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IFRS 11 — Acquisition of an interest in joint operation

Date recorded:

The Exposure Draft ED/2012/7 Acquisition of an Interest in a Joint Operation (Proposed amendment to IFRS 11) published in December 2012 (‘the ED’) includes the IASB’s proposal to amend IFRS 11 Joint Arrangements.

Due to lack of guidance significant diversity has arisen in practice in ventures’ accounting for the acquisition of interest in jointly controlled operations or assets in which the activity of the jointly controlled operations or assets constitute as business. This diversity relates to the premium paid in addition to the fair value of assets being recognised as a separate asset, deferred taxes arising from the initial recognised either on acquisition of the interest in the jointly controlled operation or they are not recognised due to paragraphs 15 and 24 of IAS 12 Income Taxes, and acquisition costs being capitalised or expenses. Based on the analysis of the comment letters, the Staff recommendation to the Committee was to advise the IASB on the accounting, by a joint operator, for the acquisition of an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3 Business Combinations.

Committee members deliberated over this issue and had contrasting views. One member wanted to proceed with the amendment as it was supported by all submissions and expressed that the relevant wording was a significant step in addressed diversity and was conceptually correct. Another member raised concern over the significant diversity in practice and that a large proportion of preparers of financial statements do not apply IFRS 3 to these transactions, which he felt, is not highlighted in the paper. The challenges the member could see are in the case of a joint operation where there may be bundle of assets or where the fact and circumstances of a joint operation is that although it may be a legal entity, the only users of the operation are its joint operators, and therefore the pre-existing relationships should be considered. Under such cases, the principles in the paper may be unsuitable. Members were concerned that the amendment was rushed and wanted to address that there is difficulty in accounting for joint operations, and also that sufficient research had not been undertaken in understanding the tax effects. Considering this the Committee proposed not to proceed with the amendments. However, the Committee will report to the IASB the results of the discussion and more research will be required before a report can be put forward.

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