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IFRS 11 — Becoming a joint operator through acquisition of an additional interest in an existing joint operation

Date recorded:

This session was devoted to discussing a request received by the Interpretations Committee to clarify whether a previously held interest in the assets and liabilities of a joint operation should be remeasured to fair value when an investor’s acquisition of an additional interest results in the investor becoming a joint operator (i.e. assuming joint control) of the investee. On the basis of their analysis, the staff believed that such a transaction should not result in a remeasurement of the entity’s original interest.  The Technical Manager introduced the session, and asked the Committee members whether they agreed with the staff’s analysis and conclusions; whether they agreed that the issue was widespread and should be taken onto the agenda; and whether the Committee members thought the scope of the project should be expanded to include other transactions involving previously held interests in joint operations.  He further asked the Committee members whether, if the Committee members decided to limit the scope of the project to the current transaction, they agreed with the staff recommendation to add the issue to its agenda for annual improvements, and whether they agreed with the staff recommendation set out in Appendix A of the agenda paper.

A Committee member noted that he did not agree with the staff conclusion because he had always considered IFRS 3 to be a “de facto framework” when looking at these types of transactions, and that not requiring remeasurement in this transaction would be departing from the principles of IFRS 3.  He referred to the sentence in paragraph 35 of the agenda paper where the staff noted that they did not think that the change that occurred upon the acquisition of joint control over a joint operation was as significant as a change that occurred upon the acquisition of control noting that this was very dependent on the individual transaction, and that it was difficult to draw a conclusion on this basis.

Another Committee member agreed that there was potential for diversity on this issue, and that some form of standard setting action was appropriate.  He expressed his preference for a wider project to be carried out in this area, noting that conceptually the Committee seemed to be introducing a lot of different concepts in terms of what might drive remeasurement or not – for example, whether it was the change in status, whether it was the change of accounting method, or whether or not the investee contained a business.  He noted that there was a mix of principles and that the Committee needed a matrix of the different types of change in status transactions and the different potential drivers of remeasurement or non-remeasurement to take a properly holistic view of the issue.

A further Committee member noted that he agreed with the analysis in the paper with respect to the specific fact pattern analysed, but acknowledged that this highlighted a number of issues with respect to when to remeasure or not when moving between stages (both increases and decreases in interests), and agreed that the project should be expanded to cover the broader array of issues.

Another Committee member noted that he also agreed with the staff analysis in this fact pattern, and like others, that the Committee should expand the project further to look at different fact patterns.

The Chairman questioned the Committee members what the objective of broadening the project would be.  A Committee member noted that he believed the first step would be to get an inventory of the different change in status transactions and identify those for which there was no current guidance in IFRS, noting that he believed the Committee would end up getting a succession of questions over time to address all those that had not been addressed proactively.

Another Committee member noted that he believed the principles were unclear, noting that he could read some parts of IFRS literature to indicate that a remeasurement should be based on a change in the nature of an investment, but that he could also read into the literature the principles that a remeasurement should be based on a change in accounting method.  Accordingly, he agreed that the Committee should take this issue on and provide some clarity.  With respect to the fact pattern analysed, he noted that he agreed with where the staff got to that if going from having some influence to having joint control was not significant enough to result in a change in accounting method, then it would also not be appropriate to remeasure the entity’s original interest.

Another Committee member also agreed with the staff’s conclusion on this issue.  He noted that if the Committee was to have a broader project, it needed to be based on driving out the principles that determined what happened when interests increased or decreased.  He expressed concern that the Committee could try to answer something for which a clear answer already existed (transactions covered by IFRS 10 – to/from control), and noted that as long as the Committee focused on trying to drive a principle out of transactions involving movements between significant influence and joint control etc., he would support such a project.

A further Committee member noted that, when a transaction was outside the scope of IFRS 10, it was hard to articulate what the rule was with respect to when one should or should not remeasure. She noted that she did not believe a change in accounting method should determine whether a remeasurement was required, noting that she believed the economic event was the change in control, as that event provided an entity with more rights and the ability to do more things.

Another Committee member noted that he agreed with the staff analysis on the particular fact pattern analysed.  He noted that there were a lot of issues in this area and that, like others, he would be in favour of expanding the project and looking at what the key criteria were for determining when to remeasure or not.

Another Committee member cautioned about taking a piecemeal approach to this exercise, and highlighted the need for all scenarios to be looked at to ensure the results were consistent.

An IASB member present reminded everyone that there were a number of open and not yet completed issues on IAS 28 relating to changes in ownership interests, whether things were businesses etc., and highlighted the need to ensure any work performed resulting from this issue did not upset anything already in progress.  She further noted that work was being started on equity accounting and also noted the need to be aware of the meaning of that and how that interacted with what would be done on this issue.

The Chairman observed that the Committee members generally agreed that the least important element in determining whether a remeasurement was required was the accounting, and that the act of gaining control, in addition to being the trigger for consolidation, was an economically significant event, and the thing that broke the remeasurement threshold.

Another Committee member noted two fact patterns he believed merited consideration – one being the acquisition of control over a joint operation, the other being loss of control that resulted in a joint operation.  He acknowledged that both transactions clearly crossed the control boundary, but that there was diversity in practice as to how people believed such transactions should be accounted for under IFRS 10 and IFRS 3.

A further Committee member pointed out that the Committee had been asked a specific question that needed an answer, and expressed concern that addressing it as part of a bigger project would result in continuing diversity in the meantime.  He suggested there could be two stages – one to address the question at hand, and another to pick it up again when the bigger project happened.

The Chairman directed the IASB staff to develop a matrix of the different types of change in status transactions and the different potential drivers of remeasurement or non-remeasurement to bring back to the Committee to consider the issue further.

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