This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

IFRS 11 — Analysis of implementation issues

Date recorded:

The discussion built on the following agenda papers:

  • Agenda Paper 2A: Feedback from consultations with IASB members
  • Agenda Paper 2B: Consideration of a specific joint arrangement structure
  • Agenda Paper 2C: Accounting treatment when the joint operators’ share of output purchased differs from their share of ownership interest in the joint operation
  • Agenda Paper 2D: Consideration of next steps

Agenda Paper 2A: Feedback from consultations with IASB members

The project manager opened his slot by explaining to the Committee that the agenda paper summarised feedback from the IASB on the financial statements of a joint operation. The staff had asked the Board whether reporting the same items in the financial statements of more than one reporting entity could be appropriate. Also, the staff asked whether the reporting could be in conflict with IFRSs or the Conceptual Framework. Most IASB members agreed that items could be reported in the financial statements of more than one reporting entity. In addition some IASB members had commented that it was important to reflect the effects of the joint operators’ rights and obligations in the accounting for the joint operation’s assets and liabilities. The staff found that the feedback from the IASB was consistent with the discussions of the IC and therefore recommended to the Committee to not take this issue on its agenda.

One Committee member said that she agreed with the decision but would like to have some issues highlighted in the agenda decision. She referred to the agenda paper where it stated that the nature of the entity would be important when considering the accounting for the joint operation. She said that not everyone would understand what was meant by that. She said that the economic activities of the joint arrangement should be reflected in the financial statements of the joint operation even if these economic activities lay outside the legal entity and that therefore rights and obligations of the joint operators could be portrayed in the financial statements of the operators as well as those of the operation.

Agenda Paper 2B: Consideration of a specific joint arrangement structure

The project manager explained that this agenda paper dealt with a special structure of a joint arrangement. In the arrangement, two parties (A and B) formed a separate legal entity (C) to carry out infrastructure work for the government. In the fact pattern, parties A and B were primary obligors and not merely sureties. This was captured as ‘Feature D’ in the staff paper. The staff thought that there were two possible views on that feature and that in one view, entity C still has the primary responsibility for providing the construction service whilst in the other view, parties A and B were in the same position as Entity C as all of them were contractually obliged to provide a construction service to the government.

The project manager asked whether the Committee agreed that there could be two views of the consequences of Feature D and if yes, if the Committee agreed with the view that the parties were contractually obliged to provide construction services.

One Committee member asked what the actual contractual arrangements of Feature D were. If A and B could be held directly liable, there was only one view in his opinion. Another Committee member agreed and said it was more a principal/agent analysis in that case. One IC member commented on the analysis in the staff paper that A and B did not have ‘gross’ rights to the assets of C as they only received the net proceeds. He said that this analysis also neglected taxes. A fellow IFRS IC member said that she thought it was a matter of law whether parties to an arrangement were primary obligors. One IC member found the fact pattern to be too narrow. Another Committee member said that the analysis neglected the feature that C could hire employees and subcontractors. She said that if entity C did not act on this feature, the accounting would be straightforward as the partners would account for their shares regardless of the arrangement being a joint operation. If entity C started hiring though, it would become difficult to decide whether it was a principal or an agent.

The Director of Implementation Activities said that the substance of those activities was the key point when looking at whether the corporate veil was pierced. The performance guarantee was only one point to identify when the entity had many activities. An observing IASB member asked how much autonomy C had in directing these activities, leading the discussion back to the principal/agent issue. A Committee member agreed and said that in practice there was a difference between the words vehicle and entity as a vehicle did not necessarily have to have a legal structure. A fellow IC member said that the fact pattern stated that the parties had obligations for C to fulfil the contract not for the performance and therefore the guarantee did not remove the separation between the parties and the entity. The Chairman raised the question whether entity C had a balance sheet at all because in his view, it never had a work-in-progress. One Committee member replied that even with non-legal entities, financial statements would be prepared. The Chairman said that nonetheless, the balance sheet would only have cash and payables. Therefore he wondered why this was such a significant issue in practice. One Committee member replied that the issue was more about the income statement rather than the balance sheet.

An observing IASB member asked whether C could be an agent for A and B at the same time. One Committee member said that he did not see a reason why not. A fellow IC member said that subsidiaries were usually not agents of a parent and that this was the chosen path of the IASB when focussing on the legal status of the vehicle. She disagreed with this focus but said there was nothing that could be done.

The project manager continued with the next analysis which examined whether the parties had direct rights to the assets. He said that even if Feature D led to direct contractual obligations to construct for parties A and B they would not have direct rights to C’s assets as they would not have substantially all of the economic benefits from entity C. He also said that Features G (i.e. the government owned the work-in-progress) and H (i.e. C invoiced the government directly) indicated that A and B did not have direct rights to the assets. He asked the Committee whether they agreed with that.

One observing Board member asked whether this meant that if an entity was the contractual party, the conclusion reached by staff would always be the same. The project manager replied that this would be consistent with IFRS 11 which put the legal form first. One Committee member agreed with the conclusion. He said that it actually did matter who was the counterparty of the contract. A fellow IC member agreed.

The project manager then went on to Analysis 3, which examined the liability side, i.e. whether the parties had in substance obligations for the liabilities of C. He referred to Feature E (i.e. A and B provided guarantees to suppliers and other creditors) and Feature F (i.e. A and B were contractually obliged to provide financing to C through cash calls without limitations). Feature F would mean that A and B provided substantially all the cash flows of C and could therefore be required to settle the liabilities of C on a continuous basis. The project manager asked the Committee whether they agreed with the staff analysis that an assessment of Features E and F would involve more specific contractual requirements of individual transactions to reach a conclusion.

