Approach Agreed at April 2003 Board Meeting
This project is being conducted in partnership with the Australian Accounting Standards Board (AASB). The AASB is conducting preliminary research for a re-examination of IAS 31. The project focuses on two major issues:
- The definitions of joint ventures and jointly controlled entities.
- The method(s) of accounting by investors in such entities.
The project team proposed to remove 'contractual arrangement' from the definition, arguing that some joint ventures could exist by taking a 50% equity interest without a specific contract. The Board disagreed, and re-affirmed that the contractual arrangement is essential because it establishes joint control and all of the other attributes of the joint venture. The Board proposed that the project team should focus its work on the distinction between joint venture and shared interests.
Regarding the method(s) of accounting by investors, several points were noted:
- Proportionate consolidation leads to a conceptual problem on the balance sheet side, because the investor reports in its balance sheet assets that it does not control.
- On the other hand, if proportionate consolidation is prohibited, the equity method will be applied for two very different types of investments: associates (in which the investor has only significant influence) and joint ventures (in which the investor has joint control).
The Board expressed the view that the accounting treatment should not depend of the legal form, but on the substance. The Board proposed that the project team explore further a method of accounting that cusses on what it is that a joint venturer controls and what kind of rights the venturer has.
As this project cannot be finished by March 2004, the Board suggested that the project team work on accounting for associates in parallel with joint ventures. The Board agreed (by vote of 10 to 4) that proportionate consolidation should be eliminated from IAS 31 and that the project team should go further with the expansion of equity method, considering in particular presentation on the balance sheet and in the income statement.
Discussion at July 2004 IASB Meeting
The staff recommended that:
a. the short-term project on joint ventures, whose objective is to achieve convergence in the accounting for interests in jointly controlled entities, be conducted by the IASB's and FASB's joint Convergence project team.
b. the longer-term and more fundamental review of joint venture arrangements be conducted as a research project by the Joint Ventures research team lead by the Australian Accounting Standards Board (AASB) with help from the standard-setters in China/Hong Kong, Malaysia, and New Zealand.
The Board tentatively agreed to remove the short-term convergence project and ask the AASB to accelerate the research project. The staff were requested to discuss this with the AASB, to obtain a revised timetable so that more Board meeting time could be made available for the project, and to consider the issue at the first available meeting, possibly November. In addition the staff should consider what amendments could be made particularly in the area of disclosures.
July 2004: Joint Venture Survey
The FASB website reports that the International Accounting Standards Board is conducting a research project that is the first phase of a longer-term effort to improve IAS 31 Interests in Joint Ventures. The Australian Accounting Standards Board is leading a team of standard setters from Hong Kong, Malaysia, and New Zealand that are conducting the research project. As a first step in the research, a joint venture questionnaire was developed as a way of identifying the various structures of joint arrangements used worldwide. In some cases where two or more parties invest in an undertaking together, these arrangements have the characteristics of, and are classified under IFRSs as, joint ventures. In other cases, they are classified under IFRSs as investments in associates. Under US GAAP, these types of investments are generally classified as equity-method investments, although some may be variable interest entities. The survey is intended to elicit information on these types of investments regardless of how they are currently accounted for. Click for a copy of the Joint Ventures Survey (PDF 199k). The information provided through this questionnaire will be used for research purposes only and will be treated confidentially. Responses are requested by 28 July 2004.
Discussion at the November 2004 IASB Meeting
At its July 2004 meeting the Board considered a paper in which the staff recommended that:
- any short-term convergence project on joint ventures should be conducted by the Short-term Convergence project team.
- the longer-term and more fundamental review of joint venture arrangements should continue to be conducted as a research project by the Joint Ventures research team.
The Board considered the merits of a short-term project intended to eliminate the option in IAS 31 with certain Board members expressing support for the removal of proportionate consolidation as it is not supportable under the Conceptual Framework.
The Board agreed to proceed with this project, which would consider elimination of the option.
The other issues related to the joint venture project would be dealt with in the long-term project.
Discussion at the December 2005 IASB Meeting
The short-term convergence project proposes to eliminate proportionate consolidation consistent with the Roadmap agreement. However, the IASB staff has considered and taken into account some of the early work developed by the AASB in its long-term research project on joint ventures as useful background information.
The Board agreed with the staff's view that the short-term convergence project be limited to requiring the application of the equity method for all interests in joint-venture entities (that is, eliminating proportionate consolidation as an option in IAS 31). In the staff's view proportionate consolidation is not consistent with the Framework's criteria for asset and liability recognition. Board members indicated their reservations with equity accounting as currently applied as it does not provide sufficient information. However, the Board indicated that they did not want to tackle, at this point, the differences between equity accounting and consolidation.
