IFRS 11 — Acquisition of an interest in a joint operation
For this topic, the staff presented the recommendations of the Interpretations Committee to the IASB members.
The Interpretations Committee received a request to clarify the applicability of IFRS 3 Business Combinations by:
- joint operators, for the acquisition of interests in joint operations as defined in IFRS 11 Joint Arrangements in circumstances in which the activity of the joint operation constitutes a business as defined in IFRS 3 (joint operations that are businesses); and
- venturers, for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 Interests in Joint Ventures in circumstances in which the activity of the jointly controlled operations or assets, constitutes a business as defined in IFRS 3 (jointly controlled operations or assets that are businesses).
More specifically, the Interpretations Committee was asked whether the acquirer of such interests should apply the principles in IFRS 3 on initial recognition of the interest or whether the acquirer should instead account for it as the acquisition of a group of assets. The Interpretations Committee discussed this request for clarification most recently in their March 2012 meeting.
The Interpretations Committee concluded that the most appropriate approach to account for the acquisition of an interest in a joint operation that is a business was to apply the relevant principles for business combinations in IFRS 3 and other IFRSs. The Interpretations Committee favoured the IFRS 3 approach over the cost approach as it leads to the separate recognition of goodwill which, as an asset, better reflects the economic substance of the transaction. The Interpretations Committee also favoured the IFRS 3 approach as fair valuing the identifiable assets and liabilities will produce more comparable and understandable information. The Interpretations Committee rejected the combination approach as such an approach might be seen as “cherry-picking” from the IFRS 3 approach and cost approach.
On behalf of the Interpretations Committee, the staff presented a recommendation to the IASB members. The Interpretations Committee recommended to the IASB that new guidance, as part of a limited-scope project, was developed on IFRS 11 on accounting for the acquisition of an interest in a joint operation as defined in IFRS 11, in circumstances in which the activity of the joint operation constitutes a business as defined in IFRS 3 (a joint operation that is a business) on the basis of the business combinations guidance in IFRS 3 and other IFRSs. The new guidance would only address the accounting for an interest in a joint operation when the joint operation is formed and there is an existing business that is contributed or where the acquisition of the interest is in an existing joint operation that is a business. The limited-scope project would not, therefore, address the accounting for an interest in a joint operation when the joint operation is formed and this coincides with the formation of the business.
The staff presented the Interpretation Committee’s illustrative draft amendment to IFRS 11 and asked whether the Board had any comments. It was noted that there would be no amendment to IAS 31 Interests in Joint Ventures, as any new guidance on this issue would have an effective date after 1 January 2013, when IFRS 11 supersedes IAS 31. It was proposed to the IASB Board members that this amendment to IFRS 11 would be applied prospectively as there could be problems (determining the acquisition date fair value of the intangible assets acquired and of the liabilities assumed as part of the acquisition of the interest in the joint operation) for those that had previously accounted under a cost approach if retrospective application was applied.
The staff also asked the Board members whether they agreed that the comment period on the amendments (within an Exposure Draft) should not be less than 120 days and on a proposed amendment to paragraph C5 of IFRS 1 to include acquisitions of interests in joint operations that are businesses (to avoid the confusion over the applicability of the transition relief exemptions for business combinations to the acquisition of interests in joint operations that are businesses).
One Board member questioned the identification of the diversity in practice that had been observed as this was based on IAS 31 as IFRS 11 is not yet effective. He also questioned whether, there would be many situations where accounting for interests in joint operations as a business would arise under IFRS 11 given that IFRS 11 reduces the notion of joint operations being a business and more businesses will be joint ventures under this standard (hence questionning the requirement for additional guidance under IFRS 11). The staff noted that the observers still felt that this diversity would be prevalent under IFRS 11 and hence guidance was still thought necessary.
Another member had a preference for the combination approach rather than the IFRS 3 approach. He noted that this would be a simpler approach to apply.
All IASB members tentatively agreed with the Interpretations Committee recommendations and the proposed amendments to IFRS 11. They also tentatively agreed that the comment period should be not less than 120 days.