Answer to Question #294574 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.        Two parties enter into a joint arrangement which is structured through an incorporated entity in which each party has a 50% ownership interest. There are no other contractual arrangements in place between the parties.

 

 

2.       Two parties enter into a joint arrangement which is structured through an incorporated entity in which each party has a 50% ownership interest.

 

The parties have also modified the features of the corporation through a separate contractual arrangement so that each has an interest in the assets of the incorporated entity, and each is responsible for settling its liabilities in a specified proportion

Answer 1

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:

• Entity X is a company in its own right (i.e., created using a separate vehicle) - This goes in line with the provisions of paragraph B23 of IFRS 11.
• Parties A and B have equal ownership rights, which means they have joint control of the business, seeing as ownership rights could also mean voting rights - as stipulated by paragraph B8 of IFRS 11.

Since no other contractual clause exists, these conditions are enough to classify Entity X as a Joint Venture arrangement.

2) 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:

• Entity X is a company in its own right (i.e., created using a separate vehicle) - This goes in line with the provisions of paragraph B23 of IFRS 11.
• Parties A and B have equal ownership rights, which means they have joint control of the business, seeing as ownership rights could also mean voting rights - as stipulated by paragraph B8 of IFRS 11.
• Parties A and B have the right to Entity X's assets, and obligation to its liabilities - as stipulated by 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.