Some Board members believe that despite this being a short-term project, it would be useful for the Board to explore the issue of differentiating joint ventures and undivided interests. Attached to this is the question of whether substantive guidance can be developed to distinguish jointly controlled assets or operations and jointly controlled entities.
Discussion at the March 2006 IASB Meeting
The staff made a presentation on the objectives of this project and the project plan.
The objective of this session was to provide the Board with an update on the work of the definition stage of the project; discuss some questions brought forward by the staff; and decide on the direction of future work on the project in light of the IASB's decisions in relation to the short-term convergence project.
At the December 2005 meeting, the Board had asked the staff to explore whether substantive guidance could be developed to distinguish jointly controlled assets or operations and jointly controlled entities. At this stage of the project, the staff had addressed classification of joint arrangements for accounting purposes by proposing to divide arrangements into:
- non-integrated resource arrangements in which the participants continue to hold direct rights in assets contributed and assume direct responsibilities for obligations arising from the joint economic activity. In this case, each participant primarily pursues its own economic activity within the arrangement to achieve its own specific objectives
- integrated resource arrangements, where rights in assets and responsibilities for liabilities reside with the joint arrangement itself, which utilises them to achieve its own separate objectives. The arrangement is a separate entity carrying on an economic activity of its own. It has a separate decision making identity.
Classification as integrated/non-integrated arrangement would be based on an analysis of the specific features in the arrangement as described in the bullets above. Furthermore the staff introduced some indicators that should give additional guidance on whether a joint arrangement exists.
The Board had a lengthy discussion, which did not take a clear path. It was rather obvious that the Board had no consensus on how they wanted to pursue the definition issue. However, Board members expressed their concern about the proposed model, and how it defined whether a joint venture could exist or not, and it was clear that the Board did not agree with the starting point of the staff, that existence of a joint venture should be defined by whether the arrangement is set out in a separate entity or not (this is in accordance with statements the Board have made at previous meetings). Rather the Board seemed to think that a joint venture would be defined based on the nature of the contractual arrangement.
Board members discussed the various scenarios set out in the staff paper and indicated that it was difficult to articulate what are the key differences between an undivided interest and a joint venture.
The Board also discussed the approach to joint control. Board members expressed that the first question that needed to be asked, before defining whether a joint venture exists, is whether the arrangement is jointly controlled. If the arrangement is not jointly controlled by the parties involved, no special accounting rules should apply. It was expressed that this concept had to be explored further and integrated in the decision process for whether you define the arrangement as a joint venture or not.
The Board also reiterated the fact that the project should not be over-complicated as the primary objective in the short-term convergence project was to get rid of proportionate consolidation as an accounting option in IAS 31.
It was decided that the staff should go back and redraft their papers based on the discussion the Board had during this session and bring them back at a later meeting.
Discussion at the July 2006 IASB Meeting
In December 2005, the Board decided to remove the option in IAS 31 Interests in Joint Ventures that allowed interests in jointly controlled entities to be proportionately consolidated. By removing this option, an investment in a joint venture 'entity' would need to be accounted for using the equity method. However, to implement that decision, the Board requested that the staff should clarify the definition of a joint venture and the difference between an interest in a joint venture entity and a direct interest in assets or liabilities of a joint arrangement.
The Board agreed, at a conceptual level (subject to exploring the practical application), that participants interests in a joint arrangement be classified as either direct interests or indirect interests in the underlying assets and liabilities. Some Board members believe this is a positive move towards a principle based classification instead of the current requirement in IAS 31 which are in effect a free choice between three alternatives.
The Board agreed that in certain circumstances where participants have indirect interests in a mere contractual arrangement (that is, not an incorporated entity or partnership), such interests should be accounted for by the equity method.
The Board agreed not to impose additional disclosure requirements on joint venturers without first undertaking a more comprehensive analysis of user needs. Such an analysis would be better undertaken as part of the longer term project.
At the March meeting there was some discussion about the impact of whether the outcome of the arrangement's operation is distributed in kind and the product is a commodity traded on an active market. The Board agreed that whether or not the output is traded on an active market is not relevant for the nature of the participant's interests in the arrangement. If the elements defining an indirect interest are met it does not matter whether the output is tradeable or not on an active market. The Board noted however that where entitlement is to physical quantity, this may be an area where the legal form of the arrangement is closely aligned with the substance.
In concluding this discussion, some Board members noted that the proposals made are an improvement to IAS 31 and it is up to the FASB to move towards the new guidance being developed in the interests of convergence.
Discussion at the November 2006 IASB Meeting
The Board was given a very short oral update on feedback that the staff had received on this project when it discussed the tentative decisions that the Board made at its July 2006 meeting with preparers and users.
