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JOINT VENTURES REDEFINED IFRS 11: JOINT ARRANGEMENTSWhy Does IFRS 11 Matter to Me?• This standard has broad application, dealing with two or more parties having joint control of

a contractual arrangement. It requires diff erent accounting treatments depending on whether the arrangement is classifi ed as a joint operation or a joint venture.

• If you have joint ventures under IAS 31, you may fi nd the application of IFRS 11 confusing because IFRS 11 has similar concepts to IAS 31, but uses diff erent terms:

ISSUE 002 | JUNE 2012

Reporting AlertIFRS

This publication was originally published by The Canadian Institute of Chartered Accountants in 2012. It has been reissued by Chartered Professional Accountants of Canada.

Old IAS 31

Joint Ventures

If separation is overcome by legal form, contractual arrangement or

other facts and circumstances, then they are called…

Jointly Controlled Operations

Jointly Controlled Assets

Jointly Controlled Entities

Is replaced by...

Are called...

Are called...

Are called...

If separation is maintained, then they are called...

New IFRS 11

Joint Arrangements

Joint Operations

Joint Ventures

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• The equity method will be the only accounting option available for arrangements classified as joint ventures under IFRS 11. IFRS 11 has eliminated the option of using proportionate consolidation for arrangements classified as joint ventures.

• These changes are anticipated to be particularly relevant for real estate, mining and oil and gas companies, where joint arrangements of various kinds are commonly used.

When Is IFRS 11 Effective?• For annual periods beginning on or after January 1, 2013.• Early adoption is permitted if the entire set of consolidation standards (IFRS 10, 11, 12 and revised

IAS 27 and 28) are adopted at the same time.

Method of adoption: The new accounting treatment is applied at the beginning of the earliest period presented, and may require adjustments to retained earnings at that date.

What Are the Basics of IFRS 11?What is IFRS 11?IFRS 11 categorizes joint arrangements as either joint ventures or joint operations and prescribes the accounting treatment accordingly.

What is a joint arrangement?• A joint arrangement is defined as a contractual arrangement where two or more parties have

joint control.

• Joint control exists when decisions about the relevant activities require unanimous consent of all parties that collectively control the arrangement. Relevant activities are defined as the activities that significantly affect its returns.

What is the difference between a joint operation versus a joint venture under IFRS 11?• In a joint operation, the parties have rights to the arrangement’s assets, and obligations for its

liabilities. In a joint venture, the parties have rights to a share of the arrangement’s net assets and net outcome.

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What factors determine whether an arrangement is a joint operation versus joint venture under IFRS 11?• If an arrangement is not structured through a separate vehicle, the arrangement is a joint

operation.

• Structuring through a separate vehicle does not necessarily mean that an arrangement is a joint venture under IFRS 11. A number of factors and circumstances need to be considered such as:

— Legal form of the separate vehicle — Contractual terms of the joint arrangement — Other facts and circumstances such as rights, risks and rewards affecting parties involved in

the arrangement.

• Under IAS 31, the establishment of a separate legal vehicle was considered to be a key factor in determining the existence of a jointly controlled entity. Under IFRS 11, however, this would not hold true in determining the existence of a joint venture.

What are the accounting implications?• In a joint operation, the parties have rights to the arrangement’s assets, and obligations for its

liabilities. The accounting treatment reflects their interests in these specific assets and liabilities and in the arrangement’s revenue and expenses.

• In a joint venture, the parties have rights to the arrangement’s net assets as a whole. The account-ing treatment reflects this by treating the arrangement as a single investment, measured using the equity method. Proportionate consolidation is not an option for joint ventures under IFRS 11.

Where are the disclosure requirements?• IFRS 12 Disclosure of Interests in Other Entities is a new standard that specifies the minimum dis-

closures that must be provided for all forms of relationships with others. The disclosure changes from IFRS 12 are covered in CICA Reporting Alert IFRS 12: Disclosure of Interests in Other Entities.

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What Are The Key Changes?The most significant changes from IAS 31 and SIC-13 to IFRS 11 are as follows:

IFRS 11 IAS 31 and SIC-13

Two types of arrangements:• Joint operations: includes arrangements formerly

known as jointly controlled operations and jointly controlled assets under IAS 31

• Joint ventures: generally equivalent to the con-cept of jointly controlled entities under IAS 31, although some jointly controlled entities may be joint operations under IFRS 11

Factors in determining the existence of a joint venture include:• Legal form of separate vehicle• Contractual terms of arrangement• Other facts and circumstances

If there is no separate vehicle, the arrangement is automatically a joint operation.

