1.1 The nature of joint arrangements

An entity may pursue an economic activity with one or more third parties and share decision-making relating to those activities. IFRS 11 – Joint Arrangements – is applicable when the arrangement establishes joint control over an activity, [IFRS 11.4], between two or more of the parties involved.

A joint arrangement is an arrangement that has the following characteristics:

1. the parties are bound by a contractual arrangement; and
2. the contractual arrangement gives two or more of those parties joint control of the arrangement. [IFRS 11.5].

The terms ‘joint arrangement,’ ‘joint control’ and ‘joint venture’ are specifically defined by IFRS 11 and have important accounting consequences. However, these terms also may be used loosely in practice and may appear in legal documents and public statements by management.

IFRS 11 classifies joint arrangements into one of two types: joint operations and joint ventures. [IFRS 11.6]. Parties to a joint operation have rights to the assets, and obligations for the liabilities, whereas parties to a joint venture have rights to the net assets of the arrangement. [IFRS 11 Appendix A, BC24]. Whether a separate legal entity is involved is not the definitive issue in classification (see 5.1 below).

A joint operation results in the recognition of assets and liabilities and revenues and expenses. [IFRS 11.BC25]. An entity must apply judgement to classify an existing jointly controlled entity either as a joint operation or a joint venture based on an assessment of the parties’ rights and obligations that arise from the arrangement. [IFRS 11.BC28].

No matter the terminology used to describe the arrangement, or its purpose, management needs to evaluate the terms of the arrangement, and the relevant facts and circumstances, to determine if it is a joint arrangement as defined in IFRS 11.

2.1 Effective date

IFRS 11 was effective for annual periods beginning on or after 1 January 2013 and was effective for a first-time adopter of IFRS on the date of transition to IFRS (see Chapter 5). Early adoption was permitted with disclosure of that fact, if the entity adopted IFRS 10 – Consolidated Financial Statements, IFRS 12 – Disclosure of Interests in Other Entities, IAS 27 – Separate Financial Statements (as amended in 2011) and IAS 28 – Investments in Associates and Joint Ventures (as amended in 2011) as of the same date. [IFRS 11.C1]. As noted at 8.3.1 below, paragraphs 21A, B33A-B33D and C1AA and their related headings, which were introduced by the May 2014 amendment to IFRS 11 – Acquisitions of Interests in Joint Operations, were effective prospectively for annual periods beginning on or after 1 January 2016.

2.2 Objective

The objective of IFRS 11 is to establish principles for financial reporting by entities that have an interest in a joint arrangement. [IFRS 11.1]. As a result, the standard defines and provides guidance on:

• what a joint arrangement is and when joint control is present (see 3 and 4 below);
• the two types of joint arrangements and how to classify an arrangement (see 5 below); and
• how to account for each type of joint arrangement in the financial statements of a party to a joint arrangement (see 6, 7 and 8 below). [IFRS 11.2].

2.3 Scope

IFRS 11 applies to all entities that are a party to a joint arrangement. [IFRS 11.3]. A ‘party to a joint arrangement’ is defined as ‘an entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement’. [IFRS 11 Appendix A]. Therefore, an entity could be required to apply IFRS 11 to an arrangement even though it does not have joint control of it.

3.1 Unit of account

The unit of account of a joint arrangement is the activity that two or more parties have agreed to control jointly. A party should assess its rights to the assets and obligations for the liabilities, relating to that activity, regardless of whether the activity is conducted in a separate vehicle. [IFRS 11.BC20, BC35]. IFRS 11 does not define ‘activity’. Therefore, the determination of the unit of account may require judgement in arrangements that are complex.

The purpose and design of an arrangement may provide insight into how to identify the unit of account (see 4.4.2 below). For example, a framework agreement can establish multiple joint arrangements of different types. [IFRS 11.18]. The possibility also exists that, within the same separate vehicle, parties to the arrangement may undertake different activities in which they have different rights to the assets, and obligations for the liabilities, resulting in different types of joint arrangements conducted within the same separate vehicle. The IASB believes such situations would be rare in practice. [IFRS 11.BC36]. We are aware of scenarios where the activity is larger than a single entity or separate vehicle. We refer to these as ‘layered agreements’, which are discussed in Example 12.11 at 4.4.2 below.

