IFRS 11 has just passed its third birthday (issued in May 2011) and is now applicable across the IFRS world. EU IFRS preparers had a one year delay but are required to apply the standard for 2014. IFRS 11 may come to rival IFRS 1 as the most frequently amended standard and IFRS 2 for the most issues submitted to the IFRS Interpretation Committee (IC). One narrow scope amendment on measurement has been published and another is due in June (see more below). Both of these amendments will put further strain on the definition of 'what is a business' under IFRS 3.
Implementation issues continue to be submitted to the IC; the staff have a catalogue of issues on classification and measurement. The IC has published one agenda decision (rejection) on 'other facts and circumstances', is considering another on the same topic and has scheduled a further discussion on project entities in July (a further classification issue).
Why has IFRS generated this flurry of standard setting activity? Are there any clues in the development of the standard?
IFRS 11 was originally conceived as an easy win for the short term convergence programme. However, as work continued on the standard, the objectives evolved. The standard eventually published was described as establishing principles for the accounting for all joint arrangements. The policy choice for proportionate consolidation was eliminated; accounting treatment now follows classification. Joint ventures are accounted for under the equity method whereas the participants in a joint operation account for their assets, liabilities, revenue and expenses in accordance with other IFRSs.
The implementation challenges and questions were initially focused on classification, particularly when a joint arrangement in a legal entity might be a joint operation. Questions on the boundary between joint venture and joint operation continue to flow to the IC, particularly how to interpret 'other facts and circumstances'.
Measurement questions have also surfaced. IFRS 11 has very little measurement guidance, referring to IAS 28 for measurement of joint ventures and 'other applicable standards' for measurement of joint operations. Two narrow scope amendments have resulted, one published in May 2014 on acquisition of an interest in a joint operation, the other scheduled for June 2014 on accounting for the contribution of a business to a joint venture.
Published amendment – acquisition of an interest in a joint operation
The amendment requires an investor to apply the principles of business combination accounting when it acquires an interest in a joint operation that constitutes a 'business' (as defined in IFRS 3, Business combinations. Specifically, an investor will need to:
- measure identifiable assets and liabilities at fair value;
- expense acquisition-related costs;
- recognise deferred tax; and
- recognise the residual as goodwill.
All other principles of business combination accounting apply unless they conflict with IFRS 11.
The amendments are applicable to both the acquisition of the initial interest and a further interest in a joint operation. The previously held interest is not re-measured when the acquisition of an additional interest in the same joint operation with joint control maintained.
Pending amendment – contribution of a business to a joint venture
There is a further narrow scope amendment for joint arrangements that is expected to be published in June 2014. The amendment will eliminate the acknowledged conflict between IFRS 10 and IFRS 11. If an entity contributes a business to a joint venture, full gain recognition will be required, similar to the current treatment for the contribution of a business to an associate.
The IASB has also decided to clarify that only partial gain recognition is required on contribution of a subsidiary that is not a business (an asset in a corporate wrapper) to a joint venture or an associate. Drafting of this clarification has held up publication of the full gain recognition amendment.
Ongoing IC discussions
The IC has reported to the IASB on one of the more challenging issues; how to assess 'other facts and circumstances'. The IASB and IC seem to agree that the assessment should 'focus on whether the parties to the joint arrangement have rights and obligations that can be identified to be, in substance, direct rights to the assets and direct obligations for the liabilities of the joint arrangement'. The agenda decision gives us a few more words to consider. Some might assert that the agenda decision is narrower than the words in the standard. How this might impact practice is unclear as presumably most entities have already concluded on classification.
The IC also discussed accounting by a joint operation held in a separate vehicle. The IC has concluded they need to go back to the IASB in order to move the discussion forward. They still have a backlog of issues including classification and measurement.
What is next?
The narrow scope amendments while addressing practice issues continue to increase the pressure on the definition of 'business' and classification will undoubtedly continue to be a hot topic. Watch this space for the next instalment as the story continues to unfold.
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