The Board stated that the comments received will not change the direction (tentative decisions made in July) of the project and the staff should continue its work to bring a draft proposal back to the Board at a later meeting.
Discussion at the April 2007 IASB Meeting
The staff used this session to introduce the approach they had adopted in drafting the proposed amendments to IAS 31, and to discuss examples intended to illustrate the application of the Board's decisions regarding the definition of a joint venture.
In addition to proposing the principal change of eliminating the proportionate consolidation method for joint venture entities, the Board will take the opportunity to rearrange IAS 31 to make it more logical and to clarify the language. As it did with the exposure draft of proposed changes to IAS 8 in the 2002 Improvements Project, the ED of IAS 31 will be presented as 'clean text' with a table of concordance, rather than use extensive 'mark-up' text, which might obscure the changes in principle being made.
The Board affirmed their proposed approach to accounting for contractual arrangements that 'establish shared decision-making over the activities of a joint arrangement.' Board members noted that there was an inconsistency between the flow chart (paragraph 9 of the Observer Note 9 on IASB Website) and the staff proposals. Both should refer to rights to individual assets and obligations for individual liabilities, rather than the phrase used in the flow chart. The Board agreed the approach outlined by the staff.
The Board discussed the examples (see Observer Note 9). Example 1 was agreed without discussion. The staff proposed to withdraw Example 3 but to include certain variations to Example 2 (joint interests in an asset). Examples 4, 5 and 6 were discussed briefly and minor changes proposed. Examples 7 and 8 (relating to extractive activities) attracted more attention. Constituents as well as Board members had proposed changes, so these examples will be comprehensively re-written. Board members wanted to the examples to demonstrate that the imposition of a company structure can have accounting effects; however, the presence of a company is not determinative. That is, not all jointly-owned companies are 'joint ventures' and joint asset and joint operation arrangements can be carried on through companies.
Discussion at the June 2007 IASB Meeting
The Board discussed several sweep issues identified in drafting the exposure draft of proposed amendments to IAS 31 Interests in Joint Ventures (ED).
Disclosures in IAS 31
The staff proposed to require similar disclosure requirements of interests in joint ventures in IAS 31 as would be required for associates in IAS 28 Investments in Associates given that the ED requires an entity to account for both joint ventures and associates by using the equity method.
The proposed disclosure requirements in the ED would read as follows (the reference to disclosure requirements of the current standards was added in brackets):
"41 A venturer shall make the following disclosures relating to interests in joint ventures:
(a) a list and description of interests in significant joint ventures and the proportion of ownership interest held; [carried forward from IAS 31 paragraph 56. Also required for interests in joint ventures measured at fair value in accordance with IAS 39]
(b) summarised financial information of joint ventures, including the venturer's interest in the amount of each of current assets, non-current assets, current liabilities, non-current liabilities, revenues and profit or loss. This disclosure is presented in total for all joint ventures; [carried forward from IAS 31 paragraph 56 with some changes]
(c) the reporting date of the financial statements of a joint venture, when such financial statements are used in applying the equity method and are as of a reporting date or for a period that is different from that of the venturer, and the reason for using a different reporting date or different period; [new disclosure consistent with IAS 28 paragraph 37]
(d) the nature and extent of any significant restrictions (for instance, resulting from borrowing arrangements or regulatory requirements) on the ability of joint ventures to transfer funds to the venturer in the form of cash dividends, or repayment of loans or advances; [new disclosure consistent with IAS 28 paragraph 37. Also required for interests in joint ventures measured at fair value in accordance with IAS 39]
(e) the unrecognised share of losses of a joint venture, both for the period and cumulatively, if a venturer has discontinued recognition of its share of losses of a joint venture. [new disclosure consistent with IAS 28 paragraph 37]
42 A venturer shall classify interests in joint ventures accounted for using the equity method as non-current assets. The venturer shall disclose separately its share of the profit or loss of such joint ventures, and the carrying amount of those interests. The venturer shall also disclose separately its share of any discontinued operations of such joint ventures. [new disclosure consistent with IAS 28 paragraph 38]
43 A venturer shall recognise directly in equity its share of changes recognised directly in the joint venture's equity. The venturer shall disclose its share of those changes in the statement of changes in equity as required by IAS 1 Presentation of Financial Statements. [new disclosure consistent with IAS 28 paragraph 39 - note: the wording of this disclosure will change when the amendments to IAS 1 are final]
44 A party shall disclose the aggregate amount of the following commitments separately from other commitments:
(a) any capital commitments of the party relating to its interests in joint arrangements; and
(b) its share of capital commitments incurred jointly with other parties. [carried forward from IAS 31 paragraph 55(a); paragraph 55(b) deleted. Also required for interests in joint arrangements measured at fair value in accordance with IAS 39]
45 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity shall disclose:
(a) any contingent liabilities incurred relating to its interests in joint arrangements; and
(b) its share of contingent liabilities incurred jointly with other parties. [carried forward from IAS 31 paragraph 54(a); paragraph 54(b) and (c) deleted because the disclosure requirements of paragraph 54(b) and (c) are incorporated within the disclosure requirements of paragraph 54(a) reproduced here as paragraph 45(a)]"
The Board made the following decisions:
- Paragraphs 41(b) to 41(d), 44. and 45 above were unanimously agreed without further discussion.