Example 12.1 below illustrates a case where a master agreement may be accounted for as several distinct joint arrangements, each of which is classified as either a joint operation or a joint venture.

In some cases, there will be multiple contractual agreements between parties that relate to the same activities, which may need to be analysed together to determine whether a joint arrangement exists, and if so, the type of joint arrangement.

In other cases, there may be a single master agreement between two parties that covers several different activities. Some of these activities may be controlled solely by one of the two parties, while the parties may jointly control other activities. Careful analysis is required to determine the unit of account and to assess whether any of the arrangements are jointly controlled. Example 12.2 below illustrates a case where a contract contains multiple agreements, only one of which is a joint arrangement.

4.1 Assessing control

The first step in evaluating joint control is to assess whether the contractual arrangement gives a single party control of the arrangement. [IFRS 11.10]. The IASB believes that the definition of control and the application requirements to assess control in IFRS 10 will assist an entity in determining whether it unilaterally controls an arrangement per IFRS 10, or whether it controls an arrangement along with other parties, per IFRS 11. [IFRS 11.BC14]. Therefore, if one of the parties to the arrangement is exposed, or has rights, to variable returns from its involvement in the arrangement and has the ability to affect those returns through its power, it would have control over the arrangement and joint control will not be possible. [IFRS 11.B5].

To perform this assessment, it is therefore necessary first to consider the following factors within IFRS 10 as they relate to the activities of the arrangement:

• the purpose and design of the arrangement (see Chapter 6 at 3.2);
• what the relevant activities of the arrangement are and how decisions about those activities are made (see Chapter 6 at 4.1);
• whether the rights of the party give it the current ability to direct the relevant activities (see Chapter 6 at 4.2 to 4.6);
• whether the party is exposed, or has rights, to variable returns from its involvement with the arrangement (see Chapter 6 at 5); and
• whether the party has the ability to use its power over the investee to affect the amount of its returns (see Chapter 6 at 6). [IFRS 10.B3].

4.2 Rights to control collectively

Joint control can only exist when the parties collectively control the arrangement. [IFRS 11.B5]. In other words, all the parties, or a group of the parties, must act together to direct the activities that significantly affect the returns of the arrangement, [IFRS 11.8], which is referred to as ‘collective control’. Factors to consider when determining whether a group of parties have collective control are addressed in the following sections.

4.3 Unanimous consent

If all the parties, or a group of the parties, control the arrangement collectively, joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that control the arrangement collectively. [IFRS 11.9, B6]. Accordingly, it is not necessary for every party to the arrangement to have joint control. Only those parties that collectively control the arrangement must agree.

In a joint arrangement, no single party controls the arrangement. A party with joint control of an arrangement can prevent any of the other parties, or a group of the parties, from controlling the arrangement. [IFRS 11.10]. In other words, 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. [IFRS 11.B9].

IFRS 11 provides additional guidance on when unanimous consent exists. For example, a contractual arrangement can establish unanimous consent implicitly where the proportion of the voting rights needed to make decisions about the relevant activities effectively requires a specified combination of the parties to agree. [IFRS 11.B7]. When that minimum proportion voting rights can be achieved by more than one combination of the parties agreeing, the arrangement is not a joint arrangement unless it specifies which parties (or combination of parties) are required to agree unanimously to decisions about the relevant activities of the arrangement. [IFRS 11.B8]. IFRS 11 provides some examples to illustrate this point. Examples 1 and 2 are summarised in the following table. [IFRS 11.B8 Example 1, 2].

4.4 Other practical issues with assessing joint control

5.1 Separate vehicle or not

The first factor in classifying a joint arrangement is the assessment of whether a separate vehicle exists. 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. [IFRS 11.B19, B20].