Three types of arrangements:• Jointly controlled operations• Jointly controlled assets• Jointly controlled entities

The establishment of a separate legal vehicle was considered a key factor in determining the existence of a jointly controlled entity.

• Joint operations accounting is relatively similar to IAS 31: you would apply joint operations accounting, which involves directly recognizing your share of the assets and liabilities, revenues and expenses related to the joint operations.

• Most significant change has occurred in joint venture accounting: you would use the equity method of accounting only. Proportionate consolidation is not an option for joint ventures under IFRS 11.

• Jointly controlled operations: recognize assets controlled, liabilities incurred, share of revenue and expenses incurred directly

• Jointly controlled assets: recognize share of assets, liabilities incurred, share of liabilities, share of income, share of expenses and expenses incurred directly

• Jointly controlled entities accounting options: Proportionate consolidation or equity method.

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How Does This Impact My Business?

Manage Your Business – Key Areas to Consider• What is the impact on the financial statements?

— Your interest in a jointly controlled entity that was recognized using the equity method under IAS 31 will be accounted for by recognizing your interest in the various assets, liabilities, revenues and expenses if it is classified as a joint operation under IFRS 11.

— Your interest in a jointly controlled entity that was recognized using proportionate consolidation under IAS 31 will be accounted for using the equity method if it is classified as a joint venture under IFRS 11.

— Transitional adjustments are required for changes in accounting for existing arrangements.

It is important to note that the adoption of IFRS 11 will not change the accounting for most arrangements. The following discussions on the impact of the adoption of IFRS 11 are relevant only to those arrange-ments for which adoption results in a change in accounting.

• Does this impact key performance metrics? — Key performance metrics may be impacted when:

» a company that recognized its interest in an arrangement using proportionate consolidation in accordance with IAS 31 is required by IFRS 11 to account for its interest using the equity method; or

» a company that recognized its interest in an arrangement using the equity method in accor-dance with IAS 31 is required by IFRS 11 to recognize its interest in the various assets, liabilities, revenues and expenses directly, according to their nature.

— Examples of key performance metrics that may be impacted include: current ratio, working capital and debt-to-equity ratio.

• What is the impact of adopting IFRS 11 on contractual arrangements? — Loan covenant compliance — Bonuses, compensation plans or share-based payment vesting options if they are based on

specific numbers in the financial statements — Structuring of future contracts

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• How do these changes affect data collection? Can your current system and processes provide the needed information?

— Joint arrangement agreements need to contain processes to ensure sufficient appropriate infor-mation is provided on a timely basis for the preparation of financial statements. Keep in mind, if an arrangement’s basis of accounting changes, procedures will need to be amended to sup-port changes in presentation. In some cases, additional financial information may be required; for example, the assets and liabilities held within joint operations may not previously have been identified on a quarterly basis. In turn, controls and procedures will need to be modified to ensure the reliability of this information.

• Outside of the financial statements, how should we communicate the impact of the changes? — In the MD&A — To investors and analysts — Press releases

• Are there any regulatory or legal implications? — The most common impact may again be on certification and control reporting. As with any

change in accounting requirements, IFRS 11 may prompt changes in controls and thus require revisions in the existing certification process.

What’s My Action Plan? Key MilestonesKey steps to consider:• Think about existing procedures for identifying your interests in joint arrangements. This encom-

passes all situations in which you have joint control over those arrangements.

• Establish a process to analyze each of these interests, and classify it either as a joint operation or as a joint venture under IFRS 11.

• Do an inventory of your existing joint arrangements as well as contemplated future arrangements.

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• Review your listing of arrangements to identify any changes in classification and resulting accounting treatment.

• Assess the availability of IFRS-compliant financial information for the joint arrangement, sufficient to appropriately account for your interests in a joint operation’s assets, liabilities, revenue and expenses; or to apply the equity method of accounting for your interests in joint ventures under IFRS 11.

