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IFRS 11 — Proposed wording for the agenda decision

Date recorded:

The Technical Manager introduced the agenda paper which comprised drafts for eight tentative agenda decisions on issues the IFRS Interpretations Committee had discussed in the past year.

He highlighted three points that had been revised in Agenda Decision A. The first point was the deletion of the terms ‘direct’ and ‘in substance’ when describing rights and obligations in connection with the assessment of other facts and circumstances. Secondly, the discussion about piercing the veil of the corporation was removed and thirdly, the removal of the implication of economic substance and its potential relocation to Agenda Decision D.

One Committee member agreed with the first two points but believed the discussion of economic substance was unnecessary. Another Committee member disagreed as he found the implication of economic substance helpful as it helped focusing on enforceable rights rather than the nature of the involvement with the arrangement itself.

The Chairman called a vote on the deletion of economic substance. Six of the twelve Committee members present voted for deleting.

The Technical Manager continued with Agenda Decision B. He asked the Committee whether they wanted the document published at all as the specific fact pattern in the draft tentative agenda decision had not been documented in the prior IFRIC Updates. He then asked whether the Committee wanted to delete the reference that the assessment of ‘substantially all of the output’ was based on monetary value rather than physical quantities. One Committee member had expressed concerns that this reference could be interpretative.

Another Committee member struggled with the reference in the draft tentative agenda decision that the parties’ purchase of the output of a joint arrangement at market price might not be sufficient to enable the joint arrangement to settle its liabilities on a continuous basis. In her view, additional rights and obligations would be needed to arrive at a joint operation classification. Also, it needed to be demonstrated that the parties had the right to any excess cash.

The Chairman called a vote on retaining the reference that assessment of ‘substantially all of the output’ should be based on monetary value. Three Committee members objected and proposed deletion. The Chairman concluded that there was sufficient support to retain the reference.

The Technical Manager went on to Agenda Decision C which concerned project entities. He said that a Committee member had found the fact pattern to be too industry- and structure-specific. They recommended focusing on generic principles in the context of a party being a primary obligor. Staff had modified the wording to reflect this comment. Both the original and the modified wording were included in the agenda paper. The Technical Manager asked the Committee which wording they preferred.

An observing IASB member expressed concern about the reference in the agenda paper that the joint arrangement was established to deliver a product or service to a single customer. He thought that the fact pattern was about the real estate industry which would imply that there were multiple customers.

One Committee member said he would not be comfortable publishing either version of the draft tentative agenda decision. He said that this draft tentative agenda decision would examine whether the decisions taken in Agenda Decisions A and B would change under a specific fact pattern which was not the case. In addition, the description of the performance guarantee was confusing to him as it suggested that the parties were primary obligors.

Another Committee member did not object to publishing either alternative but would otherwise be in favour of the modified version. The reference to primary obligors should be revised in his view as ‘sureties’ was not a clearly understandable term in his view. He would rephrase this to say that the vehicle did not have to go into default for the customers to have a claim and that the customers could enforce specific performance irrespective of a claim. He also said that he did not understand how having a primary obligation created rights to the assets of the entity unless it was the parties that had actually performed. If the vehicle had performed, the vehicle would have the rights to the assets.

A fellow Committee member supported not publishing either version. He would otherwise prefer truncating the modified version significantly. He proposed to only address the situation in which the parties of the arrangement were primary obligors and then explain that this might give the parties an obligation for the liabilities but it did not give them rights to the assets.

Several Committee members shared the concerns but they were split between publishing none of the alternatives and publishing the modified version.

The Chairman asked the Committee members who would not object to abandon the tentative agenda decision. Nine of the 14 Committee members did not object to abandoning. The Chairman concluded that the tentative agenda decision would be abandoned.

One observing Board member expressed regret about this decision. He said that with this decision the discussion would be lost and suggested alternatively bringing it to the attention of the educational team so they could consider drafting educational material on that issue.

The Technical Manager introduced Agenda Decision D which concerned two joint arrangements with similar features that were classified differently. The conclusion of the draft tentative agenda decision was that the classification of the joint arrangement reflected the rights and obligations of the parties and that the presence of a separate vehicle only played a secondary role in determining the nature of those rights and obligations.

A Committee member said that to her joint arrangements were not similar if one was structured through a separate vehicle and the other was not. She suggested rephrasing to reflect that not all features were similar.

When asked by the Chairman, none of the Committee members objected to publishing the tentative agenda decision with the proposed modification.

The Technical Manager continued with Agenda Decision E. IFRS 11 stated that a joint operator should recognise its share of the revenue from the sale of the output by the joint operation in relation to its interest. The draft tentative agenda decision stated that this reference was not applicable when the joint operation had been classified as such because the investors took all the outputs from the joint arrangement. The Committee’s rationale for this decision had been that a joint operation who sold the output to its joint operator would in fact sell the output to itself. A Committee member had suggested to change this rationale to the fact that the share of the output sold by the joint operation would be eliminated against the share of the output purchased by the joint operator in consolidation. However, staff had decided not to change the rationale as it might suggest proportionate consolidation.

A Committee member agreed not to mention consolidation procedures but suggested to remove the reference in the draft tentative agenda decision that the reference in IFRS 11 would also apply if the joint operation was a separate vehicle. He said that the type of joint arrangement was irrelevant to apply this reference.

One Committee member asked whether it would be helpful to include a paragraph in the tentative agenda decision that a joint operator should not recognise shared revenue from a sale of the joint operation that was made to another joint operator.

When the Chairman asked whether any Committee members objected to publishing the tentative agenda decision with the proposed modifications, nobody objected.

The Technical Manager said that Agenda Decision F was about the accounting treatment when the joint operator’s share of output purchased differed from its share of ownership interest in the joint operation. He asked the Committee whether they agreed with the draft for the tentative agenda decision.

A Committee member said that the proposed tentative agenda decision introduced an equalisation mechanism. This had raised concerns in him as this had not been discussed by the Committee and it was unusual in practice. He proposed deleting the paragraph that contained the reference to the mechanism. A fellow Committee member said that he would not delete the whole paragraph but would agree deleting any reference to the equalisation mechanism.

Several Committee members expressed different views about deleting and retaining the paragraph. When the Chairman asked how many of the Committee members would object to abandoning the paragraph, seven of the 14 Committee members objected. The Chairman concluded that the paragraph would be retained and asked whether the reference to equalisation provisions should instead be deleted. Four members were in favour of deleting the reference. The Chairman therefore concluded that the reference would also be retained. He asked the Committee members whether they objected to publishing the tentative agenda decision. Nobody objected.

The Technical Manager continued with Agenda Decision G which concerned accounting by the joint operator in its separate financial statements. He asked the Committee whether they agreed with publishing the tentative agenda as drafted. All agreed.

He went on to Agenda Decision H. The draft tentative agenda decision addressed accounting by a joint operation that was a separate vehicle. He asked whether the Committee members agreed with the current wording.

One Committee member said that in her view, the examples in the draft tentative agenda decision did not add any value as they were incomplete and raised questions. She proposed deleting the examples. When asked by the Chairman, 13 of the 14 Committee members supported this. Nobody objected to publishing.

Correction list for hyphenation

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