United Kingdom

Joint arrangements 

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.
two-businessmen-talking

Overview of standard

  • The classification of joint arrangements will depend on whether the parties have rights to and obligations for the underlying assets and liabilities. The following diagram summarises the changes:

joint-arrangement-diagram

  

  • IFRS 10, IFRS 11, IFRS 12, IAS 27 (2011) and IAS 28 (2011) are endorsed for use in the EU for financial years starting on or after 1 January 2014. Early adoption is permitted.
  • In June 2012, the IASB issued Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12), which simplifies the transition to these new standards by:
    • requiring the consolidation conclusion to be tested at the start of the year in which IFRSs 10 and 11 are 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.
  • In April 2013, these amendments were endorsed for use in the EU for annual periods starting on or after 1 January 2014. Early adoption is permitted.
  • The IASB has issed an amendment to IFRS 11 Accounting for acquisitions of interests in joint operations, which requires an entity to apply the principles of business combination accounting when it acquires an interest in a joint operation that meets IFRS 3's definition of a business. The amendment applies prospectively for annual periods beginning on or after 1 January 2016 (subject to endorsement for use in the EU).

Practical issues

  • 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 capitalised 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.

Forthcoming developments

  • 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. The IASB expects to issue the final amendments in Q2 2014.