The Chairman replied that it would be odd to conclude that A and B did not have rights to the assets but obligations for the liabilities.

The project manager then presented Analysis 4 which dealt with legal personality and non-legal personality. He explained that non-legal personality would mean a separate vehicle but whose legal form did not constitute a separate vehicle to be considered in its own right. He said that this issue could lead to different assessments of structures that were basically identical depending on whether they were structured through a separate vehicle or not. He asked the Committee whether they agreed with this analysis.

One Committee member said she was concerned about different results for the same economic substance. The Chairman said that the economic substance of a structure changed with the introduction of a legal entity. The Senior Director for Technical Activities confirmed this by saying that an interest in a legal personality gave right to the net residual while an interest in a non-legal personality gave rights and obligations to the individual line-items. Several Committee members said they agreed with the staff’s analysis but did not like the outcome. One IC member warned that guidance to this respect could create structuring opportunities. The Chairman expressed concerns about having different outcomes on identical structures with entities just because the entity had legal standing in one jurisdiction but not in another. The Senior Director for Technical Activities replied that this would not be the same entity as the rights to the entity were different in the jurisdiction.

The project manager concluded that the analysis of the features did not by itself lead to a joint operation classification and that a full analysis would be required. Consequently, the staff did not recommend to the Committee to take the issue on its agenda. He asked the IC whether they agreed.

One Committee member said that it needed to be highlighted to the IASB that the IFRS 11 accounting answer on this issue did not necessarily reflect the economic substance of the arrangement. Another IC member said that the agenda decision should not answer the very detailed fact pattern of this issue but rather summarise the recent discussions of the Committee around that topic. A fellow IC member said that his agreement with the recommendation would depend on how the very useful discussions around IFRS 11 would be captured if not in an interpretation.

Agenda Paper 2C: Accounting treatment when the joint operators’ share of output purchased differs from their share of ownership interest in the joint operation

The project manager introduced the agenda paper by saying that the paper dealt with the question of how the assets, liabilities, revenue and expenses of a joint operation would be presented in relation to the joint operators’ interests if the parties purchased essentially all of the operation’s output. The assets and liabilities could be accounted for based on the share of output each party purchased (View 1) or based on the share of ownership of each party in the joint operation (View 2). Another question was how parties would account for the imbalance between the amount invested by each party and the amount recognised by each party for its share of assets and liabilities. From the analysis in the paper, the staff concluded that they were in View 2 and that the accounting for the difference depended on the facts and circumstances of the arrangement. They found that the accounting was consistent with the requirements in IFRS 11 and therefore additional guidance was not needed. They therefore recommended to the Committee not to take this issue onto its agenda. The project manager asked whether the Committee agreed with the recommendation.

One Committee member agreed with View 2 but had concerns that this would be an interpretation of IFRS 11. She asked what would happen if in the example the joint operation sold its output with a profit and whether this profit would then be allocated based on the share of output. A fellow IC member said that IFRS 11 lacked guidance on this issue. He disagreed with the example in the agenda paper where the imbalance was accounted for as a receivable for one party and a liability for the other. Another IC member said that it needed to be analysed why the imbalance was there and then derive the appropriate accounting from that.

One Committee member said it should be clarified that IFRS 11 did not require the accounting to follow percentage ownership. A Committee member noted that outputs were not homogeneous so it could be difficult to account based on outputs. He said that therefore the equity stake might have to be used as a proxy. One observing IASB member said that the imbalance should reverse over time as otherwise it would not be economically sensible for the parties to enter the contract. He said that if the imbalance still existed at the end of the arrangement, there would usually be payments to compensate for that. Therefore, the accounting had to follow the nature of the imbalance. Several Committee members agreed.

Agenda Paper 2D: Consideration of next steps

The project manager said that the agenda paper looked into alternatives on how to proceed on the Committee’s discussions to date around IFRS 11. The discussions focused on two issues, which were classification of a joint arrangement and accounting by joint operators. However, other issues had been discussed as well. The staff recommended waiting for practice to continue to develop, monitor whether any further standard-setting was required and perform the scheduled post-implementation review (‘PIR’) after 18 months. He asked the Committee whether they agreed.

The Chairman said that he knew that many IC members disagreed. However he was unsure of what the alternative was. He said that they had discussed during five meetings about this issue and he felt that those discussions should be captured in some way. He said that even reading all the agenda papers would not portray what was said in the discussions.

An observing IASB member asked the Senior Director for Technical Activities whether the discussions could be summarised in educational material. He replied that they had received feedback that strongly opposed educational material, especially from parts of the world that had already started to apply IFRS 11. He said that any educational material published regardless of the concerns should not focus on specified fact patterns but look into the issues more broadly. The Chairman agreed. A Committee member agreed with education material but said that users would like specified patterns with journal entries as they illustrated the issues more clearly. A fellow Committee member asked how an agenda decision would look like. He said that the Committee needed to be careful to not be interpretive in a rejection note. Several Committee members agreed whilst one member suggested that there should be a due process for educational material. He conceded that by the publication date of such material it might already be time for the PIR.

One Committee member expressed concerns about an agenda decision. She said that practice might already have implemented accounting policies that were different to what the IFRS IC might say in the agenda decision.

The Chairman suggested summarising the recent discussions, to analyse the summary and to discuss how to proceed. One Committee member said that the issues of agenda paper 2B should be highlighted to the IASB. The Chairman said that all of the discussions would be highlighted to the Board. On observing Board member replied that the Board would probably say to wait for the PIR of IFRS 11. Another IASB member said that some Board members might not be comfortable with additional guidance to IFRS 11.

Related Topics

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.