interpretations

IFRS 11 superseded SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by


Venturers
Amendments under consideration by the IASB

IFRS 3/IFRS 11 — Remeasurement of previously held interests

The IASB has signalled an intention to conduct a post-implementation review of IFRS 11,
commencing in 2016.

Publications and resources

IFRS in Focus Newsletter IASB issues new standard on joint arrangements summarising the
requirements of IFRS 11 (PDF 69k, May 2011)
Deloitte IFRS Podcast (May 2011, 10 minutes, 7mb)
Effect analysis for IFRS 11 (link to IASB website)
Summary of IFRS 11

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 that type of joint arrangement. [IFRS 11:1-2]

Key definitions

[IFRS 11:Appendix A]

An arrangement of which two or more parties have joint control


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
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
A joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement
A party to a joint venture that has joint control of that joint venture
An entity that participates in a joint arrangement, regardless of whether that entity has joint control
of the arrangement
A separately identifiable financial structure, including separate legal entities or entities recognised
by statute, regardless of whether those entities have a legal personality
Joint arrangements

A joint arrangement is an arrangement of which two or more parties have joint control. [IFRS
11:4]

A joint arrangement has the following characteristics: [IFRS 11:5]

the parties are bound by a contractual arrangement, and


the contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement is either a joint operation or a joint venture. [IFRS 11:6]

Joint control

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. [IFRS 11:7]

Before assessing whether an entity has joint control over an arrangement, an entity first assesses
whether the parties, or a group of the parties, control the arrangement (in accordance with the
definition of control in IFRS 10 Consolidated Financial Statements). [IFRS 11:B5]

After concluding that all the parties, or a group of the parties, control the arrangement collectively,
an entity shall assess whether it has joint control of the arrangement. Joint control exists only
when decisions about the relevant activities require the unanimous consent of the parties that
collectively control the arrangement. [IFRS 11:B6]

The requirement for unanimous consent means that any party with joint control of the arrangement
can prevent any of the other parties, or a group of the parties, from making unilateral decisions
(about the relevant activities) without its consent. [IFRS 11:B9]

Types of joint arrangements

Joint arrangements are either joint operations or joint ventures:


A joint operation is 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. Those parties are called joint operators. [IFRS 11:15]
A joint venture is a joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement. Those parties are called joint
venturers. [IFRS 11:16]
Classifying joint arrangements

The classification of a joint arrangement as a joint operation or a joint venture depends upon the
rights and obligations of the parties to the arrangement. An entity determines the type of joint
arrangement in which it is involved by considering the structure and form of the arrangement, the
terms agreed by the parties in the contractual arrangement and other facts and circumstances.
[IFRS 11:6, IFRS 11:14, IFRS 11:17]

Regardless of the purpose, structure or form of the arrangement, the classification of joint
arrangements depends upon the parties' rights and obligations arising from the arrangement. [IFRS
11:B14; IFRS 11:B15]

A joint arrangement in which the assets and liabilities relating to the arrangement are held in a
separate vehicle can be either a joint venture or a joint operation. [IFRS 11:B19]

A joint arrangement that is not structured through a separate vehicle is a joint operation. In such
cases, the contractual arrangement establishes the parties' rights to the assets, and obligations for
the liabilities, relating to the arrangement, and the parties' rights to the corresponding revenues and
obligations for the corresponding expenses. [IFRS 11:B16]

Financial statements of parties to a joint arrangement

Joint operations

A joint operator recognises in relation to its interest in a joint operation: [IFRS 11:20]

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 of 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 accounts for the assets, liabilities, revenues and expenses relating to its
involvement in a joint operation in accordance with the relevant IFRSs. [IFRS 11:21]

The acquirer of an interest in a joint operation in which the activity constitutes a business, as
defined in IFRS 3 Business Combinations, is required to apply all of the principles on business
combinations accounting in IFRS 3 and other IFRSs with the exception of those principles that
conflict with the guidance in IFRS 11. [IFRS 11:21A] These requirements apply both to the initial
acquisition of an interest in a joint operation, and the acquisition of an additional interest in a joint
operation (in the latter case, previously held interests are not remeasured). [IFRS 11:B33C]

Note: The requirements above were introduced by Accounting for Acquisitions of Interests in Joint
Operations, which applies to annual periods beginning on or after 1 January 2016 on a prospective
basis to acquisitions of interests in joint operations occurring from the beginning of the first period
in which the amendments are applied.

A party that participates in, but does not have joint control of, a joint operation shall also account
for its interest in the arrangement in accordance with the above if that party has rights to the
assets, and obligations for the liabilities, relating to the joint operation. [IFRS 11:23]

Joint ventures

A joint venturer recognises its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and
Joint Ventures unless the entity is exempted from applying the equity method as specified in that
standard. [IFRS 11:24]

A party that participates in, but does not have joint control of, a joint venture accounts for its
interest in the arrangement in accordance with IFRS 9 Financial Instruments unless it has
significant influence over the joint venture, in which case it accounts for it in accordance with IAS
28 (as amended in 2011). [IFRS 11:25]

Separate Financial Statements

The accounting for joint arrangements in an entity's separate financial statements depends on the
involvement of the entity in that joint arrangement and the type of the joint arrangement:

If the entity is a joint operator or joint venturer it shall account for its interest in
a joint operation in accordance with paragraphs 20-22;
a joint venture in accordance with paragraph 10 of IAS 27 Separate Financial Statements. [IFRS
11:26]
If the entity is a party that participates in, but does not have joint control of, a joint arrangement
shall account for its interest in:
a joint operation in accordance with paragraphs 23;
a joint venture in accordance with IFRS 9, unless the entity has significant influence over the joint
venture, in which case it shall apply paragraph 10 of IAS 27 (as amended in 2011). [IFRS 11:27]
Disclosure

There are no disclosures specified in IFRS 11. Instead, IFRS 12 Disclosure of Interests in Other
Entities outlines the disclosures required.
Applicability and early adoption

Note: This section has been updated to reflect the amendments to IFRS 11 made in June 2012.

IFRS 11 is applicable to annual reporting periods beginning on or after 1 January 2013. [IFRS
11:Appendix C1]

When IFRS 11 is first applied, an entity need only present the quantitative information required by
paragraph 28(f) of IAS 8 for the annual period immediately preceding the first annual period for
which the standard is applied [IFRS 11:C1B]

Special transitional provisions are included for: [IFRS 11.Appendix C2-C13]

transition from proportionate consolidation to the equity method for joint ventures
transition from the equity method to accounting for assets and liabilities for joint operations
transition in an entity's separate financial statements for a joint operation previously accounted for
as an investment at cost.
In general terms, the special transitional adjustments are required to be applied at the beginning of
the immediately preceding period (rather than the the beginning of the earliest period presented).
However, an entity may choose to present adjusted comparative information for earlier reporting
periods, and must clearly identify any unadjusted comparative information and explain the basis
on which the comparative information has been prepared [IFRS 11.C12A-C12B].

An entity may apply IFRS 11 to an earlier accounting period, but if doing so it must disclose the
fact that is has early adopted the standard and also apply: [IFRS 11.Appendix C1]

IFRS 10 Consolidated Financial Statements


IFRS 12 Disclosure of Interests in Other Entities
IAS 27 Separate Financial Statements (as amended in 2011)
IAS 28 Investments in Associates and Joint Ventures (as amended in 2011).
https://www.iasplus.com/en/standards/ifrs/ifrs11