A separate vehicle is defined in IFRS 11 as ‘A separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality.’ [IFRS 11 Appendix A]. Apart from those entities mentioned in the definition, IFRS 11 does not provide any examples of what might constitute a ‘separate vehicle’, and there is no clear definition of what constitutes a ‘separately identifiable financial structure’. The IASB viewed joint arrangements that are not structured through a separate vehicle to be arrangements that were formerly ‘jointly controlled operations’ and ‘jointly controlled assets’ (see 1.1 above). [IFRS 11.BC26]. The existence of a separate vehicle does not depend on whether the assets and liabilities within the vehicle meet the definition of a ‘business’ in IFRS 3. [IFRS 11.BC29].

The desired economic substance often drives the selection of a particular legal form of a separate vehicle. However, the choice may be driven by tax, regulatory requirements or other reasons that can alter the intended economic substance, necessitating that the parties use contractual arrangements to modify the effects that the legal form would otherwise have on their rights and obligations. [IFRS 11.BC32].

Many common arrangements, such as partnerships, corporations, trusts and syndicates, are likely to be considered separate vehicles, although local laws should be considered. In some jurisdictions, an oral agreement is considered sufficient to create a contractual partnership, and thus, the hurdle for having a separate vehicle could be quite low.

A contract alone may create a separate vehicle, such as when it creates a deemed separate entity (referred to as a ‘silo’ in IFRS 10), or creates a partnership. A silo exists when specified assets of an arrangement are the only source of payment for specified liabilities of an arrangement, and parties other than those with the specified liability do not have rights or obligations related to the specified assets or to residual cash flows from those assets. That is, a silo exists when, in substance, all the assets, liabilities and equity of that deemed separate entity are ring-fenced from the ‘host’ arrangement. The identification of silos is discussed further in Chapter 6 at 8.1.

The term ‘separate vehicle’ is broader than an ‘entity’ as illustrated in the diagram below. We understand that this was done primarily to address concerns that, in some jurisdictions, separate vehicles created to establish a joint arrangement are not necessarily legal reporting entities or juristic persons.

The IASB concluded it would be rare that a joint arrangement would give the parties rights to the net assets without having a separate vehicle. Therefore, they considered that the benefits of introducing an additional assessment in the classification of joint arrangements when these are not structured through separate vehicles would not outweigh the costs of increasing the complexity of the IFRS. [IFRS 11.BC27].

5.2 Legal form of the separate vehicle

Once it is determined that a separate vehicle exists, the second step is to analyse the legal form of the separate vehicle to determine whether it gives the parties rights to the net assets, or rights to the assets and obligations for the liabilities of the arrangement. [IFRS 11.B21]. In other words, does the separate vehicle confer separation between the parties and the separate vehicle?

The legal form of the separate vehicle is relevant as an initial indicator of the parties’ rights to the assets, and obligations for the liabilities, relating to the arrangement. The exception is when the legal form of the separate vehicle does not confer separation between the parties and the vehicle, in which case the conclusion is reached that the arrangement is a joint operation. [IFRS 11.B24, BC31].

If the legal form of the separate vehicle does confer separation between the parties and the separate vehicle, the classification is not yet conclusive. The terms agreed by the parties in their contractual arrangement (see 5.3 below) and other facts and circumstances (see 5.4 below) can override the assessment of the rights and obligations conferred upon the parties by the legal form of the separate vehicle and the arrangement can still be classified as a joint operation. [IFRS 11.B23].

Local laws may affect the form of the separate vehicle. For example, in many countries, a corporation confers separation between the parties and the separate vehicle and provides the parties with rights to net assets. These are indicators of the corporation being a joint venture. That is, the liabilities of the corporation are limited to the corporation. Creditors do not have recourse to the investors in the corporation for those liabilities. However, this may not be true in all countries.

