IFRS 11 Joint Arrangements is a financial reporting standard that sets out the accounting requirements for joint arrangements. Joint arrangements involve two or more parties who have joint control over an arrangement, such as a joint venture or partnership. The standard was issued by the International Accounting Standards Board (IASB) in 2011 and applies to all entities that prepare financial statements in accordance with International Financial Reporting Standards (IFRS).
Rules:
Under IFRS 11, joint arrangements are classified as either joint operations or joint ventures based on the rights and obligations of the parties involved. A joint operation is a joint arrangement in which the parties have joint control over the assets, liabilities, and operations of the arrangement. Each party recognizes its share of the assets, liabilities, revenues, and expenses of the joint operation in its financial statements.
A joint venture, on the other hand, is a joint arrangement in which the parties have joint control over the arrangement itself. In a joint venture, each party recognizes its share of the assets, liabilities, revenues, and expenses of the arrangement as a single line item in its financial statements, using the equity method of accounting.
Descriptions:
IFRS 11 requires that joint arrangements be accounted for based on the rights and obligations of the parties involved, rather than the legal form of the arrangement. This means that the accounting treatment of a joint arrangement may differ depending on the specific facts and circumstances of the arrangement.
Under IFRS 11, joint control is the shared control of an arrangement, where the strategic financial and operating decisions relating to the arrangement require the unanimous consent of the parties that have joint control. This means that each party must have the ability to veto any major decisions related to the arrangement.
Examples:
An example of a joint operation could be a joint venture between two mining companies, where each company contributes assets and shares the costs and profits of the venture. The parties would have joint control over the assets, liabilities, and operations of the venture, and would each recognize their share of the revenues, expenses, and assets and liabilities on their individual financial statements.
A joint venture could be a partnership between two companies to develop and market a new product. The parties would have joint control over the arrangement itself, and would each recognize their share of the assets, liabilities, revenues, and expenses of the arrangement using the equity method of accounting.
Case studies:
In 2015, Royal Dutch Shell and Saudi Arabian Oil Company (Saudi Aramco) formed a joint venture to build and operate a new petrochemical complex in Saudi Arabia. The joint venture, called Sadara Chemical Company, was formed as a joint venture under IFRS 11.
Under the joint venture agreement, Shell and Saudi Aramco each had a 50% interest in the arrangement and shared control over the assets, liabilities, and operations of the joint venture. Each party recognized its share of the assets, liabilities, revenues, and expenses of the joint venture using the equity method of accounting.
New developments:
There have been no major developments in IFRS 11 since its issuance in 2011. However, the IASB has been considering possible amendments to the standard to address implementation issues and clarify certain aspects of the accounting requirements.
In 2019, the IASB issued a discussion paper on the accounting for goodwill in a business combination. The paper included a proposal to amend IFRS 11 to clarify how the accounting for joint arrangements should be applied in the context of a business combination. The IASB is currently considering feedback on the proposal and may issue amendments to IFRS 11 in the future.