Grant Thornton - Accounting for joint arrangements
1. Accounting for joint arrangements
by local authorities under IFRS 11
Spring 2012
Introduction Where, however, the members of the joint venture have
There were 3112 joint arrangements in the United rights to the individual assets and liabilities of the
Kingdom during the period 1990-2010, covering such separate vehicle, the arrangement is classified as a joint
industries as business services, software development and operation and members of the joint arrangement are
wholesale trade in durable goods1. Of these, 1504 (48%) required to show their share of the individual assets,
joint arrangements were structured as separate entities, with liabilities, revenue and expenses in their single entity and
1608 (52%) structured as alliances where assets and consolidated accounts.
operations were shared but no separate entity was formed.
How is IFRS 11 different from
Definition of a joint arrangement IAS 31 'Interests in Joint Ventures'?
Published in May 2011, IFRS 11 'Joint Arrangements' IAS 31 classified joint ventures into jointly controlled
defines a joint arrangement as an arrangement of which operations, jointly controlled assets and jointly controlled
two or more parties have joint control. Joint control is the entities. Under IFRS 11 both jointly controlled operations
contractually agreed sharing of control which exists only and jointly controlled assets are classified as joint
where decisions about the relevant activities require the operations.
unanimous consent of the parties sharing control. Under IAS 31 members of jointly controlled entities were
A joint arrangement will be established by a contractual permitted to use proportionate consolidation or equity
arrangement that binds the parties and provides two or accounting to account for their interests in the jointly
more parties with joint control of the arrangement. Joint controlled entity's assets, liabilities, revenue and expenses.
control can, for example, be established by the entity's Under IFRS 11 the ability to use proportional
articles of association. consolidation for interests in joint ventures is no longer
Relevant activities are defined as activities that permitted. Equity accounting is required.
significantly affect the returns of an arrangement, for
example acquiring or disposing of assets, selling or
What is equity accounting?
purchasing goods and services or obtaining funding.
An arrangement can be a joint arrangement even though Under equity accounting, as defined in IAS 28 'Investments
not all of its parties have joint control of the arrangement. in Associates and Joint ventures', a joint venture member
IFRS 11 distinguishes between parties that have joint will show in its consolidated accounts:
control of a joint arrangement and parties that participate
in, but do not have joint control of, a joint arrangement. • its investment in the joint venture entity, initially
recognised at cost
Requirements of IFRS 11 • its share of profits and losses of the joint venture in
IFRS 11 distinguishes between joint arrangements where a each accounting period
separate vehicle is established which are referred to as 'joint • its share of any dividends received from the joint
ventures' and joint arrangements where no separate vehicle venture in each accounting period (which reduce the
is established, referred to as 'joint operations'. carrying amount of the investment in the joint
IFRS 11 defines a separate vehicle as "a separately venture)
identifiable financial structure, including separate legal • changes in its share of the joint venture's net assets
entities or entities recognised by statute, regardless of arising from items recognised in the joint venture's
whether those entities have a legal personality". other comprehensive income, such as revaluations of
In the case of a 'joint venture' where the members of the plant, property and equipment or foreign exchange
separate vehicle have an ownership interest in the net translation differences.
assets of the vehicle (which will often be the case) IFRS 11
requires members of the joint venture to use 'equity In its single entity accounts the joint venture member will
accounting' to account for their interests in the joint show its investment in the joint venture at cost or more
venture. exceptionally as an available-for-sale financial asset under
IAS 39. Dividends receivable in the period will be reflected
in the Income and Expenditure Account.
1 Thomson Financial SDC Platinum Alliances/Joint Ventures
. database