Similarly, partnerships that have unlimited liability, which are common in many countries, often do not confer separation between the parties and the separate vehicle. That is, they provide the partners with rights to the assets and obligations for the liabilities, indicating that the arrangement is a joint operation. When creditors of the partnership have direct recourse to the joint arrangement partners, the partners are the primary obligors, which is indicative of a joint operation. However, in a partnership where creditors only have recourse to the partners after the partnership has defaulted, there is separation between the partners and the vehicle. The liability of the partners as secondary obligor is akin to a guarantee. This would be an indicator of a joint venture.

In March 2015, the Interpretations Committee published an agenda decision in which it observed that two seemingly similar joint arrangements from an operational perspective might need to be classified differently merely because one is structured through a separate vehicle and the other is not. The legal form of the separate vehicle could affect the rights and obligations of the parties to the joint arrangement and thereby affect the economic substance of the rights and obligations of the parties to the joint arrangement. [IFRS 11.B22, BC43].

5.3 Contractual terms

The next step in classifying a joint arrangement structured through a separate vehicle is to examine the contractual terms of the arrangement. While the legal form of the separate vehicle gives certain rights and obligations to each of the parties, the contractual terms of the joint arrangement may unwind the effects of the legal form and give the parties different rights and obligations.

IFRS 11 includes examples (which are not exhaustive) of common contractual terms found in joint arrangements and indicates whether these are examples of joint operations or joint ventures. These are included in the table below. [IFRS 11.B27].

In many cases, the rights and obligations agreed to by the parties in their contractual arrangements are consistent, or do not conflict, with the rights and obligations conferred on the parties by the legal form of the separate vehicle. [IFRS 11.B25]. However, as discussed at 5.2 above, this is not always the case, [IFRS 11.B26], as illustrated in Example 12.12 below. [IFRS 11 Example 4].

When the contractual arrangement specifies that the parties have rights to the assets, and obligations for the liabilities, relating to the joint arrangement, they are parties to a joint operation, and do not further consider other facts and circumstances when classifying the joint arrangement. [IFRS 11.B28].

5.4 Other facts and circumstances

When the legal form of the separate vehicle and the terms of the contractual arrangement do not specify that the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement, then the parties must consider all other facts and circumstances to assess whether the arrangement is a joint operation or a joint venture. [IFRS 11.B29, B30]. The ‘other facts and circumstances’ should be substantive and infer rights to the assets and obligations for the liabilities of the separate vehicle to classify the joint arrangement as a joint operation.

In March 2015, the Interpretations Committee published agenda decisions, discussed at 5.4.3 below, that provide a helpful overview of the issues that require judgement and the guidance that should be considered. The assessment of ‘other facts and circumstances’ can be challenging in practice.

5.5 Illustrative examples accompanying IFRS 11

IFRS 11 provides several examples that illustrate aspects of IFRS 11, but are not intended to provide interpretative guidance. The examples portray hypothetical situations illustrating the judgements that might be used when applying IFRS 11 in different situations. Although some aspects of the examples may be present in fact patterns, all facts and circumstances of a particular fact pattern are evaluated when applying IFRS 11. [IFRS 11.IE1].

6.1 Joint arrangements not structured through a separate vehicle

For joint arrangements not structured through a separate vehicle, 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. [IFRS 11.B16].

A contractual arrangement often describes the nature of the activities that are the subject of the arrangement and how the parties intend to undertake those activities together. For example, the parties could conduct an activity together, with each party being responsible for a specific task and each using its own assets and incurring its own liabilities and the parties share revenues and expenses. In such a case, each joint operator recognises in its financial statements the assets and liabilities used for the specific task, and recognises its share of the revenues and expenses in accordance with the contractual arrangement. [IFRS 11.B17]. When the parties agree, for example, to share and operate an asset together and share the output or revenue from the asset and operating costs, each joint operator accounts for its share of the joint asset, its agreed share of any liabilities, and of the output, revenues and expenses. [IFRS 11.B18].

6.2 Accounting for rights and obligations

An entity's rights and obligations for the assets, liabilities, revenues and expenses relating to a joint operation as specified in the contractual arrangement, are the basis for accounting for a joint operation under IFRS 11. This may differ from its ownership interest in the joint operation. [IFRS 11.BC38].