- The Board also agreed to paragraph 41(a) above and noted that a similar disclosure should be required in IAS 28. It was decided to propose a consequential amendment in the ED and explicitly ask for comments.
- In connection with paragraph 41(e) above the Board had a lengthy discussion on the accounting treatment of losses occurring after the investment has been written down to zero. Two Board member were severely concerned about the fact that unrecognised losses can arise under the equity method and one of these Board members indicated to dissent to the ED for that reason. Finally, the Board agreed that all unrecognised losses should be disclosed and agreed to paragraph 41(e) above.
- With regard to paragraph 42 above the Board questioned whether the statement that a venturer shall classify interests in joint ventures accounted for using the equity method as non-current assets would be correct in all circumstances. The issue was pushed back to the staff.
- Paragraph 43 above was not discussed.
- In addition, the Board decided to delete paragraphs 37(h) and 37(i) of IAS 28 as consequential amendments.
Transitional provisions
The Board decided to require retrospective application of the proposed amendments. It was noted that the information required to account for interests in joint ventures using the equity method should be the same as that required to apply proportionate consolidation.
Incorporation of SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers
Subject to some editorial amendments the Board agreed to incorporate the consensus of SIC 13 by adding the following paragraph to the ED:
"When a venturer contributes a non-monetary asset to a joint venture in exchange for an equity interest in the joint venture, a venturer recognises in its financial statements a gain or loss resulting from the transaction only to the extent of unrelated investors' interests in the joint venture except when:
- (a) the venturer retains control of the contributed asset;
- (b) the gain or loss resulting from the transaction cannot be measured reliably; or
- (c) the transaction lacks commercial substance, as described in IAS 16 Property, Plant and Equipment.
If (a), (b), or (c) applies, a venturer offsets the unrecognised gain or loss against its investment in the joint venture."
Conclusion
One Board member indicated an intention to dissent to the Exposure Draft for the reason that the application of the equity method can result in unrecognised losses. One Board member was indecisive and stated that he might dissent for the same reason.
Discussion at the July 2007 IASB Meeting
The Board discussed a sweep issue raised by one Board member on review of the pre-ballot draft of the proposed amendments to IAS 31 Interests in Joint Ventures (ED).
The ED stipulates that on loss of joint control the investor should remeasure to fair value any remaining investment in the former joint venture and recognise a gain or loss. As the ED will propose to require the use of the equity method for interests in joint ventures the question arose whether the investor should be required to remeasure to fair value regardless of whether it recognises its investment using the equity method both before and after remeasurement.
The following views were discussed:
View 1: Loss of joint control is a significant economic event
The wording of the Board's decision when amending IAS 27 Consolidated and Separate Financial Statements supports the view that it is appropriate to remeasure an investment in a joint venture whenever the investor loses joint control, regardless of whether the basis of accounting changes at that time. The loss of joint control is a significant economic event that changes the nature of an investment. Joint control is established by contractual arrangement. For a venturer to lose joint control, the venturers must change the terms of the contractual arrangement. That change of contractual terms would represent a significant economic event, and therefore, it is appropriate to remeasure any remaining investment in the venture, even if that investment continues to be accounted for using the equity method.
View 2: Remeasurement should result from a change in basis of accounting
The ED gives guidance on how to determine whether a joint arrangement is a joint asset, joint operation or joint venture, or a combination of these. If, according to IAS 31, a venturer has an interest in a joint venture the venturer applies the equity method as described in IAS 28 Investments in Associates. It would appear inappropriate to require remeasurement of that investment (and the recognition of a gain or loss) when the change in the nature of an investment does not result in any change in the basis for accounting.
Those Board members in favour of view 1 noted that they would accept view 2 for practical reasons in order to get out the ED quickly. One Board member expressed the view that the equity method would not be appropriate for accounting for both associates and joint ventures but that 'we have to live with it in the short term'.
The Board decided not to require re-measurement of an interest when joint control is lost but an equity interest is retained. This decision was essentially pragmatic. The Board did not want to suggest that a change in basis of accounting was a trigger for remeasurement.
