Joint arrangements & Consolidation – new standards
Joint Arrangements & Consolidation
New standards for 2013
ments
September
2011
IFRS Academy (Israel)
1
Joint arrangements & Consolidation – new standards
New Standards Effective 1 January 2013
IFRS
10 Consolidation
IFRS
11 Joint arrangements
IFRS
12 Disclosure
Consequential
changes to IAS 27 & 28
Eearly adoption allowed
September 2011
IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
IFRS 10 - Consolidation
September 2011
IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
Content

Context
New
definition of control

Key changes

Case studies

Challenges and responses

Summary
2011
September 2011
IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
IFRS 10 - Consolidated financial statements
 Replaces
all of the guidance on control and
consolidation in IAS 27 and SIC-12
 Definition
of control: same criteria are applied to
all entities to determine control
 No
change to single economic entity core principle
and the mechanics of consolidation
 No
news (yet) for investment companies
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IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
New Definition of control
POWER
Ability to
use power
to affect
returns
VARIABLE
RETURNS
2011
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IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
New definition of control
 The
revised definition of control focuses on the
need to have both power and variable returns
before control is present
 Power
is the current ability to direct the activities
that significantly influence returns
 Returns
must vary and can be positive, negative
or both
 Continuous
assessment- temporary control does
not obviate the requirement to consolidate
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IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
The new model
Identify the investee
Identify the relevant activities of the investee
Identify how decisions about the relevant activities are made
Assess whether the investor has power over the relevant activities
Assess whether the investor is exposed to variability in returns
Assess whether there is a link between power and returns
September 2011
IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
Power assessment
Consider only substantive rights
Voting rights are
relevant
Majority of
voting rights
Less than a
majority of
voting rights
Rights other than
Voting rights are relevant
consider
consider
Consider rights
held by others
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IFRS Academy (Israel)
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Joint arrangements & Consolidation – new standards
Issues to consider
Less than a majority of
voting rights
 Agreements
with other
vote holders
 Other
contractual
agreements
 Potential
 De
voting rights
facto power
September 2011
Rights other than voting
rights are relevant
 Purpose
& design
 Evidence
of practical
ability to direct
 Special
relationships
 Large
exposure to
variability in returns
IFRS Academy (Israel) 10
Joint arrangements & Consolidation – new standards
Key changes
Key Principles
Significant Impact
Consistent control criteria used
for assessing control for all
investees
De facto control considered
when assessing power
2011
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IFRS Academy (Israel) 11
Joint arrangements & Consolidation – new standards
Key changes
Decision maker’s
Rights held by
scope/ level of
other parties
discretion
Principal agent
relationships
Decision
Decision
maker’s
maker’s
remuneration
exposure to
variability
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IFRS Academy (Israel) 12
Joint arrangements & Consolidation – new standards
Key changes
Key Principles
Significant Impact
Guidance on substantive vs.
protective rights introduced
Guidance on when potential voting
rights are substantive
Guidance on power over specified
assets introduced
2011
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IFRS Academy (Israel) 13
Joint arrangements & Consolidation – new standards
IFRS 10 - Consolidated financial statements
Consider:
 Potential
voting rights
 Economic
dependency
 Shareholding
 Voting
size in comparance to their holding
patterns at shareholder’s meeting
“De - facto control”
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Joint arrangements & Consolidation – new standards
Retrospective application
(Provisions when impractical)
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Joint arrangements & Consolidation – new standards
Case Studies
•
Determine whether consolidation is
required and why?
•
Work in your table groups (10 mins)
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Joint arrangements & Consolidation – new standards
Implementation challenges
What do you see as key
implications and implementation
challenges?
Flipchart your challenges AND solutions
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IFRS Academy (Israel) 17
Joint arrangements & Consolidation – new standards
Implications & Challenges
 Investors
/ shareholders communication
 Client understanding/Denial
 Gathering data for retrospective application
 Assessing decision making power
 System changes
 Modification of agreements
 Negotiating or structuring new or past
transactions
 Impact to financial metrics
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IFRS Academy (Israel) 18
Joint arrangements & Consolidation – new standards
Summary
 One
 De
control model for all entities
facto control defined
voting rights – substantive not currently
exercisable
 Potential
 Decision
making rights – principal vs. agent
 Protective
 All
rights defined
contracts/investees must be reassessed
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IFRS Academy (Israel) 19
Joint arrangements & Consolidation – new standards
IFRS 11 – Joint
arrangements
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Joint arrangements & Consolidation – new standards
Contnet

