Ind-AS 111 JOINT ARRAGEMENTS The material/presentation is prepared for use in educational programmes conducted by the Institute of Chartered Accountants of India. The views expressed herein do not necessarily represent the views of the Council of the Institute or any of its Committees. 1
DEFINITION AND SCOPE This standard requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved by assessing its rights and obligations arising from the arrangement. This Ind AS is to be applied by all entities that are a party to a joint arrangement. What is Joint Arrangement? A joint arrangement is an arrangement of which two or more parties have joint control. What is Joint Control? This Ind AS defines joint control as the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities (i.e. activities that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control. 3 HOW THE TYPE OF ARRANGEMENT IS DETERMINED The type of joint arrangement in which it is involved is determined by considering its rights and obligations. Which in turn is determined by considering : the structure and legal form of the arrangement, the contractual terms agreed to by the parties to the arrangement and, when relevant, other facts and circumstances. What are the characteristics of joint arrangement? A joint arrangement has the following characteristics: (a) The parties are bound by a contractual arrangement (b) The contractual arrangement gives two or more of those parties joint control of the arrangement A joint arrangement is either a joint operation or a joint venture. 4 2
Assessing joint control Does the contractual arrangement give the parties control collectively? Yes Do decisions about the relevant activities require the unanimous consent of all the parties, or of a group of the parties, that collectively control the arrangement? Do decisions for relevant activities require unanimous consent of the parties that collectively control? No No Not in Ind AS 111 Not in Ind AS 111 Yes Arrangement is jointly controlled: a joint arrangement. 5 Interaction of Ind AS 11 with other standards Control (Ind AS 110) Joint Control (Ind AS 111) Disclosures (Ind AS 112) Significant influence (Ind AS 28) Investment (Ind AS 109 / Ind AS 107 and Ind AS 113) 6 3
Interaction of Ind AS 111 with other Standards Control alone? 7 yes no Consolidation in accordance with Ind AS 110 Joint control? Disclosures in accordance with Ind AS 112 yes no Define type of joint arrangement in accordance with Ind AS 111 Significant influence? Joint Operation Joint Venture yes no Account for assets, liabilities, revenues and expenses Disclosures in accordance with Ind AS 112 Account for an investment in accordance with Ind AS 28 Disclosures in accordance with Ind AS 112 Ind AS 109 ) Disclosures in accordance with Ind ASs 107 and 113 7 Erstwhile IAS 31 Erstwhile IAS 31 Structure of the joint arrangement Not structured through an entity Structured through an entity The structure of the arrangement is the only driver for the accounting Jointly controlled operations Jointly controlled assets Accounting for assets, liabilities, revenues and expenses in accordance with the contractual arrangements Jointly controlled entities Proportionate consolidation option Equity method When arrangements are structured in entities, preparers have an accounting option 8 4
Ind AS 111 Principle-based accounting for joint arrangements Parties to a joint arrangement recognise their rights and obligations arising from the arrangement 9 Ind AS 111 Parties that have rights to the assets and obligations for the liabilities relating to the arrangement are parties to a JOINT OPERATION Parties that have rights to the net assets of the arrangement are parties to a JOINT VENTURE A joint operator accounts for its assets, liabilities and corresponding revenues and expenses arising from the arrangement A joint venturer accounts for an investment in the arrangement using the equity method 10 5
Joint operation or joint venture? A Car manufacturer B Car manufacturer 50% 50% C Engine manufacturer 11 Classification and Accounting Not structured through a separate vehicle Joint operation Accounting for assets, liabilities, revenues and expenses in accordance with the contractual arrangement 12 6
Classification and Accounting Not structured through a separate vehicle * Structured through a separate vehicle * Assess the parties rights and obligations arising from the arrangement by considering: (a) the legal form of the separate vehicle (b) the terms of the contractual arrangement, and, if relevant, (c) other facts and circumstances Assessment of the parties rights and obligations Parties have rights to the assets and obligations for the liabilities Parties have rights to the net assets Joint operation Accounting for assets, liabilities, revenues and expenses in accordance with the contractual arrangement Joint venture Accounting for an investment using the equity method Accounting reflects the parties rights and obligations 13 Two types of Joint Arrangements Type Right to Accounting Treatment Joint Venture Right Net Assets Equity Method Joint Operation Rights to assets and Obligations for liabilities Proportionate method 14 7