Format of the ED
The Board decided that the forthcoming exposure draft should be exposed as a Draft IFRS and not as amendments to IAS 31.
September 2007: Exposure Draft Published for Comment
On 13 September 2007, the IASB published for public comment Exposure Draft 9 proposing to replace IAS 31 Interests In Joint Ventures with a new standard to be titled Joint Arrangements. The Exposure Draft is available for download on the IASB's website during the comment period. Comment deadline is 11 January 2008.
Click for Press Release (PDF 66k).
Definition of joint arrangement
A joint arrangement is a contractual arrangement whereby two or more parties undertake an economic activity together and share decision-making relating to that activity. Joint arrangements include joint assets, joint operations, and joint ventures.
Substance over form approach
The ED proposes that the legal form of an arrangement should not be the most significant factor in the determination of the appropriate accounting for the arrangement. This is unlike the approach taken under IAS 31 which is closely aligned to the legal structure of joint venture arrangements, with only jointly controlled entities being singled out for equity accounting
(or proportionate consolidation).
Proposals in the ED
The ED proposes that s party to a joint arrangement should:
- recognise its contractual rights and obligations (and the related income and expenses) in accordance with applicable IFRSs.
- recognise both the individual assets to which they have rights and the liabilities for which they are responsible, even if the joint arrangement operates in a separate legal entity.
- recognise an interest in a joint venture (that is, an interest in a share of the outcome generated by the activities of a group of assets and liabilities subject to joint control) using the equity method. Proportionate consolidation would not be permitted.
The ED also proposes new requirements for disclosing information about joint arrangements, subsidiaries, and associates, including a description of the nature of joint arrangements and summarised financial information relating to an entity's interests in joint ventures.
Deloitte's IFRS Global Office has published a special edition IAS Plus Newsletter on Proposed Changes to Accounting for Joint Ventures (PDF 116k). The newsletter discusses Exposure Draft ED 9.
Discussion at the April 2008 IASB Meeting
The staff presented an analysis of the comment letters received on the exposure draft ED 9 Joint Arrangements (the ED). The staff pointed out that the majority of respondents (approximately two-thirds) were not supportive and disagreed with different aspects of the exposure draft. The main concerns were:
- The changes introduced are too far reaching, in particular, many respondents believed that the reference to 'rights to use' an asset and the elimination of proportionate consolidation require further research and should not be addressed in a short-term project.
- The proposed changes to the terminology, definitions of types of joint arrangements, the accounting treatment based on recognition of contractual rights and obligations and the elimination of proportionate consolidation are not adequately justified in the Basis for Conclusion.
- The elimination of proportionate consolidation. This appeared to be the single most problematic area. Many respondents disagreed with its removal mainly for the following reasons:
- Proportionate consolidation offers more useful information and provides a better reflection of the economic substance of the arrangements. These respondents were of the view that management decision making and risk management are based on a detailed understanding of the underlying operations, assets, liabilities, cash flows and risks, and not on the share of net outcomes.
- The elimination of proportionate consolidation will lead to the same accounting treatment for 'joint control' and 'significant influence', which was considered inappropriate.
- The ED does not offer compelling arguments for its removal.
- The removal of joint control from the definition of joint assets and joint operations lessens the importance of joint control and does not reflect the essence of these joint arrangements.
- A number of important concepts in the accounting for joint arrangements are currently being deliberated and reviewed in other active IASB projects, for example, 'control' (Consolidation project), the 'definition of assets and liabilities' (Conceptual Frameworks project) and 'rights of use' (Leases project). These respondents highlighted that completion of these other projects was necessary before making changes to current practice. It would avoid the new IFRS being based on concepts and principles that might be subject to change.
Consequently, these constituents stated that the ED does not achieve its objectives and will not enhance financial reporting. Many of the constituents disagreeing with the ED suggested the postponement of the new IFRS on joint arrangement until the issues raised have been resolved in a broader project.
The Board's discussion predominantly focussed on the comments received regarding the elimination of proportionate consolidation.
Some Board members acknowledged that the elimination of proportionate consolidation will result in a loss of information for users. One Board member noted that proportionate consolidation better enables users to project future cash flows whereas applying the equity method collapses all information in one number.
However, a majority of Board members gave more weight to consistency with the framework. These Board members stated that it is not appropriate to recognise assets, liabilities, income and expenses when the venturer is merely entitled to a share of the outcome of the underlying activities but not the assets and liabilities themselves. Consequently, if the entity has a share in the output (joint ventures) it should apply the equity method; if it has a share in the asset/liability (joint assets and joint operations) it should recognise its share in that asset/liability.
