Reporting principles for entities that have interests in joint arrangements, that is arrangements which are controlled jointly with other party (or parties), are set out in IFRS 11. Accounting for joint arrangements focuses on the rights and obligations of the parties to joint arrangements, regardless of those arrangements’ structure or legal form. All entities that are a party to a joint arrangement are within the scope of IFRS 11 (IFRS 11.3).
A joint arrangement is an arrangement of which two or more parties have joint control (IFRS 11.4). Joint arrangements are established for a variety of purposes (e.g. as a way for parties to share costs and risks, or as a way to provide the parties with access to new technology or new markets), and can be established using different structures and legal forms (IFRS 11.B12). Joint arrangements are split into two major categories (IFRS 11.6):
- joint operations
- joint ventures
All joint arrangements have the following two characteristics (IFRS 11.5):
- The parties are bound by a contractual arrangement,
- The contractual arrangement gives two or more of those parties joint control of the arrangement.
Contractual arrangement will most often be in writing, but specifics will depend on local law. For joint arrangements structured through separate vehicle, the contractual arrangement will usually be incorporated in the articles of association of the separate vehicle. More guidance on contractual arrangement is included in paragraphs IFRS 11.B2-B4.
The existence of a contractual arrangement is necessary for the existence of a joint arrangement in the meaning of IFRS 11 when decisions about relevant activities can be made by more than one combination of the parties agreeing together (IFRS 11.B8).
The terms ‘joint venture’ or ‘joint arrangement’ are often used in a day-to-day business language when referring to various undertakings, but they don’t always meet IFRS 11 requirements.
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control (IFRS 11.7). All the parties, or a group of the parties, control the arrangement collectively when they must act together to direct its relevant activities. In other words, decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively. A party with joint control of an arrangement can prevent any of the other parties, or a group of the parties, from controlling the arrangement (IFRS 11.10). An arrangement can be a joint arrangement even though not all of its parties have joint control of the arrangement (IFRS 11.11).
Joint control can also be implicit as discussed in paragraph IFRS 11.B7 and in the example below.
Additional guidance on joint control is included in paragraphs IFRS 11.B5-B11.
Example: assessment of joint control #1
Entity X has 3 shareholders: Entity A holds 45% shares, Entity B holds 45% shares and Entity C holds 10%. A contractual arrangement between the shareholders that is incorporated into the articles of association of Entity X states that 100% of the votes are needed to direct relevant activities of Entity X. In this case, Entity X is jointly controlled by Entities A, B and C as decisions about the relevant activities require their unanimous consent according to a contractual arrangement between them.
Example: assessment of joint control #2
Entity X has 3 shareholders: Entity A holds 45% shares, Entity B holds 45% shares and Entity C holds 10%. Relevant activities of Entity X are directed by a majority of the voting rights. There are no contractual agreements between any of the Entities. None of the three shareholders has joint control of Entity X as the decisions about the relevant activities do not require the unanimous consent of the parties that would control the arrangement collectively. Decisions relating to relevant activities can be taken by two shareholders in any configuration. None of the shareholders can prevent the other two from making a decision relating to relevant activities.
Example: assessment of joint control #3
Entity X has two major shareholders: Entities A and B hold 40% of the voting rights each. The remaining 20% belongs to widely dispersed individual shareholders that generally do not participate in shareholders’ meetings. Relevant activities of Entity X are directed by a majority of the voting rights. There are no contractual arrangement between Entities A and B.
Despite the fact that a unanimous decision of Entities A and B can direct relevant activities of Entity X, those parties do not have joint control of the Entity X as there is no contractual arrangement between them.
Example: implicit joint control
Entity X has two major shareholders: Entities A and B hold 40% of the voting rights each. The remaining 20% belongs to widely dispersed individual shareholders that generally do not participate in shareholders’ meetings. Articles of association of Entity X state that relevant activities of Entity X are directed by at least 75% of the voting rights. There are no contractual arrangement between Entities A and B.
Entities A and B have joint control over Entity X as this implicitly results from the articles of association of Entity X because decisions about the relevant activities cannot be made without those entities agreeing.
Types of joint arrangements
Two types of joint arrangements
There are two types of joint arrangements (IFRS 11.14):
- joint operations
- joint ventures
The distinction is made based on the rights and obligations of the parties to the arrangement. When an entity has rights to the assets, and obligations for the liabilities, relating to the arrangement, the arrangement is a joint operation (IFRS 11.15). When an entity has rights to the net assets of the arrangement, the arrangement is a joint venture (IFRS 11.16).When assessing whether a joint arrangement is a joint operation or a joint venture, entities take into account the structure of the joint arrangement, terms of the contractual arrangement and other relevant facts and circumstances (IFRS 11.B15). Such an assessment of right and obligations should be done when considering normal course of business and not e.g. what would happen on the bankruptcy of the joint arrangement (IFRS 11.B14.