When the joint operator has differing rights (and percentages) to various assets, and/or different obligations for various liabilities, the financial statements would likely change because of accounting for those individual rights and obligations, as compared with consolidating a blended percentage of all assets and liabilities. Example 12.21 below illustrates joint operation accounting in this case.

6.3 Determining the relevant IFRS

As noted at 6 above, joint operators are required to recognise their rights to assets and their obligations for liabilities ‘in accordance with the IFRSs applicable’. In some cases, the relevant IFRS is clear, but questions have arisen in other cases.

• Right of use – The illustrative examples of joint operations in IFRS 11 refer to recognising the joint operator's share of assets (e.g. property, plant and equipment, accounts receivable, cash),¹³ rather than recognising a ‘right of use’. Therefore, a joint operator would recognise its share of an asset in accordance with IAS 16 – Property, Plant and Equipment, or IAS 38 – Intangible Assets, as applicable. When the contractual terms of the joint operation provide a joint operator with a right to use an asset, not a share of the asset itself, the joint operator would apply IFRS 16 – Leases (see Chapter 23).
• Liability for entire balance of certain liabilities – One of the joint operators may have a direct legal liability for the entire balance of certain liabilities of the joint operation. It may also have a right to reimbursement by the other parties for their share of that liability of the joint operation. The joint operator would recognise 100 per cent of the joint operation's liabilities and a receivable for the reimbursement due from the other parties for their share of such liability. IFRS prohibits the offsetting of the liability against the receivable. If the other parties were unable to pay, the joint operator would not be able to recognise a receivable for the full amount due. Accordingly, the receivable would be impaired, which would result in a reduction in profit in the joint operator's financial statements.

  This principle was emphasised in March 2019 when the Interpretations Committee finalised an agenda decision dealing with liabilities in relation to a joint operator's interest in a joint operation. In the fact pattern described in the request, the joint operation is not structured through a separate vehicle. One of the joint operators, as the sole signatory, enters into a lease contract with a third-party lessor for an item of property, plant and equipment that will be operated jointly as part of the joint operation's activities. The joint operator that signed the lease contract has the right to recover a share of the lease costs from the other joint operators in accordance with the contractual arrangement to the joint operation. The request asked about the recognition of liabilities by the joint operator that signed the lease agreement. In relation to its interest in a joint operation, paragraph 20(b) of IFRS 11 (see 6 above) requires a joint operator to recognise its liabilities, including its share of any liabilities incurred jointly. Accordingly, a joint operator identifies and recognises both (a) liabilities it incurs in relation to its interest in the joint operation; and (b) its share of any liabilities incurred jointly with other parties to the joint arrangement. Identifying the liabilities that a joint operator incurs and those incurred jointly requires an assessment of the terms and conditions in all contractual agreements that relate to the joint operation, including consideration of the laws pertaining to those agreements. The Interpretations Committee observed that the liabilities a joint operator recognises include those for which it has primary responsibility. Based on this agenda decision, the joint operator that is the sole signatory of the lease agreement would recognise the full lease liability and corresponding right of use asset in its financial statements. The agenda decision did not address how the joint operator should account for its right to recover a share of the lease costs from the other joint operators in accordance with the contractual arrangement to the joint operation. The joint operator would need to assess the relevant IFRS to apply to this right, for example, whether it represents a sub-lease of the right of use asset to the other joint operators.