With respect to the elimination of the proportionate consolidation method, the Board decided to proceed with the ED as currently drafted, in particular, not to further elaborate whether the equity method is the most appropriate method to account for joint ventures. However, the Board acknowledged that the rationale for the Board's decisions should be made clearer.
In addition the Board decided to take the following steps before finalising the project:
- Go back to certain constituents to ensure that the Board understood the concerns correctly. The Board intends to primarily contact users and representatives of certain industries such as extractive industries. In this context analysts should be asked what information will be lost on elimination of proportionate consolidation.
- Based on the outcome of the consultations to take into consideration requiring additional disclosures when the equity method is applied in order to compensate for any losses of information.
Discussion at the May 2009 IASB Meeting
Joint Control instead of Shared decision-making
The staff introduced the session by noting that the definitions in ED 9 were criticised by a significant majority of respondents for not placing enough emphasis on 'joint control'. Respondents observed that the term had disappeared from the definition of 'joint arrangement' and that 'joint control' was no longer related to the other types of arrangement (ie 'joint assets' and 'joint operations'). In addition, there was concern about how 'shared decision-making' was intended to operate and about the fact that both terms 'shared decisions' and 'joint control' as defined in ED 9 did not include the term 'strategic' in their definitions.
The staff admitted that they were split; some preferring to retain this distinction because control of an entity is different from control of an asset.
However, some staff are of the view that it is confusing to introduce two terms (ie 'shared decisions' and 'joint control') with similar meaning (ie, requirement of unanimous consent for strategic decisions) depending on whether the arrangement is a 'joint operation/asset' or a 'joint venture'. They also think that there are strategic operating and financing decisions related to arrangements that are joint assets or operations such as approving the budget, designing employment contracts, approving external borrowing, etc. These staff members are also of the view that 'joint control' is a term that expresses the IASB's intention better than 'shared decision-making': that the 'control' over the activities that are the subject of the arrangement is shared among the parties of the arrangement. The matters that give the parties 'control' over the activities of the arrangement need to be determined based on the requirements of IAS 27.
The Board was firmly of the view that shared decision-making was the key determinant of joint operating arrangements. Joint operating arrangements could include 'joint operations' or 'joint ventures' or both (see below).
A Board member was very concerned that two key factors in IAS 31 should be retained in the IFRS: that a characteristic of all joint arrangements was the presence of a contractual agreement over shared decision-making; and that unanimous consent over strategic financial and operating decisions. The IFRS should not change these words unnecessarily.
After further discussion, the Board agreed that it should modify the definition of 'joint arrangement' to:
- Agreements that establish the terms by which two or more parties agree to undertake and jointly control an activity.
The Board also agreed that the definition of joint control should not change unnecessarily from that in IAS 31.
Two types of joint arrangement instead of three
The Board agreed that the IFRS should describe two types of joint arrangement (that is, 'joint operations' and 'joint ventures') instead of three, as stated in ED 9 (that is, 'joint operations', 'joint assets', 'joint ventures'), noting that:
- in many instances, joint arrangements have elements of both types of arrangements (ie, joint assets that are jointly operated by the parties of the joint arrangement). The classification of this type of arrangements between 'joint operations' or 'joint assets' is difficult since elements from both types of arrangement are present;
- 'Joint operations' and 'joint assets' are types of joint arrangement that share common features: the parties to both types of arrangements have interests in assets, liabilities, revenues and expenses. Therefore, from an accounting point of view, both arrangements result in the same accounting outcome.
The Board agreed that this will allow aligning the number of different types of joint arrangement (ie, 'joint operation' and 'joint venture') with the two possible accounting requirements (ie, recognition of assets, liabilities, revenues and expenses; or recognition of an investment in the joint arrangement).
Hybrids (that is, two different types of joint arrangements within the same joint operating agreement)
The Board agreed that two types of joint arrangement (i.e., joint operations and joint ventures) can be the subject of a single joint operating agreement.
Determining the type of joint arrangement: 'rebuttable presumption' or 'open assessment'?
The Board debated whether it was possible to define a rebuttable presumption that would trigger a consistent and appropriate classification of whether a joint arrangement was a joint operation or a joint venture (or whether it had elements of both). Board members were concerned that they would not be able to develop an operational distinction.
A Board member noted that the contractual agreement establishing the joint arrangement would define the rights and obligations of the parties (that is why it was vital to have the 'contractually agreed sharing...' in the definition of joint control). A careful reading of the agreement should lead to the correct classification of the activities. This would pre-suppose an 'open assessment' approach. While not disagreeing with this view, another Board member noted that such an approach might be at odds with recent developments in US GAAP.
The Board agreed that joint arrangements that are not established through a separate entity would be 'joint operations'.