Structure of the joint arrangement
Joint arrangements not structured through a separate vehicle
When a joint arrangement is not structured through a separate vehicle, it is always classified as a joint operation (IFRS 11.B16-B18).
Joint arrangements structured through a separate vehicle
A joint arrangement structured through a separate vehicle can be either a joint venture or a joint operation (IFRS 11.B19). The classification depends on whether legal form of the separate vehicle, the terms of the contractual arrangement and other relevant facts and circumstances give the parties (IFRS 11.B21):
- rights to the assets, and obligations for the liabilities, relating to the arrangement (a joint operation); or
- rights to the net assets of the arrangement (a joint venture).
When the legal form of a separate vehicle effectively means that the assets and liabilities held there are the assets and liabilities of the separate vehicle and not the assets and liabilities of the parties, then the analysis of the legal form indicates that that the arrangement is a joint venture. However, the terms of the contractual arrangement and other relevant facts and circumstances, as discussed below, can override this preliminary conclusion (IFRS 11.B23).
On the other hand, when a legal form of a separate vehicle does not confer separation between the parties and the separate vehicle (i.e. the assets and liabilities held in the separate vehicle are the parties’ assets and liabilities), the joint arrangement is a joint operation (IFRS 11.B24).
A separate vehicle is defined as a separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality (IFRS 11.Appendix A).
Assessing the terms of the contractual arrangement
There may be instances where the parties sign an additional arrangement that modifies the rights and obligations resulting from the legal form of the separate vehicle in which the arrangement has been structured (IFRS 11.B26). Paragraph IFRS 11.B27 compares terms of the contractual arrangement in a joint operation and a joint venture. If the terms of the contractual arrangement do not specify that the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement, other facts and circumstances should be considered to assess whether the arrangement is a joint operation or a joint venture. Otherwise the joint arrangement is classified as a joint operation (IFRS 11.B28-B29).
The provision of guarantees is not itself a conclusive evidence that the joint arrangement is a joint operation (IFRS 11.B27).
See also Examples 1 – 6 accompanying IFRS 11.
Assessing other facts and circumstances
Overview of assessment of other facts and circumstances
IFRS 11.B30: A joint arrangement might be structured in a separate vehicle whose legal form confers separation between the parties and the separate vehicle. The contractual terms agreed among the parties might not specify the parties’ rights to the assets and obligations for the liabilities, yet consideration of other facts and circumstances can lead to such an arrangement being classified as a joint operation. This will be the case when other facts and circumstances give the parties rights to the assets, and obligations for the liabilities, relating to the arrangement.
This is the part where many of joint arrangements, which seem to be joint ventures at first, become joint operations. IFRS 11 makes it clear that a joint arrangement which is primarily designed for the provision of output to the parties is a joint operation, even if structured in a separate vehicle. See paragraphs IFRS 11.B29-B32 for more discussion and a decision tree in paragraph IFRS 11.B33.
See also Examples 1 – 6 accompanying IFRS 11.
In March 2015, the Interpretations Committee (IFRIC) published useful agenda decisions relating to assessing other facts and circumstances. There were several specific fact patterns discussed by the IFRIC, the most useful in my opinion are summarised below.
Output sold at a market price
The IC discussed whether the fact that the output from the joint arrangement is sold to the parties of the joint arrangement at a market price prevents the joint arrangement from being classified as a joint operation, when assessing other facts and circumstances.
The IC observed that the sale of output from the joint arrangement to the parties at market price, on its own, is not a determinative factor for the classification of the joint arrangement. It noted that the parties would need to consider, among other things, whether the cash flows provided to the joint arrangement through the parties’ purchase of the output from the joint arrangement at market price, along with any other funding that the parties are obliged to provide, would be sufficient to enable the joint arrangement to settle its liabilities on a continuous basis.
Financing from a third party
The IC discussed whether financing from a third party prevents a joint arrangement from being classified as a joint operation.
The IC noted that if the cash flows to the joint arrangement from the sale of output to the parties, along with any other funding that the parties are obliged to provide, satisfy the joint arrangement’s liabilities, then third-party financing alone would not affect the classification of the joint arrangement, irrespective of whether the financing occurs at inception or during the course of the joint arrangement’s operations. The IC noted that in this situation, the joint arrangement will, or may, settle some of its liabilities using cash flows from third-party financing, but the resulting obligation to the third-party finance provider will, in due course, be settled using cash flows that the parties are obliged to provide.
