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.