IFRS 11: JOINT ARRANGEMENTS

OVERVIEW


IFRS 11 set out the requirements for the accounting treatment and disclosures of the joint arrangements. A joint arrangement means that two or more entities have joint control over the business entity.  

Key Takeaway Points


=> IFRS 11 set out the requirements for the accounting treatment and disclosures of the joint arrangements. A joint arrangement means that two or more entities have joint control over the business entity. 


=> The joint arrangement does not mean the parent-subsidiary relationship neither it constitutes the relationship of the association but the joint control over another entity through a mutually agreed contract. In a joint arrangement, there is consent to share the control of the business entity and if the consent is missing to share the control then it does not form the joint arrangement.


=> A joint operation is a joint arrangement in which the parties have joint control of an arrangement and they have rights to the assets and obligations for the liabilities regarding the joint arrangement.


=> A joint venture is an arrangement in which the parties have joint control of the arrangement and have the rights to the net assets of the arrangement. For example, parties in a joint arrangement might establish a separate business entity over which the parties have joint control over it and such spate business entity has its own assets and liabilities.


DEFINITIONS


A joint arrangement means that two or more entities have joint control over a business entity or on any business venture jointly.


Joint control means the controlling of the business interest in other entities through the mutually agreed contract and the parties sharing the controls are unanimously agreed to share the percentage of control of a business entity and consent has been obtained in this regard.


Here it is important to note that the joint arrangement does not mean the parent-subsidiary relationship neither it constitutes the relationship of the association but the joint control over another entity through a mutually agreed contract. In a joint arrangement, there is consent to share the control of the business entity and if the consent is missing to share the control then it does not form the joint arrangement.


IFRS generally refers to all business entities not only companies. However, in this summary, we will assume that all of the parties to the joint arrangement are companies.


TYPES OF JOINT ARRANGEMENTS


As per IFRS 11, there are two types of the joint arrangements and the prescribed accounting treatment of the two joint arrangements:


Joint Operations


A joint operation is a joint arrangement in which the parties have joint control of an arrangement and they have rights to the assets and obligations for the liabilities regarding the joint arrangement. For example, parties to a joint arrangement agreed to produce a specific item jointly then each party being responsible for the specific task and with each party using its own assets and will incur its own liabilities.


The agreement between these joint operators of an agreement will specify the way in which revenue and expenses will be shared according to a specific percentage, agreed in a contract mutually.


Joint Venture


A joint venture is an arrangement in which the parties have joint control of the arrangement and have the rights to the net assets of the arrangement. For example, parties in a joint arrangement might establish a separate business entity over which the parties have joint control over it and such spate business entity has its own assets and liabilities.


In this case, the assets and liabilities of the arrangement would belong to the separate entity and not to the parties in the joint arrangement themselves. However, each party in the joint arrangement has its own interest in the net assets of the established business entity under the joint arrangement.


ACCOUNTING FOR THE JOINT ARRANGEMENT


The accounting treatment for each type of the joint arrangement as per IFRS 11 is as follow:


Joint Operations


There is no accounting complexity involved in the accounting treatment of the joint operations. However, the financial statements of the joint operator should recognize:


=> The net assets that are used by an entity to operate the joint operations and including a share of assets that are held jointly.

=> The liabilities that are related to the joint arrangement and the share of the liability that is incurred under the joint arrangement.

=> The share of the revenue that is arising due to the joint operations

=> The share of the expenses that are arising due to the joint operations

=> There is no need to prepare a separate financial statement for the joint operations itself.


Joint Ventures


A joint venturer should recognize the interest in the joint arrangement as an investment in its financial statements. The investment in the financial statements of the joint venture should be measured in the equity method. However, in this case, this is necessary to prepare the financial statements for the joint venture itself.


DISCLOSURE REQUIREMENTS


IFRS 12 – Disclosure of interest in other entities requires the entities to disclose the significant judgments and estimates which are made in the determination of the interest in other entities and the type of joint arrangement to which it is a party. The entity shall also disclose the following information which enables the users of the financial statements to evaluate:


=> The nature, extent, and the financial effects of its interest in associates and its interest in the joint arrangements.

=> The nature of the risks that are associated with the interest in the associates and in the joint arrangements shall be disclosed.