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IASB publishes limited scope amendment proposals for IFRS 11

  • IASB (International Accounting Standards Board) Image

Dec 13, 2012

The IASB has published exposure draft (ED) 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 ED proposes to amend IFRS 11, "Joint Arrangements," to clarify that a joint operator accounts for the acquisition of an interest in a joint operation that is a business by applying IFRS 3, "Business Combinations," and other relevant standards.

IFRS 11 and IAS 31, Interests in Joint Ventures, which it will replace on January 1, 2013, currently do not provide specific guidance on how a joint operator should account for the acquisition of an interest in a joint operation when 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 are considered a business combinations or acquisition of groups of assets. The differences in treatment between the two approaches include (1) the recognition or nonrecognition of goodwill and (2) deferred taxes and the capitalization 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 the most identifiable assets and liabilities at fair value.
  • Expensing acquisition-related costs (other than debt or equity issuance costs).
  • Recognizing deferred taxes.
  • Recognizing 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 on 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 finalized as proposed, would be applied on a prospective basis only to avoid the use of hindsight.

ED/2012/7 is open for comment until April 23, 2012. Click for the IASB press release (link to the IASB's Web site).

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