IFRS 11 - Accounting for interests in joint operations structured through separate vehicles

Date recorded:

In September 2013, The IASB discussed the accounting for joint operators in their separate IFRS financial statements for an interest in a joint operation that is housed in a separate entity. This was in response to a request from a national standard-setter (the ‘NSS’) to review how such investments are reported in the separate IFRS-financial statements of the joint operator. The IASB asked the staff to undertake additional consultations to identify real life examples of difficulties in practice to help the IASB to assess the magnitude of accounting issues in the separate IFRS-financial statements of the joint operator. This should include a consultation with the Committee.

The NSS thinks that joint operators should account, in their separate IFRS-financial statements, for their interests in joint operations that are housed in separate vehicles (whose legal form confers separation between the parties and the vehicle) in the same way as for their interests in subsidiaries.

The NSS noted that IFRS 11 and IAS 27 are inconsistent. IFRS 11 requires a party to a joint arrangement to account for its interest in a joint operation based on its share of assets, liabilities, revenue and expenses that are held or incurred jointly.

IAS 27 requires that a parent accounts for its interests in subsidiaries at cost or at fair value in accordance with IFRS 9.

View 1 is that a joint operator accounts for any interest in the equity of an entity that houses a joint operation measuring that investment at cost, fair value or using the equity method i.e. the interest is accounted for as an investment in an entity.

View 2 is that the joint operator accounts for its share in the assets held by the separate vehicle that houses the joint operation or in the liabilities incurred by it i.e. the consolidated financial statements are the same as those with the individual financial statements. This forms View 2.

Staff asked the Committee the following three questions:

  1. Is the accounting for interests in joint operations that are structured through separate vehicles in separate IFRS-financial statements (expected to be) a prevalent issue in practice?
  2. What are your views on the two different readings of IFRS 11 (View 1, and View 2) what observations did you make with respect to these two different readings?
  3. What are the examples from practice in which preparers face difficulties in applying IFRS 11 to the accounting for interest in joint arrangements that are structured through a separate vehicle?

A member started by saying that the issue is around measurement of revenue, expenses, assets and liabilities. There is no conflict between IAS 27 in the separate and consolidated financial statements.

Another member added that this is a real issue in practice which is especially prevalent in the UK. There is a conflict between the two standards and clarification is required to determine which standard to apply. IFRS 11 looks at the direct assets an entity has rights to and the obligations it is responsible for. Whereas IAS 27 focuses on the shares an entity holds. If IFRS 11 is followed then the treatment in the consolidated and separate financial statements should be the same.

A member said the correct treatment is to show the share of assets and liabilities for a joint operation only when the entity has enforceable rights and liabilities. There should not be a different accounting treatment in the separate financial statements and the consolidated financial statements.

With view 2 another issue arises in the financial statements of a joint operation, because it could be argued that there is nothing to recognise because all of the assets and liabilities have been accounted for by the parties to the joint operation.

Another member added that the challenge arises when you use the other facts and circumstances criteria to determine the accounting for the rights and obligations of each party to the joint operation.

A member said the Standard is clear that the same accounting treatment would be applied in the separate financial statements as the consolidated financial statements.

Another member spoke about control in the context of a subsidiary. In a subsidiary the parent owns shares, which are accounted for in the separate financial statements.  In a joint operation the investor should account for the assets and liabilities it controls, as the investor has rights to these. In the case of a subsidiary the parent may control it but only has rights to the dividends the subsidiary distributes and not the actual assets and liabilities. In addition, the purpose of separate financial statements is to reflect what assets and liabilities the parent has. Another member in agreement said that if the parent controlled a subsidiary through different rights other than the shareholding in that subsidiary, then in the separate financial statements, the parent would reflect these, hence it seems appropriate to apply the same principle in respect of a joint operation. 

Another member added that the legal form should be reflected in the financial statements.

The Chairman asked Staff to summarise the views and they were as follows:

  • the issue discussed above is a common issue in the separate financial statements of a joint operator;
  • there issue is widespread in practice;
  • majority of the Committee members agreed that the accounting for a joint operation should be the same in the consolidated as well as the separate financial statements;
  • if a party to a joint operation has no rights and obligations then in the separate financial statements there are no assets or liabilities to account for; and
  • View 1 does not reflect the distinction between a joint operation and joint venture in IFRS 11. View 2 does reflect the requirement of IFRS 11 but it needs clarity of rights and obligations (making clearer when you have a joint operation versus joint venture and how the rights and obligations affect the legal structure).

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