IFRS 11

IFRS 11: Joint arrangements

IFRS 11 Joint Arrangements establishes principles for financial reporting by parties to a joint arrangement.

A joint arrangement is an arrangement of which two or more parties, bound by a contractual agreement, have joint control. Joint arrangements are classified, dependent on the controlling parties’ rights and obligations, as either:

  • Joint operations – joint arrangements whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement.

  • Joint ventures – joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Consolidated Financial statements

Joint Operator

A joint operator recognises in its financial statements (including its separate financial statements):

  • assets, including its share of jointly held assets;
  • liabilities, including its share of jointly held liabilities;
  • revenue from the sale of its share of the output of the joint operation;
  • its share of the revenue from the sale of the output by the joint operation;
  • its expenses, including its share of any expenses incurred jointly.

A joint operator accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint operation in accordance with the relevant IFRSs.

A party that participates in, but does not have joint control of, a joint operation shall also account for its interest in the arrangement in accordance with the above if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation.

Joint Venture

A joint venturer should recognise its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard.

A party that participates in, but does not have joint control of, a joint venture accounts for its interest in the arrangement in accordance with IFRS 9 Financial Instruments unless it has significant influence over the joint venture, in which case it accounts for it in accordance with IAS 28

Separate Financial Statements

The accounting for joint arrangements in an entity’s separate financial statements depends on the involvement of the entity in that joint arrangement and the type of the joint arrangement:

If the entity is a joint operator or joint venturer it shall account for its interest in:

  • A joint operator in accordance with their interest in the direct rights and obligations of the arrangement, and their share of those assets, liabilities and transactions incurred jointly
  • A joint venture in accordance with IAS 27 Separate Financial Statements

If the entity is a party that participates in, but does not have joint control of, a joint arrangement shall account for its interest in:

  • A joint operator in accordance with their interest in the direct rights and obligations of the arrangement, and their share of those assets, liabilities and transactions incurred jointly
  • A joint venture in accordance with IFRS 9, unless the entity has significant influence over the joint venture, in which case it shall apply IAS 27

Joint arrangements

A joint arrangement is an arrangement of which two or more parties have joint control.

A joint arrangement has the following characteristics:

  • the parties are bound by a contractual arrangement, and
  • the contractual arrangement gives two or more of those parties joint control of the arrangement.

Joint control

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

Before assessing whether an entity has joint control over an arrangement, an entity first assesses whether the parties, or a group of the parties, control the arrangement (in accordance with the definition of control in IFRS 10 Consolidated Financial Statements).

After concluding that all the parties, or a group of the parties, control the arrangement collectively, an entity shall assess whether it has joint control of the arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that collectively control the arrangement.

The requirement for unanimous consent means that any party with joint control of the arrangement can prevent any of the other parties, or a group of the parties, from making unilateral decisions (about the relevant activities) without its consent.

Transactions between a venturer and the joint venture

In joint ventures adjustments similar to those in respect of associates are required where there are sales or purchases between the venturer and the joint venture. An adjustment is required for any profit on the transaction that is internal to the entity.

If a venturer sells an asset to the joint venture at a profit and the asset is still held by the joint venture:

  • The proportion of the asset that is consolidated includes an element of profit recorded by the venturer.
  • This should be removed as it is unrealised profit.
  • What remains is only the profit that relates to the share of the asset relating to the other venturers.

Where a venturer purchases assets from the joint venture the venturer’s share of the profit made by the joint venture should not be recognised until the asset is sold to a third party.

Where a loss is made on a transaction between the venturer and joint venture, it should be recognised immediately if it represents a reduction in realisable value of current assets or an impairment loss.

Receivables & Payables

If there are receivables or payables outstanding between a joint venture and the venturer the outstanding balances between the venturer and the joint venture should not be eliminated.

Classifying joint arrangements

The classification of a joint arrangement as a joint operation or a joint venture depends upon the rights and obligations of the parties to the arrangement. An entity determines the type of joint arrangement in which it is involved by considering the structure and form of the arrangement, the terms agreed by the parties in the contractual arrangement, and other facts and circumstances.

A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate vehicle can be either a joint venture or a joint operation.

A joint arrangement that is not structured through a separate vehicle is a joint operation. In such cases, the contractual arrangement establishes the parties’ rights to the assets, and obligations for the liabilities, relating to the arrangement, and the parties’ rights to the corresponding revenues and obligations for the corresponding expenses.

The process of distinguishing joint operations from joint venturesis illustrated below:

Joint Venture vs Joint Operation

Example - Joint Venture vs Joint Operation

Fone and Blakbery structure a joint arrangement in an incorporated entity, Cell. They each have a 50% ownership interest. The purpose of the arrangement is for Cell to manufacture parts for iFone and Blakbery’s own manufacturing processes. The arrangementensures that the 2 parties operate the facility that produces the parts to their specifications.

The legal form of Cell through which the activities are conducted, initially suggest that the assets and liabilities held in Cell are the assets and liabilities of Cell. The contractual agreement does not specify that iFone and/or Blakbery have rights to the assets and obligations for the liabilities of Cell.

Therefore based on the legal form of Cell and the terms to the contractual arrangement, the arrangement is a joint venture.

However, consider the following aspects of the arrangement:

  • The parties agreed to purchase all the output produced by Cell in the ratio of their ownership percentage. Cell may not sell its output to third parties, unless this is approved by iFone and Blakbery.
  • The arrangement is intended to operate at a break-even level. That is, the selling price is set by both parties and is designed to cover the costs of production and administrative expenses incurred by Cell.

From the above, the following facts and circumstances can be noted:

  • The obligation of the parties to purchase all the output reflects the exclusive dependence of Cell upon the parties for the generation of cash flows therefore the parties have an obligation to fund the settlement of Cell’s liabilities.
  • The facts that the parties have rights to all the output means that the parties are consuming and therefore have rights to all the economic benefits of the assets of Cell.

The facts and circumstances indicate that the arrangement is a joint operation.

Disclosures

IFRS 11 does not include any disclosure requirements; these are included in IFRS 12 Disclosure of Interests in Other Entities.

Further Information

More information

You can find out more about the IFRS 11 Standard here: