Accounting Science

Review of IFRS11 Standard : Joint Arrangements

Posted by

mariam elghandour

March 15, 2025

On February 17, 2025

IFRS11 STANDARD, “Joint Arrangements,” addresses how entities account for their investments in activities over which they share control with other parties. IFRS11 STANDARD sets out the principles for recognition, measurement, presentation, and disclosure of interests in joint arrangements to ensure these investments are fairly represented in the financial statements. This article provides a comprehensive review of IFRS11 STANDARD, discussing its objectives, scope, and types of joint arrangements, with a focus on the accounting for each type. We will also highlight the standard’s importance and its impact on financial statements.

What is IFRS11 Standard: Joint Arrangements?

IFRS11 STANDARD is an International Financial Reporting Standard that deals with the accounting for joint arrangements. The standard defines how to determine whether an arrangement is a joint arrangement, how to classify joint arrangements into joint operations or joint ventures, and how to account for each type of these arrangements. IFRS11 STANDARD replaced IAS 31, “Interests in Joint Ventures.”

Objectives of IFRS11 Standard:

Establish Principles for Accounting for Joint Arrangements: IFRS11 STANDARD aims to provide a clear and consistent framework for accounting for investments in activities subject to joint control.
Improve the Quality of Disclosures: IFRS11 STANDARD imposes specific disclosure requirements to improve the transparency and reliability of information related to joint arrangements in the financial statements.
Enhance Comparability: IFRS11 STANDARD contributes to improving the comparability of the financial statements of entities participating in joint arrangements.
Provide Useful Information for Decision-Making: IFRS11 STANDARD provides information that enables investors, creditors, and other stakeholders to assess the nature and extent of the risks and returns related to an entity’s participation in joint arrangements.

Scope of IFRS 11 Standard:

IFRS11 STANDARD applies to all entities that are a party to a joint arrangement. IFRS11 Standard defines a joint arrangement as an arrangement of which two or more parties have joint control.

Joint Control: 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.

Types of Joint Arrangements:

IFRS11 Standard classifies joint arrangements into two main types:

Joint Operations:
- Definition: 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.
- Characteristics of Joint Operations:
  - No separate legal entity is created.
  - Each party retains rights to specific assets and undertakes specific liabilities.
  - The parties share the revenues and expenses from the joint operation.
- Accounting for Joint Operations:
  - Recognition of Assets and Liabilities: A party to a joint operation shall recognize its share of the assets and liabilities of the joint operation in its financial statements.
  - Recognition of Revenues and Expenses: A party shall recognize its share of the revenues and expenses of the joint operation in its statement of profit or loss.
  - Recognition of Transactions with the Joint Operation: A party shall recognize gains and losses from transactions with the joint operation, but only to the extent of the other parties’ interests in the joint operation.
Joint Ventures:
- Definition: A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
- Characteristics of Joint Ventures:
  - A separate legal entity is usually created.
  - Each party has an interest in the net assets of the joint venture.
  - The parties share the profits and losses from the joint venture.
- Accounting for Joint Ventures:
  - Equity Method: A party to a joint venture shall recognize its interest in the joint venture as an investment in an associate and account for that investment using the equity method in accordance with IAS 28, “Investments in Associates and Joint Ventures.”
    - Initial Recognition: The investment in the joint venture is recognized at cost.
    - Subsequent Measurement: The carrying amount of the investment is adjusted by the investor’s share of the changes in the net assets of the joint venture after the acquisition date.
    - Recognition of Profits and Losses: The investor’s share of the profit or loss of the joint venture is recognized in the investor’s statement of profit or loss.

Note: IFRS11 STANDARD does not permit the use of proportionate consolidation for accounting for joint ventures, which was permitted under IAS 31.

How to Determine the Type of Joint Arrangement:

The classification of a joint arrangement depends on the rights and obligations arising from the arrangement, not on the legal form of the arrangement. To determine the type of joint arrangement, an entity should assess:

Structure of the Arrangement: Has a separate legal entity been created or not?
Contractual Terms: What rights and obligations are granted by the contractual terms to each party in the arrangement?
Other Facts and Circumstances: Any other relevant information that helps determine the rights and obligations of each party.