Financial statements of parties to a joint arrangement
Interests in joint ventures are accounted for using the equity method. The equity method, including initial recognition of interest in a joint venture, is covered in IAS 28. Note that IAS 28 exempts certain entities from applying equity method. Accounting for investments in joint ventures in separate financial statements in covered in IAS 27.
Overview of accounting for joint operations
Accounting for joint operations is similar to a consolidation. IFRS 11.20 states that a joint operator recognises in relation to its interest in a joint operation:
- its assets, including its share of any assets held jointly;
- its liabilities, including its share of any liabilities incurred jointly;
- its revenue from the sale of its share of the output arising from the joint operation;
- its share of the revenue from the sale of the output by the joint operation; and
- its expenses, including its share of any expenses incurred jointly.
The accounting for a joint operation is different from simply applying a specified percentage to all items reported by a joint operation. There may be assets, revenue etc. that the joint operator will fully include in its financial statements, and conversely there may be items that will not be included at all. It all depends on the assessment of the rights and obligations of each joint operator.
See Examples 7 and 8 accompanying IFRS 11.
Example: accounting for a joint operation that is a shared service centre
Entity A is a separate legal entity and a joint operation of Entities X and Y. Both entities have 50% interest in Entity A and all decisions on relevant activities of Entity A must be taken unanimously. Entities X and Y are competitors in a taxi business and they incorporated Entity A to optimise their expenses relating to repairs and maintenance of cars. Entity A is responsible for repairs and maintenance of cars belonging to taxi networks X and Y. Entity A provides services to third parties only when there is no need to service cars belonging to taxi networks X and Y. Services provided to third parties are incidental and immaterial to Entity A. Entity A charges Entities X and Y based on work done for those respective parties and this never is 50/50.
Income statement of Entity A for year 20X1 shows the following results (you can scroll these tables horizontally if they don’t fit your screen):
|Revenue from Entity X||100|
|Revenue from Entity Y||80|
|Expenses incurred |
services to Entity X
|spare parts expense||(20)|
|allocation of other direct expenses||(10)|
|Expenses incurred |
services to Entity Y
|spare parts used||(15)|
|allocation of other direct expenses||(9)|
|General administrative expenses (not allocated)||(30)|
In order to see the accounting from A to Z, let’s assume that Entity A distributed also its net income of $6 million to its owners through dividends. Distribution of dividends is made equally between joint operators according to their interest in Entity A.
The accounting by Entity X for the joint operation results in the following figures reported in the financial statements of X:
|initially recognised |
|IFRS 11 adjustment||Accounting under IFRS 11|
|invoices from Entity A||(100)||100||-|
|dividends from Entity A||3||(3)||-|
|spare parts expense||-||(20)||(20)|
|allocation of other|
As we can see, Entity X does not recognise any revenue with respect to the joint operation.
Acquisitions of interests in joint operations
Transactions with a joint operation
Gains and losses resulting from transactions with a joint operation are recognised only to the extent of the other parties’ interests in the joint operation (IFRS 11.B34).
When an entity purchases assets from its joint operation, it does not recognise its share of the gains and losses until it resells those assets to a third party (IFRS 11.B36).
Accounting for interest in a joint operation without joint control
When an entity participates in, but does not have joint control of, a joint operation, it may still have rights to the assets, and obligations for the liabilities, relating to it. If this is the case, it accounts for its assets, liabilities etc. in accordance with general rules applicable to joint operations set out in paragraphs IFRS 11.20-22 and discussed above (IFRS 11.23).
It may of course be the case that such an entity does not have rights to the assets, and obligations for the liabilities of a joint arrangement. If so, other IFRS apply (e.g. IAS 28, IFRS 9).
Separate financial statements
Accounting for joint operations in separate financial statements is essentially the same as in consolidated financial statements (IFRS 11.26). This may pose some problems in practice when a joint operation is structured through a separate vehicle, as this requirement will often require to perform an additional ‘consolidation’ that will include in its scope only the joint operator and its joint operations.
Continuous reassessment and changes in classification of joint arrangements
Paragraphs IFRS 11.13 and IFRS 11.19 require continuous reassessment of the existence of joint control and the classification of the joint arrangement. The reassessment may be triggered by a change in ownership structure, change of contractual terms, change of legal form of the joint arrangement or change in other facts and circumstances.
