International Financial Reporting Standards
Accounting for
joint arrangements
and associates
Joint World Bank and IFRS Foundation ‘train the
trainers’ workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IFRS 11
Joint Arrangements
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Introduction
3
• IFRS 11 Joint Arrangements establishes principles for
financial reporting by parties to a joint arrangement.
• The standard must be applied by all entities who are
party to a joint arrangement.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Principle
4
IFRS 11 establishes a principle-based approach for the
accounting for joint arrangements:
Parties to a joint arrangement recognise their
rights and obligations arising from
the arrangement, regardless of its structure or legal form
Information about those rights and obligations assists users
to better assess the prospects for future net cash inflows to
the entity which is useful in making decisions about providing
resources to the entity.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Application of the principle
5
• Parties that have rights to the assets and obligations for
the liabilities relating to the arrangement are parties to a
joint operation.
• A joint operator accounts for assets, liabilities and
corresponding revenues and expenses arising from the
arrangement.
• Parties that have rights to the net assets of the
arrangement are parties to a joint venture.
• A joint venturer accounts for an investment in the
arrangement using the equity method.
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Classification
6
Structured through a
separate vehicle *
Not structured through a
separate vehicle *
Assess the parties’ rights and
obligations arising from the arrangement
by considering:
Assessment
of the parties’
rights and
obligations
(a) the legal form of the separate vehicle
(b) the terms of the contractual
arrangement, and, if relevant,
(c) other facts and circumstances
Parties have rights to the assets
and obligations for the liabilities
Joint operation
Accounting for assets, liabilities, revenues
and expenses in accordance with the
contractual arrangements
Parties have rights
to the net assets
Joint venture
Accounting for an
investment using the
equity method
(*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognised by
statute, regardless of whether those entities have a legal personality.
Accounting
reflects
the parties’
rights and
obligations
Separate vehicles
Contractual
terms
Other
Do the parties have rights to the assets
and obligations for the liabilities?
Yes
No
Do the parties have contractual rights to
the assets, and obligations for the
Yes
liabilities?
No
Is the arrangement designed so:
a) Its activities primarily aim to provide
parties with an output, and
(b) It depends on the parties for settling
liabilities?
No
Joint Venture
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Yes
Joint Operation
Legal form
7
Example:
Construction and real estate
• A separate vehicle is established, over which two
parties have joint control.
• The purpose of the Joint Arrangement is to construct
and sell residential units to the public
• Neither the legal form nor the contractual terms give
the parties rights to the assets or obligations for the
liabilities of the arrangement
• Contributed equity by the parties is sufficient to buy
the land and raise debt finance for the construction
• Sales proceeds will be used to repay external debt
and remaining profit is distributed to parties
• Parties provide guarantee to financier
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8
Example:
Mining
9
• A and B jointly establish a corporation D over which
they have joint control to process the ore from the mine
C
• A & B have agreed to the following:
• A & B will purchase all the output produced by D in a
ratio of 60:40 (in proportion to ownership interest in D)
• D cannot sell the output to third parties
• Price of the output is set by A and B at a level to cover
production and admin costs (i.e. D breaks even)
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Comparison to the IFRS for SMEs
10
• Some of the differences between Section 15
Investments in Joint Ventures of the IFRS for SMEs and
IFRS 11 include:
• Section 15 has different methods of accounting for jointly
controlled entities to full IFRSs. The IFRS for SMEs
permits use of the equity method, cost or the fair value
model.
• If the equity method is used, any implicit goodwill is
systematically amortised over its expected useful life—
full IFRS does not allow amortisation of goodwill.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Evaluating the differences
11
The rules in Section 15 require fewer judgements
The principle-based approach in IFRS 11
• enhances verifiability and understandability
• the accounting in IFRS 11 reflects more faithfully the economic
phenomena that it purports to represent
• improves consistency
• it provides the same accounting outcome for each type of joint
arrangement
• increases comparability among financial statements
• it will enable users to identify and understand similarities in,
and differences between, different arrangements
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
12
• Assessing whether the parties, or a group of parties,
have joint control of an arrangement (see IFRS 10 for
judgements about control).
• Determining whether the joint arrangement is a joint
operation or a joint venture requires consideration of the
structure and legal form of the arrangement, the terms
agreed and when relevant other facts and
circumstances.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
International Financial Reporting Standards
IFRS 12
Disclosure of Interests in
Other Entities
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Objective
14
• The IFRS requires an entity to disclose information that
enables users of financial statements to evaluate:
• the nature of, and risks associated with, its interests in
other entities; and
• the effects of those interests on its financial position,
financial performance and cash flows.
• That evaluation assists users in making decisions about
providing resources to the entity.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Requirements
15
Disclosures
• significant judgements and assumptions made
• information about interests in:
• subsidiaries
• joint arrangements and associates
• unconsolidated structured entities
• any additional information that is necessary to meet the
disclosure objective
Strike a balance between overburdening financial statements
with excessive detail and obscuring information as a result of
too much aggregation
15
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Joint arrangements and associates
16
Nature, extent and financial effects of interests in joint
arrangements and associates, eg*
•
•
•
•
•
List and nature of interests
Quantitative financial information
Unrecognised share of losses of JVs and associates
Fair value (if published quoted prices available)
Nature and extent of any significant restrictions on transferring
funds
Nature of, and changes in, the risks associated with the
involvement
• Commitments and contingent liabilities
* for individually-material joint ventures and associates
16
Judgements and estimates
• An entity must disclose information about significant
judgements and assumptions it has made in
determining…
• joint control (see IFRS 11) of an arrangement or
significant influence (see IAS 28) over an entity
• type of joint arrangement when the arrangement has
been structured through a separate vehicle
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17
International Financial Reporting Standards
IAS 28
Investments in Associates
and Joint Ventures
The views expressed in this presentation are those of the
presenter,
not necessarily those of the IASB or IFRS Foundation
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Scope and introduction
19
• IAS 28 must be applied by all entities that are investors
with joint control of, or significant influence in an
investee.