Disclosure Requirements under IFRS11 STANDARD:

IFRS11 STANDARD requires entities participating in joint arrangements to disclose information about:

Nature, Extent, and Risks of Joint Arrangements: Information about the nature of the activities undertaken through joint arrangements and the key risks associated with those activities must be disclosed.
Accounting Policies Used to Account for Joint Arrangements.
Basis for Determining the Type of Joint Arrangement (Joint Operation or Joint Venture).
Summarized Financial Information for Each Material Joint Venture, including the entity’s share of assets, liabilities, revenues, expenses, and net profit or loss.
Reconciliations between the Carrying Amount of the Entity’s Interest in Each Joint Venture and the Disclosed Amount.
Information about Any Significant Restrictions on the Ability of the Joint Venture to Transfer Funds to the Entity.
Information about Any Financial or Other Support Provided to the Joint Arrangement.

Importance of IFRS11 STANDARD for Users of Financial Statements:

IFRS11 STANDARD provides valuable information to users of financial statements, such as investors and analysts, helping them to:

Understand the nature and extent of an entity’s participation in joint arrangements.
Assess the risks and returns related to joint arrangements.
Analyze the impact of joint arrangements on the entity’s financial position and financial performance.
Compare the performance of entities participating in joint arrangements.
Make more informed investment and financing decisions.

Challenges in Applying IFRS11 STANDARD:

Determining Whether an Arrangement is a Joint Arrangement: In some cases, it can be difficult to determine whether an arrangement is a joint arrangement, especially when participation agreements are complex.
Classifying the Joint Arrangement: It can be difficult to determine whether a joint arrangement is a joint operation or a joint venture, especially when a separate legal entity is not created.
Gathering Financial Data from Joint Operations or Joint Ventures: It can be difficult to gather the necessary financial data from joint operations or joint ventures, especially if those operations or ventures operate in countries with different accounting practices.
Applying the Equity Method to Joint Ventures: Accountants may encounter difficulties in correctly applying the equity method, especially when there are complex transactions between the entity and the joint venture.

Practical Example of Applying IFRS 11 Standard:

Scenario: Company “A” and Company “B” establish a joint company “C” to produce and sell a new product. Company “A” owns 60% of the shares of Company “C,” while Company “B” owns 40%. The two companies share control of Company “C” under a shareholders’ agreement that stipulates that all major decisions require the consent of both parties.

Analysis:

Joint Arrangement: Company “C” is a joint arrangement because Companies “A” and “B” share control of it.
Type of Joint Arrangement: Company “C” is a joint venture because the companies have rights to the net assets of the company.
Accounting: Company “A” must use the equity method to account for its interest in Company “C” in its financial statements. Company “A” will recognize its share of the profit or loss of Company “C” in its statement of profit or loss.

Note: For more information about IFRSs in general, you can refer to an article on: [International Financial Reporting Standards] (You would insert a relevant link here in a real document).

Role of Technology in Applying IFRS11 STANDARD:

Accounting software and Enterprise Resource Planning (ERP) systems help in applying IFRS11 STANDARD more efficiently and accurately through:

Automating the accounting process for joint arrangements.
Facilitating the collection of financial data from joint operations or joint ventures.
Generating the reports necessary to comply with disclosure requirements.
Improving the accuracy and comprehensiveness of disclosures related to joint arrangements.

Conclusion:

IFRS11 STANDARD provides a clear accounting framework for joint arrangements, helping to improve the quality and transparency of financial information related to these arrangements. Companies participating in joint arrangements must adhere to the requirements of this standard to ensure the proper recognition, measurement, presentation, and disclosure of their interests in these arrangements. Understanding IFRS11 STANDARD is essential for accountants, auditors, investors, and anyone seeking to understand how joint arrangements affect an entity’s financial position and financial performance. With the increasing prevalence of joint arrangements in today’s business environment, IFRS11 STANDARD is becoming increasingly important as a tool to enhance the transparency and reliability of financial reporting and support the efficiency of capital markets.