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A quick look at IFRS 11 Joint Arrangements
Accounting for joint arrangements is an example of a topic where the accounting standard (IFRS 11) is relatively straightforward to apply.
The difficult part is identifying if a joint arrangement exists, and if one is present deciding what type of arrangement is it. The following questions will help you determine the correct accounting treatment.
Does a joint arrangement exist?
Under exam conditions many students fail to recognise that a joint arrangement exists or jump to the conclusion that it does exist. This is the real challenge when applying IFRS 11.
The crucial point in determining whether you are dealing with a joint arrangement is whether joint control exists. This means that all material decisions relating to the arrangement require the unanimous consent of the parties sharing control. Joint arrangements can exist between two or more parties, remember decision making based on a simple majority is not a joint arrangement. A joint arrangement is where all parties need to agree for a decision to be made.
What type of joint arrangement is it?
Joint arrangements are either joint operations or joint ventures. It is not easy to remember the difference between the two, but try to think about a joint operation being something that is within the normal operating activities of the organisations involved. A joint arrangement that is organised through a separate vehicle, where all parties have rights to the net assets of the arrangements is likely to be a joint venture.
What is the correct accounting treatment?
Once you know the type of joint arrangement the treatment is straightforward.
For a joint operation, a joint operator in both their individual and consolidated accounts should recognise the operation in relation to their interest in all of the individual elements of the arrangement. e.g. the assets and liabilities.
For joint ventures the equity method should be use on consolidation, in individual accounts the venture should be recognised in accordance with IAS 28, i.e. at the lower of cost or net realisable value.
Caroline Chaffer is an AIA Achieve e-tutor. The AIA Achieve team is producing a series of A Quick Look at . articles and more can be found on the AIA website:
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