• Review financial reporting impact and disclosure requirements as set out in IFRS 11 and 12. Refer to the CICA Reporting Alert IFRS 12: Disclosure of Interests in Other Entities which covers the disclosure changes.

• Draft revised financial statements and notes.

• Determine MD&A disclosures and impact on key metrics.

• Assess the implications for contractual arrangements — consider modifying agreements if necessary. For example, some entities may want to modify the contracts governing their joint arrangements to remove aspects of financial support or other elements that blur their interpretation as joint ventures under IFRS 11.

• Assess the adequacy of existing controls and procedures. For example, monitor your arrange-ments on an ongoing basis to identify developments that might change the analysis.

• Consider education and training available on this topic.

ResourcesNeed more information? CICA has compiled some external resources to help you understand and apply IFRS 11.

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APPENDIX A:

KEY IMPACTS FOR SMALLER ENTITIESInteraction between IFRS 10, 11, 12 and IAS 28On May 12, 2011, the International Accounting Standards Board (IASB) completed its improvements to the accounting requirements for off -balance sheet activities and joint arrangements by issuing IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements and IFRS 12 Disclosure of Interests in Other Entities. IAS 28 Investments in Associates and Joint Ventures was amended for the issuance of IFRS 11. The following diagram illustrates the interaction between IFRS 10, 11, 12 and IAS 28.

Control alone

Consolidation in accordance with IFRS 10

Disclosures in accordancewith IFRS 12

Joint control?

Defi ne type of joint arrangement in accordance with IFRS 11

Signifi cant infl uence?

Account for assets, liabilities, revenues and expenses

Account for an investment in accordance with IAS 28

IFRS 9

Disclosures in accordance with IFRS 12

Disclosures in accordance with IFRS 12

Yes No

Yes No

Yes NoJoint Operation Joint Venture

Overview of IFRS 11IFRS 11 addresses arrangements subject to joint control: that is, a contractually agreed sharing of con-trol, existing when decisions about the arrangement’s relevant activities (the activities that signifi cantly aff ect its returns) require the unanimous consent of the parties sharing control. IFRS 11 categorizes joint arrangements as either joint ventures or joint operations and prescribes the accounting treatment based on the type of arrangement.

In a joint operation, the parties with joint control have rights to the arrangement’s assets, and obli-gations for its liabilities. The accounting treatment in their fi nancial statements refl ects their interests in these assets and liabilities, and in the arrangement’s revenue and expenses. In a joint venture under IFRS 11, they have rights to the arrangement’s net assets as a whole. The accounting treatment refl ects this by treating the venture as a single investment, measured using the equity method. Proportionate consolidation is not an option for joint ventures under IFRS 11.

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Using hypothetical questions and answers, the following table illustrates some of the issues most likely to apply to smaller companies in applying IFRS 11. The table is intended only for general guidance and does not substitute for directly consulting the Standard and accompanying materials.

We have an arrangement with another party that we refer to as a “joint venture.” The arrangement didn’t involve setting up a separate legal entity or vehicle, but we do have a contract which defines our mutual responsibilities. How do we account for this?

IFRS 11 specifies that a joint arrangement not structured through a separate vehicle is a joint operation, not a “joint venture”. You account for your interest in the joint operation’s assets, liabilities, revenues and expenses in accordance with the IFRSs applying to those items. For example, if you control some of the assets used in the arrangement and the other party controls the others, then your financial statements recognize only your own assets. If you share a particular asset and operate it jointly, then your financial statements recognize your share of that asset. Similarly, you recognize liabilities on the basis of the obliga-tions applying to you, and recognize revenue and expenses on the basis set out in the contract.

We have a 50/50 “joint venture” arrangement with another party, and we established a separate legal entity to carry out the joint venture’s activities. At the same time, for clarity, we and the other party signed a contract specifying that each of us is responsible for funding 50% of the joint venture’s costs and expenses, and that each has a 50% interest in its assets and revenues. How do we account for this?

IFRS 11 specifies that a joint arrangement not structured through a separate vehicle is not a “joint venture”; however, the converse is not necessarily true. Not every arrangement that is structured through a separate vehicle is a joint venture under IFRS 11. The facts and circumstances must be reviewed to determine if a joint venture under IFRS 11 exists. In this case, the vehicle’s legal form is consistent with creating a joint venture under IFRS 11, but the contract overrides this by reestablishing your direct interest in its assets and revenues and your direct obligation for its liabilities and expenses. The arrangement is treated then as a joint operation, consistent with the previous answer.