  The Interpretations Committee also highlighted the importance of disclosing information about joint operations that is sufficient for a user of financial statements to understand the activities of the joint operation and a joint operator's interest in that operation. The Interpretations Committee concluded that the principles and requirements in IFRSs provide an adequate basis for the operator to identify and recognise its liabilities in relation to its interest in a joint operation. Consequently, the Interpretations Committee decided not to add this matter to its standard-setting agenda. Respondents to the tentative agenda decision suggested that the Board consider more broadly the accounting for this type of joint operation as part of its Post-Implementation Review (PIR) of IFRS 11.¹⁴

• Jointly and severally liable – In some cases, the joint arrangement (or legal form of the separate vehicle, if applicable) gives joint and several liability for the obligations of the arrangement. This may result in the joint operator recognising the entire obligation due, not just its share. The facts and circumstances need to be assessed in each case, and the liability accounted for in accordance with IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.
• Obligation to reimburse other parties – A party to the joint arrangement who has an obligation to reimburse another party would recognise a financial liability for the amount related to the reimbursement.
• Service fee income – In some joint operations, one joint operator receives fees from the other joint operators for providing management services in respect of the joint operation. IFRS 11 does not specifically require that such parties account for any fees received in accordance with IFRS 15 – Revenue from Contracts with Customers. Paragraph BC55 of IFRS 15 explains that a contract with a collaborator or a partner in a joint arrangement could also be within the scope of IFRS 15 if that collaborator or partner meets the definition of a customer for some or all of the terms of the arrangement.
• Inter-company sales – In March 2015, the Interpretations Committee published an agenda decision that addressed the issue of revenue recognition by a joint operator. If a joint arrangement is structured through a separate vehicle, classified as a joint operation, the joint operators’ purchase of all the output from the joint operation, is in effect a sale to itself. The Interpretations Committee interpreted paragraph 20(d) of IFRS 11 to mean that a joint operator only would recognise its share of the joint operation's revenue when the joint operation sells its output to third parties (i.e. other parties who have rights to the assets and obligations for the liabilities relating to the joint operation).
• Sale of output by a joint operator – In March 2019, the Interpretations Committee finalised an agenda decision dealing with another matter of revenue recognition by a joint operator. The request dealt with the recognition of revenue by a joint operator 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. This is commonly known in the oil and gas industry as an overlift or underlift (see Chapter 43 at 12.4). In the fact pattern described in the request, the joint operator has the right to receive a fixed proportion of the output arising from the joint operation and is obliged to pay for a fixed proportion of the production costs incurred. For operational reasons, the output received by the joint operator and transferred to its customers in a particular reporting period is different from the output to which it is entitled. That difference will be settled through future deliveries of output arising from the joint operation – it cannot be settled in cash. Applying IFRS 15 the joint operator recognises revenue as a principal for the transfer of all the output to its customers. The request asked whether, in the fact pattern described, the joint operator recognises revenue to depict the transfer of output to its customers in the reporting period or, instead, to depict its entitlement to a fixed proportion of the output produced from the joint operation's activities in that period. In relation to its interest in a joint operation, paragraph 20(c) of IFRS 11 (see 6 above) requires a joint operator to recognise its revenue from the sale of its share of the output arising from the joint operation. Accordingly, the revenue recognised by a joint operator depicts the output it has received from the joint operation and sold, rather than, for example, the production of output. The Interpretations Committee concluded that, in the fact pattern described in the request, the joint operator recognises revenue that depicts only the transfer of output to its customers in each reporting period, i.e. revenue recognised applying IFRS 15. This means, for example, that the joint operator does not recognise revenue for the output to which it is entitled but which it has not received from the joint operation and sold. The Interpretations Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for a joint operator to determine its revenue from the sale of its share of output arising from a joint operation as described in the request. Consequently, the Interpretations Committee decided not to add this matter to its standard-setting agenda.

  The agenda decision did not address the cost of goods sold and hence diversity in practice will continue in this respect. See Chapter 43 at 12.4.3 for more detail.¹⁵

6.4 Interest in a joint operation without joint control

A party that participates in a joint arrangement but does not have joint control (see 4 above) is not a joint operator. However, if that party has rights to assets and obligations for liabilities, the accounting is the same as that for a joint operator, as discussed above. [IFRS 11.23].