They also agreed that the IFRS should adopt an indicator approach (open assessment) to assessing the classification of joint arrangements that are established in entities separate from the parties to the joint arrangement. ('Entities' in this context is to be understood in a manner consistent with the definition of a 'reporting entity' in the IASB's current Conceptual Framework project.)
'Investors' in joint arrangements
The Board had an initial discussion of whether and how to address the issue of 'investors' in a joint venture - that is, those participants in a joint arrangement that do not have joint control over the activities that are the subject of the joint arrangement.
The Board did not agree with the staff recommendation, in particular their suggestion that 'Investors in a joint venture shall account its investment in accordance with IAS 39 or, if they have significant influence in the joint venture, in accordance with IAS 28', which they thought was unhelpful.
Board members noted that investors should be recording their 'beneficial interest' in the joint arrangement: something not addressed in IAS 39 or IAS 28. In addition, the Board needed to think more about what the beneficial interest represented: was it an interest in the assets and liabilities of the joint arrangement or in the net income of that joint arrangement? The accounting would be quite different.
The staff closed the discussion, saying that it would reconsider its recommendations in light of the Board's advice and would return to the Board at a later date.
A final topic, "clarification of the accounting requirements for 'joint operations/assets'", was deferred.
Discussion at the June 2009 IASB Meeting
Redeliberation of ED 9 – Parties to Joint Arrangements that do not share in 'joint control'
The Board discussed whether the final standard should refer in some manner to parties to joint arrangements that do not share in joint control and, if so, how such parties should account for their interests. Respondents to ED9 had suggested that there was diversity in practice and the Board wished to clarify what they thought the appropriate accounting should be.
After discussion, the Board agreed that the final standard should acknowledge that a party to a joint arrangement might not have joint control. Such participants should account for shall account for their assets, liabilities, revenues and expenses, including their share of any assets, liabilities, revenues and expenses arising from the joint operation. A cross-reference for investors in 'joint ventures' (as now defined) to guidance in IAS 39 (or IAS 28) might be necessary.
Clarification of the accounting requirements for 'joint operations'
Unit of account and nature of the assets and liabilities to be recognised
Respondents to ED9 had challenged the Board's conclusions on certain aspects of the unit of account, especially in relation to its decision to eliminate the proportionate consolidation method (ED9, BC8-BC10), when compared to its other conclusions on the unit of account (e.g. ED9 BC18).
The Board noted that BC8-BC10, and in particular BC9 were conclusions specifically related to its conclusions related to the unsuitability of the proportionate consolidation method. In determining the accounting for joint operations, the Board intended that participants in such arrangements would account for the assets, liabilities, revenues and expenses that were contributed to the joint operation. Such items would be defined in the terms of the joint operating agreement, which would specify the rights and obligations of the joint operating agreement parties. The accounting should follow those rights and obligations. The over-all effect might look like proportionate consolidation, but it was fundamentally different.
The Board agreed that the basis for conclusions accompanying the final standard should describe the Board's conclusions about when it is appropriate for an entity to account for its share of assets/ liabilities and when to account for an investment rather than focusing on the elimination of the proportionate consolidation method.
Nature of the assets and liabilities to be recognised
The Board agreed that the final standards should clarify the accounting requirements in relation to the nature of the assets and liabilities to be recognised by the parties in 'joint operations' to be 'shares of assets/liabilities' instead of 'rights. In doing so, the guidance in IAS 31 relating the classification of the share of assets according to their nature should be retained.
Next steps
The senior staff noted that, although the major items of ED9 had been redeliberated and resolved, the staff needed to undertake a careful review of the consequential amendments, in particular given that the consolidation standard was being redeliberated. There were potential conflicts between ED9 and other standards that needed to be analysed carefully and brought before the Board.
Discussion at the December 2009 IASB Meeting
Inconsistency between IAS 27 and SIC 13
The Board discussed the inconsistency between the requirements in IAS 27 and SIC 13 relating to the accounting for gains and losses resulting from contributions of non-monetary assets to joint arrangements. The Board was reminded that SIC 13 requires gains or losses arising from contributions of non-monetary assets to a jointly controlled entity (JCE) to be recognised only to the extent of the interest attributable to the other equity holders. Where the non-monetary asset consists of a subsidiary that is contributed to a JCE, IAS 27 requires the assets and liabilities of the subsidiary to be derecognised and gains or losses to be recognised in full in profit or loss.
Several Board members supported the proposal to incorporate the current requirements of SIC 13 in the proposed Standard on Joint Ventures, but they questioned when the inconsistency would be addressed. It was pointed out that the areas that will need to be addressed to resolve the inconsistency will require further work to be performed and may result in the clarification of the scope and interaction between IFRS 3, IAS 27, IAS 31, and IAS 28. This will most likely delay the publication of the new Joint Ventures Standard.
