Answer to Question #294573 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 are real estate companies and set up a separate vehicle (entity X) for the purpose of acquiring and operating a shopping centre.

According to entity X's legal form it has rights to its own assets, and obligations for its own liabilities, relating to the arrangement. Entity X also owns the shopping centre.

 

Parties A and Bare not liable in respect of the individual debts, liabilities or obligations of entity X. Parties A and Beach receive a share of the income from operating the shopping centre.

Answer 1

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

1. Entity X is a company in its own right (i.e., created using a separate vehicle)
2. Entity X has the right to its assets, and obligation to its liabilities - as stipulated by paragraph B23 of IFRS 11.
3. Parties A and B are not liable in respect of the individual debts, liabilities, or obligations of Entity X - which is in tandem with paragraph B27 of IFRS 11.
4. Both parties A and B share a part of operating income from the shopping center owned by Entity X - this goes in line with the conditions for a joint venture when assessing other facts and conditions as stipulated in 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.