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Joint Ventures

Date recorded:

The Board discussed a sweep issue raised by one Board member on review of the pre-ballot draft of the proposed amendments to IAS 31 Interests in Joint Ventures (ED).

The ED stipulates that on loss of joint control the investor should remeasure to fair value any remaining investment in the former joint venture and recognise a gain or loss. As the ED will propose to require the use of the equity method for interests in joint ventures the question arose whether the investor should be required to remeasure to fair value regardless of whether it recognises its investment using the equity method both before and after remeasurement.

The following views were discussed:

View 1: Loss of joint control is a significant economic event

The wording of the Board's decision when amending IAS 27 Consolidated and Separate Financial Statements supports the view that it is appropriate to remeasure an investment in a joint venture whenever the investor loses joint control, regardless of whether the basis of accounting changes at that time. The loss of joint control is a significant economic event that changes the nature of an investment. Joint control is established by contractual arrangement. For a venturer to lose joint control, the venturers must change the terms of the contractual arrangement. That change of contractual terms would represent a significant economic event, and therefore, it is appropriate to remeasure any remaining investment in the venture, even if that investment continues to be accounted for using the equity method.

View 2: Remeasurement should result from a change in basis of accounting

The ED gives guidance on how to determine whether a joint arrangement is a joint asset, joint operation or joint venture, or a combination of these. If, according to IAS 31, a venturer has an interest in a joint venture the venturer applies the equity method as described in IAS 28 Investments in Associates. It would appear inappropriate to require remeasurement of that investment (and the recognition of a gain or loss) when the change in the nature of an investment does not result in any change in the basis for accounting.

Those Board members in favour of view 1 noted that they would accept view 2 for practical reasons in order to get out the ED quickly. One Board member expressed the view that the equity method would not be appropriate for accounting for both associates and joint ventures but that 'we have to live with it in the short term'.

The Board decided not to require re-measurement of an interest when joint control is lost but an equity interest is retained. This decision was essentially pragmatic. The Board did not want to suggest that a change in basis of accounting was a trigger for remeasurement.

The Board decided that the forthcoming exposure draft should be exposed as a Draft IFRS and not as amendments to IAS 31.

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