IFRS 11 – Acquisition of interest in joint operation (continuing)
In May 2011, the Committee received a request to clarify the applicability of IFRS 3 by: (a) joint operators for the acquisition of interests in joint operations as defined in IFRS 11 Joint Arrangements; and (b) venturers for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 Interests in Joint Ventures in circumstances where the activity of the joint operation, or the activity of the jointly controlled operations or assets, constitutes a business as defined in IFRS 3. The Committee was asked whether the acquirer of such an interest should apply the principles in IFRS 3 on the initial recognition of the interest or whether the acquirer should instead account for it as the acquisition of a group of assets.
The Committee discussed the issue in the July 2011 meeting, with the July 2011 IFRIC Update reporting that the Committee noted that the issue raised the question of what unit of account (the joint arrangement or the interest in the joint arrangement) is to be considered for the application of IFRS 3 and whether the activities and assets related to that unit of account can constitute a business. More specifically, the question is whether, and how, to recognise goodwill, if present, on the acquisition of an interest in a joint operation as defined in IFRS 11 or jointly controlled operations or assets as specified in IAS 31. The Committee directed the staff to do further analysis on this issue with the aim of assessing whether the issue could be solved through annual improvement.
The staff concluded from its analysis of the issue that IFRS 3 is the IFRS applicable to the particular assets and liabilities arising from the acquisition of an interest in a joint operation if the joint operation includes a business as defined in IFRS 3. The staff noted that significant uncertainty (and therefore diversity) exists in accounting for the acquisition of an interest in jointly controlled operations or assets as specified in IAS 31 in circumstances where the activity of the jointly controlled operations or assets constitutes a business as defined in IFRS 3. This is because there is no explicit guidance in IAS 31 for such transactions. The staff expects that this significant diversity in practice will continue under IFRS 11 unless the Committee or the Board provide some kind of clarification. However, the staff also noted that some of the guidance in IFRS 3 would not be applicable to the acquisition of interests in joint operations. For example, the acquirer of an interest in a joint operation does not recognise non-controlling interests in the acquiree; it only recognises its share of the assets and liabilities related to its interest in the joint operation, not the shares of the other parties to the joint operation.
To avoid significant diversity in practice continuing after the adoption of IFRS 11, the staff recommended developing application guidance for IFRS 11 on this issue. This guidance could explain how to account for the acquisition of an interest in jointly controlled operations or assets in circumstances where the activity of the jointly controlled operations or assets constitutes a business as defined in IFRS 3. The application guidance would clarify which guidance in IFRS 3, and which guidance related to business combinations in other standards such as IAS 12 Income Taxes, should be applied in accounting for this kind of transaction. The staff felt that such application guidance could be introduced to IFRS 11 by an annual improvement because it is clarifying the requirements of IFRS 11.
To address the issue above, several Committee members suggested that the scope exemption of IFRS 3 be modified to exclude joint arrangements. These Committee members noted that either forming or acquiring joint activity under IFRS 11 could give rise to potential goodwill and noted that the measurement attributes in IFRS 3 is different from IFRS 11. Some Committee members noted that given that the forming or acquiring of joint activity does not result in a business combination, goodwill should not be recognised. Rather, the excess would either be absorbed in cost or as a potential intangible. Several other Committee members disagreed with this view and noted that goodwill could arise and IFRS 3 could be applied by analogy. The Committee asked for the issue to be brought back and for the staff to explore the alternatives further and include worked examples.