Accounting for instances when a former subsidiary or a ‘regular’ equity investment (e.g. a 5% interest) becomes a joint venture, or additional interest is acquired without changes in classification, is covered in accounting under the equity method.
When a joint venture becomes a ‘regular’ equity investment or is disposed of completely, entities need to discontinue using the equity method and recognise appropriate gain or loss. Accounting for discontinuing the use of the equity method is covered in IAS 28.
When a joint venture becomes a subsidiary, IFRS 3 applies, which deals also with previously held interest.
Acquisitions of initial interests in joint operations
When an entity acquires an initial interest in a joint operation in which the activity of the joint operation constitutes a business (as defined in IFRS 3) it applies, to the extent of its share in accordance with paragraph IFRS 11.20, all of the principles on business combinations accounting in IFRS 3 and other IFRS (IFRS 11.21A).
This rule applies also if an existing business is contributed to the joint operation on its formation by one of the parties that participate in the joint operation. However, this rule does not apply to the formation of a joint operation if all of the parties that participate in the joint operation only contribute assets or groups of assets that do not constitute businesses (IFRS 11.B33B).
When a joint operation is not a business as defined by IFRS 3 (e.g. it is a single asset), the asset acquisition accounting should be applied.
See Examples 7 and 8 accompanying IFRS 11 and the examples below.
Example: acquisition of interest in a joint operation
Entity A pays $100 million to acquire 50% shares in existing Entity X which is a business as defined by IFRS 3. The selling company previously held 100% shares. Entity A concludes that the Entity X is a joint operation. Entity A determines that the fair value of Entity’s X net assets is $160 million. Entity A incurred also transaction costs of $3 million.
The following entries are made by Entity A with respect to its 50% share in the joint operation:
|Fair value of |
net assets of X (50%)
Example: contribution of assets to a joint operation
Entities A and B established a separate vehicle that is a joint operation – Entity X – which is a business as defined by IFRS 3. Both Entities have 50% interest and rights to assets in the same proportion. Entity A contributes a property to Entity X with a fair value of $100m and carrying amount of $90m. Entity B contributes assets with a fair value of $40m together with employees and experience in the industry. Transaction costs incurred by Entity A amounted to $3m.
The following entries are made by Entity A:
|Fair value of |
net assets of X (50%)
|Gain on disposal |
of property (1)
(1) Gain on disposal of property is recognised only in 50%, i.e. with respect to the share in Entity X attributable to Entity B.
(2) Balancing figure. Can be calculated as follows:
|180||total consideration grossed up|
|140||FV of assets of Entity X|
|20||50% of the difference attributable to Entity A|
|5||Gain recognised on disposal of property|
* consideration grossed up to 100% interest (2x carrying value of property given)
Joint operation becomes a subsidiary
When an entity acquires control over joint operation that constitutes a business as defined by IFRS 3, it should account for the transaction as a business combination achieved in stages. Consequently, any previously held interest should be remeasured as per IFRS 3 requirements.
A former subsidiary becomes a joint operation
There are two common ways in which a subsidiary can become a joint operation: a parent sells its interest or contributes its subsidiary to a joint operation over which it gains joint control (and loses control of this subsidiary).
As a rule, when losing control of a subsidiary, entities need to remeasure the retained interest at fair value. However, the retained interest in a joint operation is the entity’s share in assets and liabilities of the former subsidiary which were already included in consolidated financial statements. Therefore, in my opinion, the entity should derecognise the assets and liabilities over which the control was lost, but the retained assets and liabilities should not be remeasured as they will be kept in the statement of financial position. This issue is not explicitly covered in IFRS 10 or IFRS 11, besides general criteria for accounting for loss of control in IFRS 10 linked to above.
Joint operation becomes a joint venture, an associate or a financial asset
When a joint operation becomes a joint venture, an associate or a financial asset, there are no specific provisions relating to accounting treatment. For sure, an entity needs to derecognise its assets and liabilities, including its share in those.
I my opinion, a new interest should be accounted for according to IAS 28 (associate) or IFRS 9 (financial assets), which is at fair value of consideration given. See the discussion on what ‘at cost‘ means. The difference between the carrying amount of net assets derecognised, the fair value of consideration received and the fair value of the interest retained, is recognised in P/L.
When a joint operation becomes a joint venture simply due to change of classification (e.g. change of contractual arrangement between operators), without any changes in interest held by an entity, there should be no gain or loss on disposal. The value at initial recognition of interest in the joint venture equals the value of net assets previously recognised with respect to joint operation. Again, this is not covered in IFRS.
IFRS 12 is a comprehensive standard that covers all disclosure requirements relating to interests in other entities.