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IFRS 11 – Acquisition of interest in a joint operation (new)

Date recorded:

The Committee received a request to clarify the accounting by venturers for the acquisition of interests in jointly controlled operations or assets as specified in IAS 31 Interests in Joint Ventures, superseded by the recently issued IFRS 11 Joint Arrangements, and the accounting by joint operators for the acquisition of interests in joint operations as defined in IFRS 11 when the activities and assets underlying the jointly controlled operations or assets, or the joint operation, constitute a business.

The staff presented analysis noting that paragraph 21 of IFRS 11 requires joint operators to account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRSs applicable to the particular assets, liabilities, revenues and expenses. The staff also noted that IFRS 3 Business Combinations is the applicable IFRS for the recognition of goodwill.

In addition, the staff noted that IAS 31 does not give guidance on the accounting by venturers for acquisitions of interests in jointly controlled operations or assets. However, any amendment to IAS 31 or interpretation on this issue that the Committee might develop to clarify the accounting in accordance with IAS 31would not become effective before 1 January 2013 when IFRS 11 replaces IAS 31.

The majority of the Committee also expressed concern over the clarity of paragraph 21 of IFRS 11. Specifically, and similar to yesterday's discussion regarding defining a business under IFRS 3, Committee members questioned whether paragraph 21 of IFRS 11 indicated that the acquisition of an interest in a joint venture could also be considered a business acquisition in accordance with IFRS 3 (i.e., is the unit of account to be considered in evaluating paragraph 21 the activity of the jointly controlled operations and related assets, or the acquired interest controlled by the joint operator). IFRS 11, in the Committee's view, seems to indicate accounting for the business combination under a joint arrangement as if you own 100% of the related assets and liabilities and appears to leave open the question of how to account for items which would otherwise be accounted for as goodwill in a business combination. Following the goodwill component further, multiple Committee members questioned whether goodwill could be "attached" to a portion of assets / interests (under a joint arrangement), and if so, how would this goodwill value be sustained for impairment testing in the future (although other Committee members discussed historic practice where goodwill may be present in acquisition of a portion of assets based on synergies or other fact patterns).

Based on this discussion, the Committee asked that the staff bring back a proposal to provide clarity to paragraph 21 of IFRS 11 as part of the Annual Improvements Project so that the Committee could best consider an appropriate way forward on this issue.