Joint Arrangements

Date recorded:

The Board discussed matters related to transition and disclosure. Before those issues were addressed the Chairman pro tempore raised an issue noted in the cover note to the papers for the meeting about conflicts identified between IAS 28 and SIC-13. The staff noted that the joint arrangements project would not address the conflicts (at least not now) because the issue reflected a conflict within the equity method itself and whether it was a valuation method (in which case inter-company transactions, etc would not be eliminated) or a form of consolidation (in which case such transactions would be eliminated). The staff was aware of the issue but did not wish to delay finalising the joint arrangements material.

Transitional arrangements

Jointly-controlled entity proportionate consolidated (IAS 31) to be a Joint Venture accounted for using the equity method (IFRS)

The staff noted that ED9 proposed retrospective application: some constituents criticised this but other evidence suggested that moving from proportionate consolidation to the equity method was not overly onerous. However, the staff proposed a 'simplified procedure' that would collapse the proportionate consolidation assets into a 'net investment' number that would form the 'deemed cost' of the investment for equity accounting purposes, subject to the usual impairment tests.

Several Board members were uncomfortable with this proposal. They did not like creating an exception from retrospective application and could not see the difficulty in 'reverse engineering' the equity accounting number for the earliest period presented. The investor/venturer already had the information, so determining the amount at which the x% investment in the joint venture should be recognised would not be difficult. Impairment should be recognised when it fell and should not be buried in the opening adjustment to retained earnings.

Other Board members raised concerns about the effect of partial dispositions in the period between the earliest period presented and the end of the reporting period, and about the effect of a joint venture being in a net liability position and the consequences for the equity method. A Board member noted that if a venturer's interest in a joint venture on a proportionate consolidation basis was a net liability position, it probably indicated that real liabilities existed in the venture.

The Board did not support the staff recommendation. However, they did support (unanimously) a modified retrospective approach, under which the IFRS would be applied retrospectively to all periods presented, with any catch-up adjustments, including the effects of any impairment occurring in periods prior to those presented being recognised in the earliest period presented (that is, not buried in opening retained earnings).

The Board agreed (by majority) to require disclosure of the breakdown of the investment balance of the opening balance of the investment for the period in which the IFRS is first applied. Disclosures should be in aggregate for all Joint Ventures (as defined in the IFRS).

Jointly-controlled entity accounted for using the equity method (IAS 31) to be a Joint Operation for which the entity recognises its (share of) assets and liabilities (IFRS)

Again, the staff recommendations were not supported by the Board. In particular, Board members objected to recognising goodwill on a transaction that was not a business combination.

Some Board members thought that the population of such situations was small enough to be silent and let preparers figure things out on their own; however, having raised the issue, a straight-forward approach was best. Again, full retrospective adjustment was not necessary and the adjustments should be limited to the earliest period presented.

After a lively debate, the Board agreed (unanimously) that in the situation under debate, the equity accounting carrying amount at the date of transition would be allocated to assets and liabilities on a reasonable basis. Although relative fair value might be an appropriate basis, the IFRS should not prescribe any particular basis.

Jointly-controlled entity proportionate consolidated (IAS 31) to be a Joint Operation (IFRS)/Jointly-controlled asset/ operation under both IAS 31 and IFRS

The Board agreed that in this situation no special transitional requirements were necessary.

Separate financial statements

The Board agreed to clarify that the accounting for interests held by an entity in joint operations will be the same in the party's separate, individual and consolidated financial statements. In addition, IAS 27 will be amended such that the requirements for the accounting for investments in joint arrangements in the separate financial statements of the parties refer exclusively to the 'joint ventures' type of arrangement.

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