IFRS 11 — Acquisition of an interest in a joint operation
The Committee previously considered a request to clarify the accounting by venturers for the acquisition of interests in jointly controlled operations or assets in IAS 31 Interests in Joint Ventures 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 as defined in IFRS 3 Business Combinations. 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.
At its November 2011 meeting, the Committee observed that uncertainty exists in accounting for the acquisition of an interest in a joint operation and jointly controlled operations or asset in circumstances where the activity of the joint operation or the jointly controlled operations or assets constitutes a business as defined in IFRS 3. To limit expected future diversity in practice following the adoption of IFRS 11, as the Committee acknowledged that IAS 31 would be superseded by IFRS 11 from 2013, the Committee decided to require application of IFRS 3 to the particular assets and liabilities of a joint operation, including measurement of identifiable assets and liabilities at fair value with few exceptions, and recognition of the residual as goodwill.
At its January 2012 meeting, the Committee confirmed its previous decisions. The Committee directed the staff to draft a recommendation to amend IFRS 11 to address the uncertainty that exists in accounting for the acquisition of an interest in a joint operation or jointly controlled operations or assets where the activity of the joint operation or the jointly controlled operations or assets constitutes a business as defined in IFRS 3.
At this meeting, the staff presented their proposed IFRS 11 amendment wording. The staff noted that they applied a ‘general reference approach´ in detailing IFRS 3 guidance within the IFRS 11 amendments. Specifically, under a general reference approach, the staff sought to provide a general reference to the principles of business combination accounting and related disclosure requirements in IFRS 3 and other IFRSs instead of providing specific and comprehensive references in IFRS 11 to the relevant guidance on accounting for business combinations in IFRS 3 and other standards.
Committee deliberations focused primarily on the appropriateness of a general reference approach. While Committee members generally preferred a general reference approach, many Committee members preferred more thorough discussion of the applicability of principles and specific guidance in IFRS 3. For example, one Committee member noted that the staff has outlined a number of areas (e.g., guidance on accounting for reverse acquisitions in paragraphs B19-B22(d) and B25-B27 of IFRS 3, guidance on applying the acquisition method to combinations of mutual entities in paragraphs B47-B49 in IFRS 3, guidance on equity-settled share-based payment transactions of the acquiree in paragraphs B62A and B62B of IFRS 3 and guidance on insurance contracts acquired in a business combination in paragraphs 31-33 of IFRS 4 Insurance Contracts) during the January 2012 meeting where the guidance in IFRS 3 was not relevant in the accounting for interests in joint operations described herein. She preferred that the amendments specify these areas. However, other Committee members were concerned with the inclusion of this information as it was not perceived to be an all inclusive listing.
While many Committee members believed that the amendments should merely specify that the principles of IFRS 3 apply to these type transactions, other Committee members preferred that the proposed amendments detail relevant IFRS 3 principles. Specifically, these Committee members preferred that the amendments specify that all relevant principles of IFRS 3 apply, including, but not limited to measuring identifiable assets and liabilities at fair value with the exceptions given in IFRS 3 and other IFRSs, recognising acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with the exception that the costs to issue debt or equity securities are recognised in accordance with IAS 32 Financial Instruments: Presentation and IFRS 9 Financial Instruments, recognising deferred tax assets and deferred tax liabilities arising from the initial recognition of assets or liabilities, except for deferred tax liabilities arising from the initial recognition of goodwill and recognising the residual as goodwill. Similarly, several Committee members preferred to include an application example in the amendments.
When put to a vote, the Committee tentatively decided that the proposed amendments should specify the principles of IFRS 3 (as outlined above) and an application example should be included.
The staff noted that it will be circulating a final draft of the proposed amendments to the Committee for negative clearance in advance of submission to the Board for approval.