If the party that participates in a joint arrangement but does not have joint control does not have rights to the assets and obligations for the liabilities relating to the joint operation, it accounts for its interest in the joint operation in accordance with other applicable IFRS. [IFRS 11.23]. For example, if it has:

1. an interest in a separate vehicle over which it has significant influence, it should apply IAS 28;
2. an interest in a separate vehicle over which it does not have significant influence, it should account for that interest as a financial asset under IFRS 9; or
3. an interest in an arrangement without a separate vehicle, it should apply other applicable IFRS (see 4.4.1 above).

Effectively, if the joint arrangement is a joint operation, and the party has rights to the assets and obligations for the liabilities relating to that joint operation, it does not matter whether the parties to that joint arrangement have joint control or not – the accounting is the same. The disclosure requirements of IFRS 12 that may apply are discussed in Chapter 13 at 5.

6.5 Joint operations with a party that participates in a joint arrangement but does not have joint control

A joint operation conducted through a separate vehicle may involve a party that participates in the joint arrangement but does not have joint control (see 4 and 6.4 above). In such cases, a joint operator does not recognise the rights to assets and obligations for the liabilities attributable to such party or recognise a higher percentage with a ‘non-controlling interest’. Rather, a joint operator only recognises its share of any assets held jointly and its obligations for its share of any liabilities incurred jointly. Example 12.22 illustrates this point.

6.6 Transactions between a joint operator and a joint operation

IFRS 11 addresses transactions such as the sale, contribution or purchase of assets between a joint operator and a joint operation. [IFRS 11.22].

When a joint operator enters into a transaction with its joint operation, such as a sale or contribution of assets to the joint operation, the joint operator is conducting the transaction with the other parties to the joint operation. The joint operator recognises gains and losses resulting from such a transaction only to the extent of the other parties’ interests in the joint operation. [IFRS 11.B34].

However, when such transactions provide evidence of a reduction in the net realisable value of the assets to be sold or contributed to the joint operation, or of an impairment loss of those assets, those losses are recognised fully by the joint operator. [IFRS 11.B35].

When a joint operator enters into a transaction with its joint operation, such as a purchase of assets from the joint operation, it does not recognise its share of the gains and losses until the joint operator resells those assets to a third party. [IFRS 11.B36].

However, when such transactions provide evidence of a reduction in the net realisable value of the assets to be purchased or of an impairment loss of those assets, a joint operator recognises its share of those losses. [IFRS 11.B37].

When there is a transaction between a joint operator and a joint operation, consideration should be given to whether the transaction changes the nature of the joint operator's rights to assets, or obligations for liabilities. Any such changes should be reflected in the joint operator's financial statements, and the new assets and liabilities should be accounted for in accordance with the relevant IFRS.

6.7 Accounting for a joint operation in separate financial statements

In the separate financial statements, both a joint operator and a party that participates in a joint arrangement but does not have joint control (see 6.4 above) account for their interests in the same manner as accounting for a joint operation in consolidated financial statements. That is, regardless of whether or not the joint operation is structured through a separate vehicle, such a party would recognise in its separate financial statements:

• assets, including its share of any assets held jointly;
• liabilities, including its share of any liabilities incurred jointly;
• revenue from the sale of its share of the output arising from the joint operation;
• share of the revenue from the sale of the output by the joint operation; and
• expenses, including its share of any expenses incurred jointly. [IFRS 11.20‑23, 26(a), 27(a)].

Accordingly, the guidance at 6 to 6.6 above also applies to accounting for joint operations in separate financial statements.

7.1 Interest in a joint venture without joint control

IAS 28 also applies if a party that participates in a joint arrangement but does not have joint control (see 6.4 above) in a joint venture has significant influence over the entity. [IFRS 11.25]. However, the disclosure requirements differ (see Chapter 13 at 5). If the party that participates in a joint arrangement does not have joint control but does have significant influence in a joint venture, but the joint venture is not an entity (i.e. but is in a separate vehicle) (see 5.1 above), IAS 28 would not apply, and the investor would apply the relevant IFRS.

If the party participates in a joint arrangement but does not have joint control and does not have significant influence, its interest in the joint venture would be accounted for as a financial asset under IFRS 9. [IFRS 11.25, C14].

