IASB publishes limited scope amendment proposals for IFRS 11
The International Accounting Standards Board has published ED/2012/7 'Acquisition of an Interest in a Joint Operation (Proposed Amendment to IFRS 11)', the latest in a series of proposed narrow scope amendments to IFRSs. The Exposure Draft proposes to amend IFRS 11 'Joint Arrangements' to clarify that a joint operator accounts for the acquisition of an interest in a joint operation which is a business by applying IFRS 3 'Business Combinations' and other relevant standards.
IFRS 11, and IAS 31 Interests in Joint Ventures which it replaces from 1 January 2013, currently do not provide specific guidance on how a joint operator should account for the acquisition of an interest in a joint operation where the activity of the joint operation constitutes a business.
As a result, diversity in practice has arisen, with accounting outcomes depending on whether the transactions is considered a business combinations or acquisition of groups of assets. The differences in treatment between the two approach include the recognition or non-recognition of goodwill and deferred taxes, and the capitalisation or expensing of acquisition-related costs.
The issue was initially considered by the IFRS Interpretations Committee, which considered proposing an annual improvements to IFRS 3 or developing application guidance, before deciding on proposed amendments to IFRS 11.
The amendments would clarify that IFRS 3 and other relevant standards would be applied to acquisitions of interests in joint operations that are businesses. Accordingly, such acquisitions would be accounted for using the acquisition method under IFRS 3, to the extent of the joint operator's interest in the joint operation, resulting in:
- measuring most identifiable assets and liabilities at fair value
- expensing acquisition-related costs (other than debt or equity issuance costs)
- recognising deferred taxes
- recognising any goodwill or bargain purchase gain.
The amendments would apply to the acquisition of an interest in an existing joint operation and also to the acquisition of an interest in a joint operation on its formation, unless the formation of the joint operation coincides with the formation of the business. No specific guidance is provided in relation to the acquisition of an additional interest in a joint operation in which the acquirer already has an interest.
The ED also proposes a consequential amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards to extend and clarify the operation of the business combination exemptions in Appendix C, so that they include past acquisitions of interests in joint operations in which the activity of the joint operation constitutes a business.
The amendments, if finalised as proposed, would be applied on a prospective basis only, in order to avoid the use of hindsight.
ED/2012/7 is open for comment until 23 April 2012. Click for IASB press release (link to IASB website).