A short discussion followed on whether it is possible for the Board to finalise the Joint Ventures Standard and what the most appropriate way would be in which to address the inconsistency. One Board member suggested that it be included in the post-implementation review of IFRS 3 and IAS 27.
When put to a vote, the Board unanimously agreed to incorporate the current requirements of SIC 13 in the consequential amendments to IAS 28 and to resolve the inconsistency separately from the Joint Ventures project.
Consequential amendments to IAS 28
The Board discussed the requirements of paragraph 5 of SIC 13 which lists the following circumstances in which it is not appropriate to recognise a portion of a gain or loss from the contribution of a non-monetary asset to a JCE:
- significant risks and rewards of ownership have not been transferred; or
- gain or loss on contribution cannot be measured reliably; or
- the transaction lacks commercial substance.
The Board deliberated whether those requirements should be carried forward to the new Joint Ventures Standard. The Board considered that the focus of ED 9 was on a control approach as opposed to a risks and reward approach. It acknowledged that the transfer of risks and rewards was not decisive in establishing whether control exists, but only an indicator of control. The Board further considered that the requirement of reliable measurement is stated in the Framework and that is was unnecessary to repeat statements from the Framework when discussing recognition.
The Board also noted that the requirement relating to a transaction that lacks commercial substance was designed to prevent the recognition of gains where an entity enters into an artificial transaction with the intention to 'manufacture' a gain through inflated values.
The Board unanimously agreed to only incorporate this requirement and omit the other two requirements from the new Standard.
The Board considered further concerns raised by respondents to ED 9 regarding the omission of the existing requirements of IAS 31 regarding impairment losses. Several Board members noted that it was not the intention of ED 9 not to incorporate the guidance from IAS 31 and it was agreed to include the guidance in the new Standard.
Discussion at Special 10 February 2010 Joint IASB-FASB Meeting
Partial use of fair value for measurement of interest in joint ventures
In the light of the Board's agreement to amend IAS 28 to allow the use of different measurement basis when accounting for associates, the Board was asked to consider whether equivalent guidance should be included in the IFRS replacing IAS 31.
The Board did not agree with the staff's recommendation, and no resulting changes will be made in the forthcoming IFRS on joint ventures.
Discussion at the February 2010 IASB Meeting
At this meeting, the Board addressed scope section and loss of joint control section of the proposed Standard. In March, the Board will discuss transition provisions and disclosures. The Board expects publication of the final Standard at the end of the second quarter of 2010.
Scope
The Board briefly discussed a wording change in the scope paragraph of the proposed Standard that would require all entities to account for interests in joint arrangements using this Standard. The current scope exemption for investment company type venturers would be incorporated in the measurement section, that is, those entities would be still permitted to use fair value instead of the equity method.
The staff justified this change by tying to clean the standard as, currently under IAS 31, disclosures requirements of IAS 31 are required for these entities, even though they are scoped out from measurement requirements.
Some Board members felt uneasy and questioned why such a proposal is made at such a late stage. In addition they questioned the logic of consequential amendments to IAS 28, when an annual improvement is being deliberated at the same time and expressed their concerns that two changes will be made in the same 'scope' paragraph in a very short period time, potentially with two different effective dates.
One Board member expressed his preference for the current guidance as he preferred a scope exemption from two different measurement bases in the Standard.
Finally, with a bare majority of votes, the Board approved the proposed change. On the annual improvement issue, the Board noted that it would incorporate the annual improvement related to scope paragraph of IAS 28 into consequential amendments of IAS 28 when the final Joint Arrangements Standard is published, to avoid two successive changes to IAS 28 scope paragraph.
Loss of Joint Control
The Board briefly discussed the measurement requirements related to loss of joint control in particular, when a reporting entity has an investment that changes from being a joint venture to become an associate
The Board agreed that as the measurement method is maintained in this case (equity method), no remeasurement is required. One Board member suggested to clarify that this principle would apply in the reverse order as well (associate becoming a joint venture), but the Board decided to remain silent on this point and allow constituents to analogise the accounting treatment to the guidance provided.
The staff noted that partial disposal issues would be addressed at a later stage of the project.
The Board also agreed to redefine 'significant economic event' as an event that changes the nature of the investment and affects group boundaries and consequently remove all descriptions that associate loss of joint control and loss of significant influence in current standards to 'significant economic events'.
Finally, the Boards agreed that Joint Arrangement Standard should confirm that change from joint control to significant influence result in partial disposal in IAS 21 and explain the removal of 'significant economic influence' in Basis for Conclusion in IAS 21.
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