Joint Ventures

INTRODUCTION

Previously, a jointly controlled entity was required to follow the standards of the IAS 31 Interest in Joint Ventures. Annual period of 1st January 2013 onwards, the companies which involve in joint agreement are required to follow IFRS11 Joint Agreements standards. There are reasons why these changes were made. The IAS 31 focused exclusively on the structure of the arrangement. If a separate vehicle existed, the arrangement was classified as a ‘jointly controlled entity’. In addition, under IAS 31, investors could choose to account for jointly controlled entities using either the proportionate consolidation or the equity method of accounting. However, the IASB now believes that proportionate consolidation is not appropriate where an entity lacks direct rights or obligations to or for the arrangement’s underlying assets or liabilities. Therefore, the IFRS 11 Joint Agreement was introduced. The IFRS 11 introduces a new accounting standard for joint arrangements, which are now classified as either joint operations or joint ventures. It supersedes IAS 31, Interests in Joint Ventures. The IFRS 11 requires a party to a joint arrangement to determine the type of joint arrangement by assessing its rights and obligations. It also eliminates the option of proportionate consolidation as a method of accounting for a joint arrangement.

IFRS defines a joint arrangement as a contractual arrangement over which multiple parties have joint control. Joint control is now defined as “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.” The IFRS addresses the accounting for two categories of joint arrangements which is joint operations and joint ventures. An arrangement where the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement is a joint...