Key changes recap

Case studies

Implementation Challenges

Questions
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IFRS Academy (Israel) 21
Joint arrangements & Consolidation – new standards
Current model – IAS 31 (interests in JVs)
Joint
operations
Manufacturing
Distribution
R&D
Jointly
controlled
assets
Sharing tagible or
intangible assets
(Oil pipeline ..)
Joint ventures
Jointly controlled
entities (corporations,
partnerships or other
legal form)
; Requires - contractual arrangement that
establishes Joint control of two or more
parties
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IFRS Academy (Israel) 22
Joint arrangements & Consolidation – new standards
Current model – IAS 31 (interests in JVs)
Joint venture
(Accounting policy choice)
Proportional
consolidation
Line by line
September 2011
Equity method
Accounting
(IAS 28)
Separate line
for major
captions
IFRS Academy (Israel) 23
Joint arrangements & Consolidation – new standards
Current model – IAS 31 (interests in JVs)
Jointly controlled
assets
Joint operations
Venturer will recognise
in separate FS:
Venturer will recognise in
separate FS:

Asset that it controls;


Liabilities that it incurs
Its share of jointly
controlled assets

Its share in income
and expenses
incurred

Its share in liabilities
incurred jointly

Its share in income and
expenses
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IFRS Academy (Israel) 24
Joint arrangements & Consolidation – new standards
IFRS 11 – Joint arrangements
Joint operations
IFRS
11
IAS
31
Changes in the definitions:
Jointly controlled
assets
Joint
operations
Reflect direct
rights &
obligations
September 2011
Joint ventures
Joint ventures
Apply equity
accounting
IFRS Academy (Israel) 25
Joint arrangements & Consolidation – new standards
Key changes

Legal structure is no longer key determining factor

Accounting follows substance of joint arrangement for
each party
 Greater emphasis on contractual rights and obligations

Jointly controlled entities could meet either definition

proportionate consolidation prohibited

possible change from equity accounting to share of
assets and liabilities
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IFRS Academy (Israel) 26
Joint arrangements & Consolidation – new standards
Unveiling the legal form
Rights to:
• Assets
•Share of production or output
Obligations for:
• Liabilities
• Share of costs
Legal structure is NOT the determining factor
Classification depends on rights and obligations
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IFRS Academy (Israel) 27
Joint arrangements & Consolidation – new standards
IFRS 11 – New definitions
Joint control
o same control principles as Consolidation standard
o contractually agreed sharing of control
o exists only when decisions about relevant activities
require unanimous consent of parties sharing control
Relevant activities
o Activities that significantly affect returns of arrangement
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IFRS Academy (Israel) 28
Joint arrangements & Consolidation – new standards
IFRS 11 – New definitions
Joint operations
o Joint arrangement with rights to assets and obligations for
liabilities
Joint venture
Joint arrangement with rights to net assets of arrangement
o Profit-sharing arrangements are not automatically joint
ventures
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Joint arrangements & Consolidation – new standards
Flowchart approach
Structure
Is the arrangement structured through a vehicle that is
separate from the parties ?
No
Yes
Does the legal form of the separate vehicle give the parties
rights to the assets and obligations for the liabilities of the Yes
arrangement ?
No
Contractual
arrangement
Do the contractual agreements give the parties rights to the
assets and obligations for the liabilities of the arrangement?Yes
No
Other facts
& circ.
Joint operation
Legal
Form
Do the parties have rights to substantially all of the
economic benefits of the assets relating to the arrangement, Yes
and does the arrangement depend on the parties on a
continuous basis for settling its liabilities?
No
Joint venture
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Joint arrangements & Consolidation – new standards
Accounting for joint arrangements
Joint
Operation
September 2011
Recognises:
• Own assets and liabilities
• Share of assets and liabilities in joint
operation
• Own revenue and expenses
• Share of revenue and expenses in joint
operation
Accounting entries booked in operator’s own
financial statements
IFRS Academy (Israel) 31
Joint arrangements & Consolidation – new standards
Accounting for joint arrangements
Joint Venture
• Equity Method of Accounting under IAS 28
• Proportionate consolidation is prohibited
• Accounting entries differ in a venturer’s
separate financial statements
Party to joint IAS 28 where significant influence is held
venture who IAS 39 or IFRS 9 Financial Instruments
does not have where no significant influence
joint control
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IFRS Academy (Israel) 32
Joint arrangements & Consolidation – new standards
Impacts
 From accounting for assets and liabilities to
equity accounting –