• An associate is any entity over which the investor has
significant influence.
• A joint venture is joint arrangement whereby the parties
have joint control of the arrangement.
• the contractually agreed sharing of control of an
arrangement
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Significant influence
20
• Significant influence is the power to participate in the
financial and operating policy decisions of the investee.
• significant influence is not control (which indicates a
subsidiary)
• significant influence is not joint control (which indicates
an interest in a joint arrangement)
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Significant influence continued
21
• Significant influence is usually evidenced in one or
more of the following ways:
• representation on the board of directors;
• participation in policy making, including decisions
about dividends;
• a close relationship involving transactions between
investor and investee;
• interchange of managerial personnel; or
• provision of essential technical information.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Measurement
22
Measurement rule
• Associates and joint ventures are accounted for using
the equity method.
Exemptions from the equity method
• Entity is a parent and the scope exemption in paragraph
4(a) of IFRS 10
• A venture capital organisation or similar entity can elect
to measure its investments in associates or joint
ventures at fair value through profit or loss in
accordance with IFRS 9.
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Equity method
23
• Recognise the investment initially at cost, then adjusting
for the post-acquisition change in the investor’s share of
net assets of the associate or joint venture.
• Presentation:
• a one-line entry in the statement of comprehensive
income ‘investor’s share of the associate or joint
venture’s profit or loss’ and a separate line item for other
comprehensive income.
• a one-line item in the statement of financial position—
Investment in associate or joint venture.
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Example
equity method
•
24
On 1/3/20X1 A buys 30% of B for 300,000 (assume
no implicit goodwill & fair value adjustments).
B’s profit = 80,000 for the year ended 31/12/20X1
(including 66,667 from March to Dec). On 31/12/20X1
B declared a dividend of 100,000.
At 31/12/20X1 the recoverable amount of A’s
investment in B = 290,000 (ie fair value 293,000 less
costs to sell 3,000).
No published price quotation for B.
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Equity method continued
25
• Equity accounting for an associate’s losses continues
until the investment is reduced to zero.
• Additional losses may be recognised as a liability if an
entity has a legal or constructive obligation or made
payments on behalf of the associate or joint venture
• Recognition of future share of profits only after share of
profits equals losses
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Equity method continued
26
• The ‘investment’ includes not only shares in the
associate, but also some non-equity interests such as
some long-term receivables.
• Uniform accounting policies should be used
• If the associate or joint venture’s year end differs from
the investor’s adjustments must be made for significant
transactions that occurred between the dates
• Difference in year-ends may not exceed three months
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Equity method continued
27
• Goodwill forms part of the investment in associate or
joint venture
• Therefore, the goodwill is tested for impairment as part
of a single asset—the investment
• Application of the equity method is discontinued when:
• The investment becomes a subsidiary
• Significant influence or joint control of the investment is
lost
• IFRS 9 application to interest retained (if any)
• Profit or loss on disposal
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Comparison to the IFRS for SMEs
28
• The main differences between IAS 28 and Section 14
Investments in Associates and Section 15 Investments
in Joint Ventures is in an investor’s primary financial
statements are:
• full IFRSs require investments in associates and joint
ventures to be accounted for using the equity method
• the IFRS for SMEs requires an entity to elect one of
three models to account for its investment in associates
and joint ventures—the equity method, the cost model
and the fair value model. A different model can be used
for associates as compared to joint ventures
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Comparison to the IFRS for SMEs
continued
29
• If an SME elects the equity method, the IFRS for SMEs
requires that implicit goodwill be systematically
amortised throughout its expected useful life (see
paragraph 14.8(c))—full IFRS does not allow
amortisation of goodwill
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Judgements and estimates
30
• Investors must exercise judgement in the context of all
available information to determine whether they have
significant influence over an investee.
• There is no exemption from equity accounting when
severe long-term restrictions impair the associate’s
ability to transfer funds to the investor.
• However, the investor should consider whether such
restrictions, taken with other factors, indicate that the
investor does not have significant influence
© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Questions or comments?
Expressions of individual views
by members of the IASB and its
staff are encouraged.
The views expressed in this
presentation are those of the
presenter.
Official positions of the IASB on
accounting matters are
determined only after extensive
due process and deliberation.
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Foundation
| 30 Cannon Street
| LondonStreet
EC4M 6XH
| UK. EC4M
www.ifrs.org
© 2012
IFRS Foundation
| 30 Cannon
| London
6XH | UK | www.ifrs.org
31
32
The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at
1 January 2012 with an effective date after 1 January
2012 but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and
the publishers do not accept responsibility for loss
caused to any person who acts or refrains from acting
in reliance on the material in this PowerPoint
presentation, whether such loss is caused by
negligence or otherwise.
© 2011
IFRS Foundation
| 30 Cannon
| London
6XH | EC4M
UK. www.ifrs.org
©
IFRS Foundation
| 30Street
Cannon
StreetEC4M
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6XH | UK | www.ifrs.org