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International Financial Reporting Standards
The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.
•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 11 establishes a principle-based approach for the accounting for joint arrangements:
Parties to a joint arrangement recognise theirrights and obligations arising from
the arrangement, regardless of its structure or legal form
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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
Assess the parties’ rights and obligations arising from the arrangement by considering:
(a) the legal form of the separate vehicle (b) the terms of the contractual
arrangement, and, if relevant, (c) other facts and circumstances
Joint operation Joint venture
Assessment of the parties’ rights and obligations
Accounting for assets, liabilities, revenues and expenses in accordance with the
contractual arrangements
Accounting for an investment using the
equity method
Not structured through a separate vehicle *
Structured through a separate vehicle *
Parties have rights to the net assets
Parties have rights to the assets and obligations for the liabilities
Accounting reflects the parties’ rights and obligations
(*): A separate vehicle is a separately identifiable financial structure, including separate legal entities or entities recognised bystatute, regardless of whether those entities have a legal personality.
6Classification
Separate vehicles
Contractual terms
Other
Legal formYes
Yes
No
No
No
Yes
Joint Venture
Joint Operati
on
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Do the parties have rights to the assets and obligations for the liabilities?
Do the parties have contractual rights to the assets, and obligations for the
liabilities?
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
• 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
•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)
•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.
The rules in Section 15 require fewer judgementsThe 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
•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.
•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.
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 fundsNature of, and changes in, the risks associated with the involvement•Commitments and contingent liabilities
* for individually-material joint ventures and associates
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•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
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.
•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.
•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
•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
• 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
•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
•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
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.