Answer to Question #294572 in Accounting for lloyd

Question

IFRS 11 - Classifying Joint Arrangement Practice Exercise 2

 

For each of the following scenario, identify which type of joint arrangement qualifies based on the given facts.

 

 

1.         Parties A and B provide many types of construction services, and jointly enter into a contractual arrangement to design/build a road. The parties set up a separate vehicle (entity Z) to facilitate this arrangement.

Entity Z enters into a contract with the government for the road and holds the assets and liabilities relating to the road contract, as well as invoicing the government for the construction services.

 

The main feature of entity Z's legal form is that the parties (not entity Z in its own right) have rights to the assets, and obligations for the liabilities, of entity Z.

 

Entities A and B appoint an operator, who will be an employee of one of the parties.

 

Answer 1

Entity Z should be classified as a joint operation in the books of Parties A and B, and not a joint venture, for the following reasons:

1. Entity X is a company in its own right (i.e., created using a separate vehicle)
2. While Entity Z holds the assets and liabilities in respect to the road contract construction, Parties A and B have the right to Entity Z's assets, and obligation to its liabilities - in tandem with the provisions of paragraph B27 of IFRS 11.

References

International Accounting Standards Board (IASB). (2021). IFRS 11 - Joint Arrangements. Author; London, United Kingdom. https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ifrs-11-joint-arrangements.pdf.