IFRS 11 — Acquisition of interest in joint operation
The Committee previously received a request to clarify the applicability of IFRS 3 Business Combinations by (1) joint operators for the acquisition of interests in joint operations under IFRS 11 Joint Arrangements and (2) venturers for the acquisition of interests in jointly controlled operations or assets under IAS 31 Interests in Joint Ventures, when the activity of the joint operation or the activity of the jointly controlled operation or assets constitutes a business as defined in IFRS 3. Specifically, the Committee was asked whether the acquirer of such an interest 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 staff presented their analysis with respect to whether guidance in IFRSs exists to account for the acquisition of an interest in a joint operation that constitutes a business under IFRS 3. The staff noted that in practice, there appears to be three approaches used in accounting for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 when the activity constitutes a business. The first approach is a IFRS 3 approach where identifiable assets and liabilities are measured in accordance with IFRS 3 and the residual amount is recognised as goodwill. The second approach is the 'cost approach' where the total cost is allocated to the individual identifiable assets and liabilities on a relative fair value basis such that any premium is allocated out to the identifiable assets. The third approach is the 'combination approach' in which the identifiable assets and liabilities are measured at fair value and the residual amount is recognised as a separate asset (i.e., goodwill). This approach is based on the cost approach but utilises guidance in IFRS 3 to issues not addressed in other IFRSs.
At this meeting, Committee members expressed a general preference for applying an IFRS 3 approach without significant debate. However, some Committee members preferred that the specific question raised in the submission be addressed more broadly by clarifying how IFRS 11 Joint Arrangements should be applied. This concern was primarily in the area of determining whether proportionate consolidation was still a possibility in IFRS 11 in relation to acquired joint operations; to which it was noted by the staff that the Board's intention was not to allow proportionate consolidation for joint operations.
As the majority of Committee members expressed a preference for IFRS 3 application, Committee members were asked how this clarification should be addressed in IFRSs. While the staff initially recommended drafting an interpretation on this issue to closely align the requirements in applicable IFRSs, most Committee members preferred amending IFRS 11. The Committee asked the staff to consider possible amendment wording (effectively saying if the acquisition of an interest in a joint operation that constitutes a business under IFRS 3, apply IFRS 3 in the accounting for the acquisition of interests in jointly controlled operations or assets) and to bring back that wording to a future meeting.