Will change financial ratios and leverage levels;
Will take out volumes from revenues and expenses
May require:

Investors / shareholders communication
 Modification of agreements
 Negotiating or structuring new or past transactions
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IFRS Academy (Israel) 33
Joint arrangements & Consolidation – new standards
Other impacts

Clarified that movement from associate to JV (or vice
versa) not revaluation event (no gain or loss
recognised)

Transitional provisions:


From equity accounting to accounting for assets
and liabilities - Balance under equity accounting
grossed up to component assets and liabilities
From accounting for assets and liabilities to equity
accounting - Aggregate of assets and liabilities
consolidated into single line
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Joint arrangements & Consolidation – new standards
Case studies
 For
each scenario, add to your
flipcharts:
 The
type of joint arrangement which
exists
 The justification for your conclusion
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IFRS Academy (Israel) 35
Joint arrangements & Consolidation – new standards
Case studies
 Key
messages:

Incorporated entities can be joint operations (S1)

Decision-making powers to consider are those over
relevant activities -Protective rights do NOT determine
control (S6)
“Simple majority” is NOT joint control where > 2
decision-makers - Judgement required even where 2
shareholders have equal representation on board (S3)


Casting votes can give control - NOT a joint
arrangement (S4)
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IFRS Academy (Israel) 36
Joint arrangements & Consolidation – new standards
Case studies
 Key


messages:
It is critical to determine the level at which decisions are
made - Shareholders may not be the effective decisionmaking body (S5, 6)
Many arrangements are called “joint ventures” in legal
agreements - This does not make it so (S4)
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IFRS Academy (Israel) 37
Joint arrangements & Consolidation – new standards
Implementation challenges
What do you see as key implementation
challenges?
Flipchart your challenges AND solutions
September 2011
PwC
2011
IFRS Academy (Israel)38 38
Joint arrangements & Consolidation – new standards
Implementation challenges – Joint arrangements
 Detailed
and extensive reviews of joint arrangement
agreements required
 Understanding complexity of contract is key
 Identifying type of joint arrangements may not be
straightforward
 Ongoing review and judgement required
 May lead to change in agreements and structuring
transctions for companies seeking way to include sales
from certain operations
September 2011
PwC
2011
IFRS Academy (Israel)39 39
Joint arrangements & Consolidation – new standards
September 2011
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IFRS Academy
Joint arrangements & Consolidation – new standards(Israel)
Israeli Technical Team:
Steinberger, Partner – Head of Accounting
and Technical Services
(menachem.steinberger@crowehorwath.co.il)
 Menachem
 Vered
 Batel
Mesika
Dadoun
Isreali office +972-3-7538300
September 2011
IFRS Academy (Israel) 41
IFRS Academy
Joint arrangements & Consolidation – new standards
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