7.2 Contributions of non-monetary assets to a joint venture

When an entity contributes a non-monetary asset or liability to a joint venture in exchange for an equity interest in the joint venture, it recognises the portion of the gain or loss attributable to the other parties to the joint venture except when the contribution lacks commercial substance.

The measurement of the non-monetary asset in the financial statements of the joint venture (i.e. not the joint venturer) can differ, depending on the method of settlement. When the consideration given by the joint venture is its own shares, the transaction is an equity-settled share-based payment transaction in the scope of IFRS 2 – Share-based Payment. As a result, the joint venture measures the non-monetary asset received at its fair value. When the consideration given by the joint venture is not its own shares, the transaction is outside the scope of IFRS 2; we believe the joint venture should measure the non-monetary asset received at its cost, which is the fair value of the consideration given.

However, when the contributed non-monetary asset is a subsidiary of an entity, a conflict arises between the requirements of IAS 28 and IFRS 10. This is discussed in Chapter 11 at 7.6.5.C and at 8.2.3 below.

7.3 Accounting for a joint venture in separate financial statements

In its separate financial statements, a joint venturer accounts for its interest in the joint venture at cost, as a financial asset per IFRS 9, or under the equity method. [IFRS 11.26(b)]. These separate financial statements are prepared in addition to those prepared using the equity method. The requirements for separate financial statements are discussed in Chapter 8 at 2.

In its separate financial statements, a party that participates in, but does not have joint control of a joint venture (see 6.4 above) accounts for its interest as a financial asset under IFRS 9, unless it has significant influence over the joint venture. [IFRS 11.27(b)]. In this case, it may choose whether to account for its interest in the joint venture at cost, as a financial asset per IFRS 9, or the equity method. [IAS 27.10].

However, if an entity elects, in accordance with IAS 28, to measure its investments in associates or joint ventures at fair value through profit or loss in accordance with IFRS 9, it also accounts for those investments in the same way in its separate financial statements. [IAS 27.11].

8.1 When to reassess under IFRS 11

A party reassesses upon any change in facts and circumstances whether it has joint control, and whether the classification of joint arrangement has changed. In some cases, such change in facts and circumstances might result in a party having control over the arrangement and therefore losing joint control. A party also may lose joint control upon a change in facts and circumstances. In other cases, an arrangement may remain under joint control, but the classification might change from joint venture to joint operation (or vice versa).

Reassessment of a joint arrangement occurs upon a change in:

• How activities are directed – For example, A sets up Z to develop a new product or technology. Initially, Z had a Board of Directors elected by shareholders, separate management and the relevant activities were directed by voting rights held exclusively by A. If A enters into an agreement with B so that A and B must agree on all decisions (e.g. they replace the Board and make decisions for management), reassessment would be required to evaluate whether A and B have joint control of Z.
• Legal form – For example, a separate vehicle that initially did not confer separation between the parties and the vehicle (e.g. a general partnership) and was considered a joint operation, is converted into a separate vehicle that now does confer separation between the parties and the vehicle (e.g. a corporation). Reassessment would be required to evaluate whether this indicates a change in classification from a joint operation to a joint venture.
• Contractual terms – For example, the terms of a joint arrangement are renegotiated, such that the parties have rights to the assets or obligations for the liabilities. Reassessment would be required to evaluate whether this indicates a change in classification to a joint operation.
• Other facts and circumstances – For example, the terms and conditions of a joint operation are renegotiated. Initially, a joint arrangement could sell output only to the parties of the joint arrangement. Thereafter, the joint arrangement may also sell output to third-party customers. Reassessment would be required to evaluate whether this indicates a change in classification from a joint operation to a joint venture.

As discussed at 5.3.1 above, another event that might trigger reassessment would be an event that leads a guarantor to have to pay (or perform) under a guarantee.

8.2 Changes in ownership of a joint venture that constitutes a business

8.3 Changes in ownership of a joint operation that is a business

8.4 Changes in ownership of a joint arrangement that does not constitute a business