IFRS 10 intercompany margin with JV

All topics related to IFRS Standards.
Post Reply
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

IFRS 10 intercompany margin with JV

Post by Jonny »

Hi

If a company X sell in 20X1 an asset to a JV owned 50% by X (perfect 50-50 governance). The JV is consolidated with the equity method. The project is sold with a margin of 100. This project will be developed JV in 20X2 e 20X3. If the project is successful, the project will be sold to X in 20X3. For consolidated purpose would you write of in 20X1 100% of the margin or only the 50% (as the JV is a 50% JV)?

The general rule is to write off 50% of the margin but IMO in this case I would write off 100% as the project could be bought again, if successful, by X.

What are your thoughts?

Thanks
User avatar
Marek Muc
Site Admin
Posts: 3226
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 10 intercompany margin with JV

Post by Marek Muc »

What do you mean when you refer to a project? Is it a business or an asset?
What are the key terms of the call option held by X?
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 10 intercompany margin with JV

Post by Jonny »

I am referring to an asset. Development costs incurred up to now by X.

Is not a call option. The Jv acquired the asset ( several assets) at a early stage and has the duty to develop it up to be ready to build. The contract between X and JV states that if the asset is ready to build it will be sold back to X with a margin. If not it becomes a loss for JV (impaired).
User avatar
Marek Muc
Site Admin
Posts: 3226
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 10 intercompany margin with JV

Post by Marek Muc »

So X is obliged to buy back the asset from JV if those specified criteria are met, right?
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 10 intercompany margin with JV

Post by Jonny »

Yes. I have to add that the asset has to reach a certain IRR.
User avatar
Marek Muc
Site Admin
Posts: 3226
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 10 intercompany margin with JV

Post by Marek Muc »

I would seriously reconsider whether this asset should be derecognised from X's balance sheet at all. It sounds more like the JV is hired to further develop the asset which is still economically owned by X. Such arrangements need a more holistic approach.

Does this JV carry out any significant activities for external clients (other than investors)?
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 10 intercompany margin with JV

Post by Jonny »

no, JV carries out only activity for the shareholders. In case the assets are not interesting for the shareholders JV can sell it to third parties.
User avatar
Marek Muc
Site Admin
Posts: 3226
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 10 intercompany margin with JV

Post by Marek Muc »

Well, then it's a joint operation rather than a JV...
so no equity method and this asset seems to belong to X's balance sheet even more :)

https://ifrscommunity.com/knowledge-bas ... cumstances
Jonny
Posts: 90
Joined: 22 May 2020, 11:09

Re: IFRS 10 intercompany margin with JV

Post by Jonny »

Interesting, I did not think about this.

Reeding IFRS 11 B27 IMO seams a JV because:

- The parties have no interests (ie no rights, title or ownership) in the assets of the arrangement.
- The contractual arrangement establishes that the parties to the joint arrangement are liable to the arrangement only to the extent of their respective investments in the arrangement or to their respective obligations to contribute any unpaid or additional capital to the arrangement, or both.
- The contractual arrangement states that creditors of the joint arrangement do not have rights of recourse against any party with respect to debts or obligations of the arrangement.
- The contractual arrangement establishes each party’s share in the profit or loss relating to the activities of the arrangement.

Instead the parties have a first refusal on the assets sold and in the future assets that could be sold to third parties.

Could this change the picture?


Thanks
User avatar
Marek Muc
Site Admin
Posts: 3226
Joined: 15 Oct 2018, 17:21
Contact:

Re: IFRS 10 intercompany margin with JV

Post by Marek Muc »

there are three steps in making this assessment:
https://ifrscommunity.com/wp-content/up ... gement.png

B27 is the second step (contractual terms), you then need to proceed to step 3 - assessing other facts and circumstances (link in my previous post)
Post Reply