AU: Joint Arrangement

Joint Arrangement

1. What is a joint arrangement?

A joint arrangement is an arrangement of which two or more parties have joint control.
A joint arrangement has the following characteristics:
(a) The parties are bound by a contractual arrangement (see paragraphs B2–B4).
(b) The contractual arrangement gives two or more of those parties joint control of the arrangement (see paragraphs 7–13).
A joint arrangement is either a joint operation or a joint venture.

2. What is meant by joint control?

See AASB 11/IFRS 11 para 3 and Appendix A.
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. The key element of joint control is the sharing of control. In other words, there must be at least two investors who have shared control of the investee.

3. How does joint control differ from control as used in classifying subsidiaries?

Under AASB 10/IFRS 10, an investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
There are three investor-investee relationships which are based on different levels of control:

With a subsidiary there can be only one parent. With joint control there needs to be at least 2 entities that share control.

4. How does a joint venture differ from a joint operation?

The classification of a joint arrangement into either a joint operation or a joint venture depends on the rights and obligations of the parties to the arrangement.
A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators.
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Those parties are called joint venturers.

5. What are the key steps in classifying a joint arrangement into joint ventures and joint operations?

The key element in the classification of a joint arrangement is the rights and obligations of the parties to the arrangement. For a joint operation the rights pertain to the rights and obligations associated with individual assets and liabilities, whereas with a joint venture, the rights and obligations pertain to the net assets, that is the investment in net assets. See AASB 11/IFRS 11 para 14.
The assessment of the classification of a joint arrangement requires judgement. The assessment of the rights and obligations in an arrangement involves analysing four factors:
1. the structure of the arrangement
2. the legal form of the arrangement
3. the terms agreed to by the parties in the contractual arrangement, and
4. any other relevant facts and circumstances.

6. How are joint ventures accounted for?

With a joint venture, the joint venturers have an interest in the investment in the joint arrangement. The accounting for this interest is done by application of the equity method in accordance with AASB 128/IAS 28 Investments in Associates and Joint Ventures.

7. How are joint operations accounted for?

The key feature of a joint operation is that the joint operator has an interest in the individual assets and liabilities of the joint operation. In the situation where the joint operation produces an output which is distributed to the joint operators, the joint operator will receive a share of the output of the joint operation as well as be responsible for a share of the expenses of the operation that are not capitalised into the cost of the output.
Hence each joint operator needs to recognise its own accounts:
(a) its share of any jointly held assets
(b) its share of any jointly held liabilities
(c) its revenue from the sale of any output received from the joint operation
(d) its share of any revenue from the sale of any product that is jointly constructed by the joint operators
(e) its share of any expenses incurred by the joint operation
(f) its expenses incurred in construction of a joint product.