We have a 50/50 “joint venture” arrangement with another party, and we established a separate legal entity to carry out the joint venture’s activities. Our interest is in the shares of the joint venture; we have no direct interest in the underlying assets and liabilities. We have a 50% share in the venture’s profit or loss, which will be distributed periodically in accordance with our arrangement. How do we account for this?

You have created a separate legal entity and you have a defined right to the net assets, but not to any specific asset, and you have no specific obligation for any specific liability. Therefore, you account for your interest as a single investment, not by its individual elements. IFRS 11 requires applying the equity method.

Our situation is identical to that in the previous question. Additionally, we and the other party to the arrangement are its only customers; we established the entity to ensure ourselves a stable supply of a key manufacturing component. We carry out all transactions at market prices. Does this change the answer?

Yes, most likely. If the entity has no external customers, then in substance it satisfies all its liabilities with the cash flows it receives from you and the other party. IFRS 11 states that if the parties to the arrangement are substantially the only source of cash flows contributing to the continuity of its operations, then they have an obligation for its liabilities and the arrangement doesn’t bear any credit risk or other risks typical of a stand- alone operation. Consequently, you treat this as a joint operation, not as a joint venture under IFRS 11. If the arrangement has a minimal or restricted volume of activity with external customers, it is more likely the arrangement is a joint operation. The facts and circumstances of each arrangement should be consid-ered when determining whether an arrangement is a joint operation or joint venture under IFRS 11.

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Our situation is similar, except that the arrangement sells to a range of external customers, rather than to us or the other party to the arrangement. On this basis, it is a joint venture under IFRS 11. However, we do provide guarantees to some of the arrangement’s key suppliers. Does this change the analysis?

IFRS 11 specifies that providing such guarantees doesn’t by itself make a joint arrangement a joint operation. As the previous item discusses, the determining feature is whether the parties to the arrangement have an obligation for its liabilities. Providing a guarantee doesn’t itself create an obligation, any more than providing a guarantee in other circumstances for someone else’s liabilities inherently makes them your liabilities. Therefore this is a joint venture under IFRS 11.

Under the terms of our agreement with the other party, some aspects of the arrangement’s activities require both our consents. However, other aspects of its activities require the consent of only one of us, or neither of us. How do we decide whether this is a situation where joint control exists?

The concept of joint control flows from the concept of control defined in IFRS 10. First, apply the concept in IFRS 10 to determine whether you and the other party, considered collectively, control the arrangement. If you do, then consider whether this control requires the unanimous consent of you and the other party. Key to this is whether the activities requiring unanimous consent are the activities significantly affecting the arrangement’s returns. For example, depending on the circumstances, the arrangement might require unanimous consent about the investee’s operating and capital decisions, including budgets; and about appointing and remunerating its key management personnel or service providers and terminating their services or employment. If the agreement requires the consent of both you and the other party on these matters, then it’s likely that you jointly control the investee.

Under IAS 31, we’ve been using proportionate consolidation to account for our joint venture. Now, with IFRS 11 replacing IAS 31, we are required to move to the equity method of accounting for joint ventures. Is it possible we could trigger an impairment? What is the transition process?

Outlined below is a process to follow when transitioning from proportionate consolidation to the equity method of accounting for your joint venture under IFRS 11:

Recognize your investment in the joint venture under IFRS 11 as at the beginning of the earliest period presented.• Measure your investment

— The initial investment is equal to the aggregate of the carrying amounts of the assets and liabilities you previously proportionately consolidated, including any goodwill arising from acquisition.

— If the goodwill previously belonged to a larger cash-generating unit, or to a group of cash - generat-ing units, then allocate goodwill to the joint venture under IFRS 11 on the basis of the relative carrying amounts of the joint venture under IAS 31 Interests in Joint Ventures and the cash-generating unit or group of CGUS to which it belonged.

— Note that the initial recognition exception does not apply to deferred tax assets and liabilities under IAS 12 Income Taxes when moving to the equity method of accounting for an investment.

