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IFRS 11 - Summary of outreach on implementation issues

Date recorded:

In January 2013, the Committee received several requests to clarify the application of the requirements of IFRS 11, in particular the classification of a joint arrangement as a joint venture or a joint operation and the accounting for joint operations. Staff conducted an outreach on the various issues and asked for additional significant issues that have been raised regarding the application of IFRS 11. There were five initial principal issues identified under different categories and 21 additional issues were identified from the outreach.
A summary of these issues is provided in the Staff paper on pages 23-26. Staff asked the Committee for next steps on these issues.

A member started by commenting that some issues in the paper probably require judgement to be exercised. Some of them need to consider the criteria of other facts and circumstances in IFRS 11, which would determine the measurement and recognition of joint operations and this is difficult to do. The member also highlighted to the Committee that approaching issues raised in a piecemeal manner is not the best approach. Staff should adopt a more holistic approach and therefore suggested to let practice prevail before addressing these issues.

Another member in agreement said that out of the 26 issues raised there are some that could be addressed within the framework of the Standards and a few may be addressed by looking at IFRS 3. The five original issues should take priority but that member suggested that the Committee let practice prevail and revisit the issues in the post implementation phase.

A member commented that Staff should have the following two priorities:

  • the application of other facts and circumstances – whether this should look at the legal and enforceable terms or if it should include an analysis of the substance, so there is a clear answer on how to use the other facts and circumstances criteria; and
  •  what is accounted for – the direct rights and obligations when in fact these are owned by a separate entity (this is looked at in agenda paper 11).

The members from the regulators said that there is major diversity in practice and currently there is little guidance on the accounting for joint operations.

Another member said that reading both agenda papers 10 and 11 highlighted that there is significant diversity in practice and there are different views on the application of IFRS 11. Therefore, it is essential that these issues should be addressed. The three main issues to be addressed are as follows:

  1. clarification of  joint operation and a joint arrangement;
  2. initial recognition of rights and obligations; and
  3. the treatment of a change from joint operation to a joint venture or a joint operation to a subsidiary.

The member also suggested that IFRS 11 should be deferred further.

Another member added that there may be some entities that may apply the other facts and circumstances criteria but some may not. The challenge is to address the correct consolidation method.

A member was concerned about trying to address issues on a relatively new standard and agreed to let practice coalesce.

In agreement another member suggested that the five original issues should be the main focus but the Committee should provide clarity on the application of other facts and circumstances as leaving it may lead to further divergence in practice. Another member added that the application of facts and circumstances could be applied in a different way to the way it was intended to be applied.

Staff commented that deferral of the Standard has already caused problems in the first year that it has been issued. Most of the issues are around the equity method and by the time they address these issues it would have already been another year. Therefore the best approach is to issue clarification in the short term and then deal with the other issues in the post implementation phase.

Another member said that this issue is widespread throughout Europe especially in France, Germany and Italy and therefore postponement may not be ideal.

Another member added that paragraph B30 of IFRS 11 is clear that other facts and circumstances should be taken into consideration along with the direct rights to assets and obligations, therefore proportional accounting may not always be the ideal solution. These measurement issues arise as the Standard does not provide guidance when there are rights to assets and obligations for liabilities but the substance of the operation is different. Therefore the Committee should address this issue through a narrow scope amendment.

The Chairman concluded that Staff need to prioritise the issues presented and focus on those specifically around other facts and circumstances and how it affects the classification of a joint operation and the issues related to measurement.

With the 21 issues identified Staff are to assess how many issues can be resolved by amending the standards, or by providing additional guidance and those that can be addressed through the current Standard. All of these are to be resolved before presenting the issues to the IASB.

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