Overview of Accounting Associate Joint arrangement Joint venture Joint operation Ind AS 28 Ind AS 111 15 Example A and B establish joint operation C in which A and B have rights to the assets and obligations for the liabilities of C. A own 60% and B own 40% of the equity in C. However, the contractual terms of the joint arrangement state that A has the rights to all of Building No. 1 and the obligation to pay all the third party debt in C. A and B have rights to all other assets in C, and obligations for all other liabilities in C in proportion to their equity interests (i.e. 60% & 40%). C's balance sheet is as follows (in CUs): Assets Liabilities and equity Cash 20 Debt 120 Building No. 1 120 Employee benefit plan obligation 50 Building No. 2 100 Equity 70 Total assets 240 Total liabilities and equity 240 16 8
Example Under Ind AS 111, A would record the following in its financial statements, to account for its rights to the assets in C and its obligations for the liabilities in C. This may differ from the amounts recorded using proportionate consolidation. Assets Liabilities and equity Cash 12 Debt (note 2) 120 Building No. 1 (note 1) 120 Employee benefit plan obligation 30 Building No. 2 60 Equity 42 Total assets 192 Total liabilities and equity 192 Note 1: Since A has the rights to all of Building No. 1, it records that amount in its entirety. Note 2: A's obligations are for the third-party debt in its entirety. 17 ACCOUNTING BY THE JOINT OPERATOR A joint operator shall recognize in relation to its interest in a joint operation: (a) its assets, including its share of any assets held jointly; (b) its liabilities, including its share of any liabilities incurred jointly; (c) its revenue from the sale of its share of the output arising from the joint operation; (d) its share of the revenue from the sale of the output by the joint operation; and (e) its expenses, including its share of any expenses incurred jointly. 18 9
JOINT OPERATIONS A party that participates in, but does not have joint control of a joint operation shall also account for its interest in the arrangement, if that party has rights to the assets, and obligations for the liabilities, relating to the joint operation. If a party that participates in, but does not have joint control of, a joint operation does not have rights to the assets, and obligations for the liabilities, relating to that joint operation, it shall account for its interest in the joint operation in accordance with the Ind ASs applicable to that interest. 19 ACCOUNTING BY JOINT VENTURES A joint venturer shall recognize its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with Ind-AS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in Ind-AS 28. A party that participates in, but does not have joint control of, a joint venture shall account for its interest in the arrangement in accordance with Ind-AS 109 Financial Instruments, unless it has significant influence over the joint venture, in which case it shall account for it in accordance with Ind-AS 28 20 10
Separate financial statements In its separate financial statements, a joint operator or joint venturer shall account for its interest in: (a) a joint operation in accordance Ind-AS 27 (b) a joint venture in accordance with Ind AS 27 In its separate financial statements, a party that participates in, but does not have joint control of, a joint arrangement shall account for its interest in: (a) a joint operation in accordance with paragraph 23; (b) a joint venture in accordance with Ind AS 109, unless the entity has significant influence over the joint venture, in which case it shall apply Ind AS 27. 21 ACCOUNTING FOR SALES OR CONTRIBUTION OF ASSETS TO A JOINT OPERATION When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a sale or contribution of assets, it is conducting the transaction with the other parties to the joint operation and, As such, the joint operator shall recognise gains and losses resulting from such a transaction only to the extent of the other parties interests in the joint operation. 22 11
ACCOUNTING FOR PURCHASES OF ASSETS FROM A JOINT OPERATION When an entity enters into a transaction with a joint operation in which it is a joint operator, such as a purchase of assets, it shall not recognise its share of the gains and losses until it resells those assets to a third party. 23 Thank You for your Attention Any Questions? Contact :9820133227 12