IFRS 11 Joint Arrangements overhauls the accounting for joint ventures (now called joint arrangements). In particular, the structure of the arrangement is no longer the main factor in determining the accounting.
Overview of the standard
- The classification of joint arrangements will depend on whether the parties have rights to and obligations for the underlying assets and liabilities.
- In December 2012, IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) were endorsed for use in the EU for financial years starting on or after 1 January 2014. Early adoption is permitted.
- The IASB has issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12). These amendments simplify the transition to these new standards by:
- requiring the consolidation conclusion to be tested at the start of the year in which IFRS 10 is adopted;
- removing the requirement to disclose the impact of the change in accounting policy for the year in which the standard is adopted; and
- requiring disclosures in respect of unconsolidated structured entities to be provided only prospectively.
- The classification of all joint arrangements will need to be re-assessed on transition to IFRS 11. This is expected to be an area of judgement that will require careful consideration in practice.
- The transition from proportionate consolidation to the equity method will affect virtually all of an entity’s financial statement line items, notably decreasing revenue, gross assets and gross liabilities. There may be other consequential accounting effects resulting from the cessation of proportionate consolidation. For example, when a venturer has hedged a joint venture’s asset or liability (e.g. hedging of interest rate risk on the joint venture’s debt), there is no case for hedge accounting once equity accounting is applied. Similarly, a venturer’s interest expense may no longer be capitalized into a joint venture’s asset.
- The transition from the equity method to accounting for a venturer’s share of individual assets and liabilities, will result in the opposite effect, with the recognition of increased revenue, gross assets and gross liabilities.
- On 13 December 2012 the IASB issued proposals for a narrow scope amendment to IFRS 10 to address an acknowledged inconsistency between IFRS 10 and IAS 28 (2011) Investments in associates and joint ventures (formerly SIC-13) in respect of the sale or contribution of a subsidiary to an associate or joint venture. The proposals are discussed in more detail in our publication, In the Headlines: Transfer of a subsidiary to an associate or JV.
- On 13 December 2012 the IASB also published draft guidance dealing with the acquisition of an interest in a joint operation. This draft guidance is discussed in more detail in our publication, In the Headlines: Business combination accounting for interests in a joint operation
First Impressions: Joint arrangements
Explains how the new joint arrangements standard (IFRS 11) works. We discuss its implications for business and highlight areas of ambiguity.
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