— If aggregating those previous amounts results in negative net assets, then recognize a liability only if you have legal or constructive obligations in relation to the negative net assets. Otherwise, adjust retained earnings at the beginning of the earliest period presented to eliminate the liability, and disclose this fact.

— Disclose the breakdown of the amounts that were aggregated to make up the investment cost as at the beginning of the earliest period presented.

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• Review and test the investment for impairment — Review for impairment indicators as described under IAS 39 Financial Instruments: Recognition

and Measurement.

— If indicators exist, then test for impairment using IAS 36 Impairment of Assets. Note that since good-will forms part of the carrying amount of the investment, it is not tested for impairment separately. Instead, the entire carrying amount of the investment is tested as a single asset.

— Consider when to adopt IFRS 13 Fair Value Measurement and how IFRS 13 impacts the fair value calculation — it can be adopted prospectively or early adopted. IFRS 13 is effective January 1, 2013.

— Recognize any impairment loss as an adjustment to retained earnings at the beginning of that earli-est period presented. Since the impairment loss on transition is not considered part of the deemed cost of the investment, any impairment loss recognized can be reversed in later periods through profit and loss, if the reversal criteria are met.

• Apply the equity method of accounting, as described in IAS 28, for the investment in the joint venture under IFRS 11 after initial recognition.

Under IAS 31, we’ve been using the equity method to account for our “joint venture.” Now with IFRS 11 replacing IAS 31, we’ve determined it is a joint operation, and must recognize our interests in its separate assets and liabilities (we previously recognized our interest in this arrangement using the equity method). What is the transition process?

• Derecognize the investment as at the beginning of the earliest period presented.

• Recognize your share of each of the joint operation’s assets and liabilities based on the contractual agreement and relevant IFRSs.

• Recognize any goodwill that formed part of the carrying amount of the equity-accounted investment.

• If the net amount of the assets and liabilities, including any goodwill, is higher than the investment you previously accounted for using the equity method, this difference would then reduce goodwill relating to the investment. Any remaining difference would increase retained earnings at the beginning of the earliest period presented.

• If the net amount of the assets and liabilities, including any goodwill, is lower than the investment you previously accounted for using the equity method, this difference would then reduce retained earnings at the beginning of the earliest period presented.

• Disclose a reconciliation of the amounts previously and newly recognized, showing any difference adjusted against retained earnings.

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DisclaimerCICA Reporting Alerts provide an orientation to matters in an accounting standard or securities regulation, focused on the needs of smaller public company CFOs and audit committee chairs. Reporting Alerts are prepared by the Guidance and Support group at The Canadian Institute of Chartered Accountants (CICA) in consultation with CICA’s Small Company Advisory Group. They have not been approved by any Board or Committee of the CICA and neither CICA nor the authors accept any responsibility or liability that might occur directly or indirectly as a consequence of the use, application or reliance on this material.

copyright Copyright © 2012 The Canadian Institute of Chartered Accountants

We find proportionate consolidation useful in conveying the overall scope of our activities. Can we continue to provide this information on a supplemental basis?

For each joint venture under IFRS 11 that is material to the reporting entity, an entity is required by IFRS 12 to disclose summarized financial information for the joint venture (in total, not for the reporting entity’s share) including, but not necessarily limited to:• current assets• non-current assets• current liabilities• non-current liabilities• revenue• profit or loss from continuing operations• post-tax profit or loss from discontinued operations• other comprehensive income• total comprehensive income.

In addition to this summarized financial information, an entity is required by IFRS 12 to disclose for each joint venture under IFRS 11 that is material to the reporting entity the amount of:• cash and cash equivalents• current financial liabilities (excluding trade and other payables and provisions)• non-current financial liabilities (excluding trade and other payables and provisions)• depreciation and amortization• interest income• interest expense• income tax expense or income.

Keep in mind:• The summarized financial information presented for a joint venture under IFRS 11 in accordance with

IFRS 12 represents the exact same amounts included in the IFRS financial statements of the joint venture. It does not represent your share of those amounts.

• The disclosure of summarized financial information for a joint venture under IFRS 11 is not limited to the disclosures listed in IFRS 12. You can disclose additional information about the joint venture under IFRS 11 if you believe it enables users of your financial statements to evaluate the nature, extent and financial effects of your interest in the joint venture under IFRS 11.