IFRS 11 Joint Arrangements—Output received by a joint operator (Agenda Paper 2)

Background

The Committee received a submission about how a joint operator accounts for output arising from a joint operation when the output it receives in a reporting period is different from the output to which it is entitled, in other words when there is an imbalance between a joint operator's share of output according to the joint operation agreement (JOA) and the output it actually receives in a reporting period. Each joint operator transfers any output received to its customers during the reporting period and the joint operator recognises revenue for that output applying IFRS 15 Revenue from Contracts with Customers. The submission asked whether the joint operator recognises revenue to depict the transfer of output to its customers in the reporting period or, instead, to depict its share of the output produced from the joint operation’s activities in that period. The Committee received responses from accounting firms and other accounting bodies and noted there is a diversity in practice.

Staff analysis

IFRS 11:21 states that a joint operator shall account for the assets, liabilities, revenues and expenses relating to its interest in a joint operation in accordance with the IFRS Standards applicable to the particular assets, liabilities, revenues and expenses. Accordingly, there are two revenue streams that a joint operator might recognise in relation to a joint operation—(i) revenue from the sale of its share of the output arising from the joint operation; and (ii) its share of the revenue from the sale of the output by the joint operation. The staff analyse that the joint operators recognise revenue that depicts the transfer of output to its customers in each reporting period by applying IFRS 15. Accordingly, a joint operator that has received less output than its JOA share (an underlifter) has a right to future production of the joint operation and the underlifting portion shall be recognised as an asset that represents a prepayment for output not yet received, with the other side of the entry presented in profit of loss as part of the production expenses and not as other revenue. On the other hand, the overlifting portion of the joint operator that has received more output than its JOA share (an overlifter) shall be recognised as a liability that represents an accrual for inventory/output received (and sold to customers) but not yet paid for, with the other side of the entry presented in profit or loss as part of the production expenses and not as negative other revenue. In some situations, the joint operator may receive output from the joint operation’s activities that it has not transferred to its customers by the end of the reporting period—in that situation, we assume that the joint operator controls the output at the end of the reporting period and that the output will be sold in the ordinary course of business in a future reporting period. If that is the case, then the joint operator has inventory at the end of the reporting period (applying IAS 2 Inventories) for the output received and not yet sold.

Staff recommendation

The staff did not recommend to add this matter to the Committee's standard-setting agenda since the staff think the requirements in existing IFRS Standards provide an adequate basis for a joint operator to determine its revenue from the sale of its share of the output arising from a joint operation as described in the submission. Instead the staff recommended to publish a tentative agenda decision, discussing how a joint operator determines its revenue from the sale of its share of the output arising from a joint operation.

Discussion

Most of the Committee members agreed with the staff analysis and conclusion. Some Committee members considered it is more appropriate to only stick to the revenue recognition issue but not additional matters. A few committee members agreed that one would have to make clear the specific facts and circumstances, i.e. why there is overlifting and underlifting and what is the nature of such over or underlifting. Some Committee members had expressed their concern that there will be a risk of having revenue recognised more than once and about the conclusion in a 2015 meeting that a transfer of some of the entity's output to the joint venture partner is not part of revenue. The Committee decided, by a majority of votes, not to add this matter to the Committee's standard-setting agenda but to publish an Agenda Decision.

The Committee decided, by a majority of votes, to adopt the wording in the draft Agenda Decision except that the title of the Agenda Decision will indicate the issue is about revenue and the Agenda Decision is not going to address any other issues such as inventory lending.