IFRS 11 Joint Arrangements IAS 28 Investments in Associates

Day 24: IFRS 11 – Joint Arrangements & IAS 28 – Investments in Associates

International Financial Reporting Standard (IFRS) 11, “Joint Arrangements,” and International Accounting Standard (IAS) 28, “Investments in Associates,” are two crucial standards that guide accounting for joint arrangements and investments in associates. In this blog post, we will explore the key concepts and principles of these standards, including the differences between joint operations and joint ventures and the equity method of accounting.

Introduction to Joint Arrangements

A joint arrangement is an arrangement where two or more parties have joint control over a business or asset. Joint control is defined as the contractually agreed sharing of control over a business or asset, where no single party has control. Joint arrangements can take many forms, including joint operations, joint ventures, and partnerships.

Types of Joint Arrangements

There are two types of joint arrangements: joint operations and joint ventures.

Joint Operations: A joint operation is a joint arrangement where the parties have joint control over the operation of a business or asset. In a joint operation, the parties have rights to the assets and obligations for the liabilities of the arrangement. The parties account for their share of the assets, liabilities, revenues, and expenses of the joint operation.
Joint Ventures: A joint venture is a joint arrangement where the parties have joint control over a business or asset, but the parties do not have rights to the assets and obligations for the liabilities of the arrangement. Instead, the parties account for their investment in the joint venture using the equity method.

Equity Method of Accounting

The equity method of accounting is a method of accounting for investments in associates, which is defined in IAS 28. An associate is an entity over which the investor has significant influence, but not control or joint control. Significant influence is defined as the power to participate in the financial and operating policy decisions of the investee, but not to control those decisions.

Under the equity method, the investor recognizes its investment in the associate at cost, and then adjusts the carrying amount of the investment to reflect the investor’s share of the associate’s profit or loss. The investor also recognizes its share of the associate’s other comprehensive income.

The equity method is applied as follows:

Initial Recognition: The investor recognizes its investment in the associate at cost.
Share of Profit or Loss: The investor recognizes its share of the associate’s profit or loss in its income statement.
Other Comprehensive Income: The investor recognizes its share of the associate’s other comprehensive income in its other comprehensive income statement.
Impairment: The investor assesses the investment for impairment, and recognizes any impairment loss in its income statement.

Example

Suppose Company A invests $100,000 in Company B, which is an associate of Company A. Company A has significant influence over Company B, but not control or joint control. In the first year, Company B makes a profit of $20,000. Company A recognizes its share of Company B’s profit, which is 20% of $20,000, or $4,000. Company A also recognizes its share of Company B’s other comprehensive income, which is $1,000. The carrying amount of Company A’s investment in Company B is increased by $5,000, to $105,000.

Advantages of Joint Arrangements

Joint arrangements offer several advantages, including:

Shared Risk: Joint arrangements allow parties to share the risks and rewards of a business or project.
Access to New Markets: Joint arrangements can provide access to new markets, customers, and technologies.
Improved Efficiency: Joint arrangements can improve efficiency by allowing parties to share resources and expertise.
Increased Flexibility: Joint arrangements can provide increased flexibility, as parties can adjust their level of involvement and commitment as needed.

Challenges of Joint Arrangements

Joint arrangements also present several challenges, including:

Complexity: Joint arrangements can be complex and difficult to establish and manage.
Conflicting Interests: Joint arrangements can involve conflicting interests and priorities among the parties involved.
Cultural and Language Barriers: Joint arrangements can involve cultural and language barriers, which can create communication and coordination challenges.
Regulatory Requirements: Joint arrangements must comply with regulatory requirements, which can be time-consuming and costly.

Best Practices for Joint Arrangements

To succeed in joint arrangements, parties should follow best practices, including:

Clear Communication: Parties should communicate clearly and regularly to ensure that everyone is aligned and informed.
Defined Roles and Responsibilities: Parties should define their roles and responsibilities clearly to avoid confusion and overlap.
Established Decision-Making Processes: Parties should establish decision-making processes that are fair, transparent, and efficient.
Regular Monitoring and Evaluation: Parties should monitor and evaluate the joint arrangement regularly to ensure that it is meeting its objectives and to identify areas for improvement.

Conclusion

In conclusion, IFRS 11 and IAS 28 provide important guidance on accounting for joint arrangements and investments in associates. The standards introduce a new approach to accounting for joint arrangements, and provide a clear framework for applying the equity method of accounting. By understanding these standards, companies can ensure that their financial statements accurately reflect their investments in joint arrangements and associates.

Frequently Asked Questions

1. What is a joint arrangement?

A joint arrangement is an arrangement where two or more parties have joint control over a business or asset.

2. What is the difference between a joint operation and a joint venture?

A joint operation is a joint arrangement where the parties have joint control over the operation of a business or asset, while a joint venture is a joint arrangement where the parties have joint control over a business or asset, but the parties do not have rights to the assets and obligations for the liabilities of the arrangement.

3. What is the equity method of accounting?

The equity method of accounting is a method of accounting for investments in associates, where the investor recognizes its investment in the associate at cost, and then adjusts the carrying amount of the investment to reflect the investor’s share of the associate’s profit or loss.

4. What are the advantages of joint arrangements?

Joint arrangements offer several advantages, including shared risk, access to new markets, improved efficiency, and increased flexibility.

5. What are the challenges of joint arrangements?

Joint arrangements present several challenges, including complexity, conflicting interests, cultural and language barriers, and regulatory requirements.

Glossary

Joint Arrangement: An arrangement where two or more parties have joint control over a business or asset.
Joint Operation: A joint arrangement where the parties have joint control over the operation of a business or asset.
Joint Venture: A joint arrangement where the parties have joint control over a business or asset, but the parties do not have rights to the assets and obligations for the liabilities of the arrangement.
Equity Method: A method of accounting for investments in associates, where the investor recognizes its investment in the associate at cost and then adjusts the carrying amount of the investment to reflect the investor’s share of the associate’s profit or loss.
Associate: An entity over which the investor has significant influence but not control or joint control.

Bookkeeping Services at One Web One Hub in association with MTF & Co.

One Web One Hub, in association with MTF & Co., offers comprehensive bookkeeping services to help businesses comply with IFRS 11 and IAS 28. Our team of experienced accountants and bookkeepers can assist with:

Financial statement preparation
Accounting and reporting for joint arrangements and investments in associates
Equity method of accounting
Impairment testing and recognition
Financial analysis and reporting

Contact us today to learn more about our bookkeeping services and how we can help your business succeed. Please email us at mtfco@onewebonehub for more details.

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