Joint Arrangements (Joint Ventures)

Date recorded:

The staff presented an analysis of the comment letters received on the exposure draft ED 9 Joint Arrangements (the ED). The staff pointed out that the majority of respondents (approximately two-thirds) were not supportive and disagreed with different aspects of the exposure draft. The main concerns were:

  • The changes introduced are too far reaching, in particular, many respondents believed that the reference to 'rights to use' an asset and the elimination of proportionate consolidation require further research and should not be addressed in a short-term project.
  • The proposed changes to the terminology, definitions of types of joint arrangements, the accounting treatment based on recognition of contractual rights and obligations and the elimination of proportionate consolidation are not adequately justified in the Basis for Conclusion.
  • The elimination of proportionate consolidation. This appeared to be the single most problematic area. Many respondents disagreed with its removal mainly for the following reasons:
    • Proportionate consolidation offers more useful information and provides a better reflection of the economic substance of the arrangements. These respondents were of the view that management decision making and risk management are based on a detailed understanding of the underlying operations, assets, liabilities, cash flows and risks, and not on the share of net outcomes.
    • The elimination of proportionate consolidation will lead to the same accounting treatment for 'joint control' and 'significant influence', which was considered inappropriate.
    • The ED does not offer compelling arguments for its removal.
  • The removal of joint control from the definition of joint assets and joint operations lessens the importance of joint control and does not reflect the essence of these joint arrangements.
  • A number of important concepts in the accounting for joint arrangements are currently being deliberated and reviewed in other active IASB projects, for example, 'control' (Consolidation project), the 'definition of assets and liabilities' (Conceptual Frameworks project) and 'rights of use' (Leases project). These respondents highlighted that completion of these other projects was necessary before making changes to current practice. It would avoid the new IFRS being based on concepts and principles that might be subject to change.

Consequently, these constituents stated that the ED does not achieve its objectives and will not enhance financial reporting. Many of the constituents disagreeing with the ED suggested the postponement of the new IFRS on joint arrangement until the issues raised have been resolved in a broader project.

The Board's discussion predominantly focussed on the comments received regarding the elimination of proportionate consolidation.

Some Board members acknowledged that the elimination of proportionate consolidation will result in a loss of information for users. One Board member noted that proportionate consolidation better enables users to project future cash flows whereas applying the equity method collapses all information in one number.

However, a majority of Board members gave more weight to consistency with the framework. These Board members stated that it is not appropriate to recognise assets, liabilities, income and expenses when the venturer is merely entitled to a share of the outcome of the underlying activities but not the assets and liabilities themselves. Consequently, if the entity has a share in the output (joint ventures) it should apply the equity method; if it has a share in the asset/liability (joint assets and joint operations) it should recognise its share in that asset/liability.

With respect to the elimination of the proportionate consolidation method, the Board decided to proceed with the ED as currently drafted, in particular, not to further elaborate whether the equity method is the most appropriate method to account for joint ventures. However, the Board acknowledged that the rationale for the Board's decisions should be made clearer.

In addition the Board decided to take the following steps before finalising the project:

  • Go back to certain constituents to ensure that the Board understood the concerns correctly. The Board intends to primarily contact users and representatives of certain industries such as extractive industries. In this context analysts should be asked what information will be lost on elimination of proportionate consolidation.
  • Based on the outcome of the consultations to take into consideration requiring additional disclosures when the equity method is applied in order to compensate for any losses of information.


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