IFRS 11: Joint arrangements
Joint control, and the difference between a joint operation (your share of assets and liabilities) and a joint venture (equity method).
ACCA exams this helps with: FR Financial Reporting SBR Strategic Business Reporting See the ACCA map
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What it is: The rules for a business you run together with others, where the key decisions need everyone’s agreement.
The key idea: there are two types. In a joint operation you have rights to the assets and obligations for the liabilities, so you show your share of them directly. In a joint venture you have rights to the net assets, so you use the equity method, one line, like an associate.
History. IFRS 11 replaced IAS 31 Interests in Joint Ventures from 2013. IAS 31 allowed proportionate consolidation for jointly controlled entities. That option no longer exists: joint ventures must use the equity method.
Key words
- Joint arrangement
- An arrangement of which two or more parties have joint control.Example: Two oil companies jointly running a pipeline.
- Joint control
- The contractually agreed sharing of control, where decisions about the relevant activities need the unanimous consent of the parties sharing control.Example: Neither partner can make major decisions without the other.
- Joint operation
- A joint arrangement where the parties have rights to the assets and obligations for the liabilities.Example: Each partner owns 50% of a jointly operated factory.
- Joint venture
- A joint arrangement where the parties have rights to the net assets of the arrangement.Example: A separate company, JV Ltd, owned 50:50.
Learn
Step 1: is there joint control?
There must be a contractual arrangement, and decisions about the relevant activities must need the unanimous consent of the parties sharing control. If one party controls it alone, it is a subsidiary (IFRS 10). If there is only significant influence, it may be an associate (IAS 28).
Step 2: joint operation or joint venture?
- Is it structured through a separate vehicle (for example, a company)? If not → joint operation.
- If yes, look at the legal form of the vehicle, the contract terms, and other facts (for example, whether the parties take all the output and are the only source of its cash). If these give the parties rights to the assets and obligations for the liabilities → joint operation. Otherwise → joint venture.
Accounting
| Joint operation | Joint venture | |
|---|---|---|
| Rights to | Assets and obligations for liabilities | Net assets |
| Accounting | Recognise your assets, liabilities, revenue and expenses, including your share of joint ones | Equity method (IAS 28) |
| In consolidated and in own accounts | Same treatment | Group: equity method. Own accounts: IAS 27 choice |
A party that takes part in a joint arrangement but does not have joint control accounts for its interest under the relevant standard (its share of assets and liabilities for a joint operation; IFRS 9 or IAS 28 otherwise).
Worked example
Joint operation. A and B build and run a pipeline together with no separate company, sharing 60:40. The pipeline cost £1,000,000. This year it earned revenue of £300,000 and had operating costs of £100,000.
| A’s own accounts | £ |
|---|---|
| Property, plant and equipment (60% × 1,000,000) | 600,000 |
| Revenue (60% × 300,000) | 180,000 |
| Operating costs (60% × 100,000) | 60,000 |
Joint venture. A instead owns 50% of JV Ltd, a company in which A and B have rights only to the net assets. A paid £500,000. JV Ltd makes a profit of £120,000 and pays no dividend. A’s investment in the joint venture = 500,000 + 50% × 120,000 = £560,000, and A shows a £60,000 share of profit.
Practice questions
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