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Short term Convergence: Interests in Joint Ventures

Date recorded:

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.