Acquisitions of interests in joint operations that are businesses

ey.com/oilandgas April 2013 IFRS Developments for Oil & Gas Acquisitions of interests in joint operations that are businesses An analysis of the potential business and accounting implications of the proposed amendment to IFRS 11 Joint Arrangements What you need to know There is diversity in practice when accounting for the acquisition of an interest in a joint operation that is a business. The IASB has issued an exposure draft proposing to amend IFRS 11 Joint Arrangements to require an entity to apply the principles of business combinations accounting to such a transaction, which we believe is the most appropriate approach. There are still a significant number of areas where the accounting requirements are not clear and we believe the IASB will need to clarify these if further diversity is to be avoided. For some entities, the proposed amendment will be a significant change to current practice. If an oil and gas entity has particular concerns, it should submit a comment letter to the IASB. Closing date for comments is 23 April 2013. What s happened? Joint arrangements are common in the oil and gas sector, therefore any changes in the accounting for them can have wide-ranging implications. In May 2011, the IASB 1 issued a new standard, IFRS 11 Joint Arrangements, which became effective from 1 January 2013. While IFRS 11 introduces many changes, two primary changes are: There are now only two types of joint arrangements joint ventures and joint operations, with the latter likely to be the most common in the oil and gas sector Proportionate consolidation is no longer permitted for arrangements classified as joint ventures, instead equity accounting has to be applied While IFRS 11 provides guidance on most of the accounting for joint operations, there are certain issues it does not address. One such issue is how a joint operator (one of the parties with joint control over a joint operation) should account for the acquisition of an interest in a joint operation which represents a business. The predecessor to IFRS 11, IAS 31 Joint Ventures, was also silent on this issue, leading to diversity in practice. Some oil and gas entities applied full business combinations accounting as they considered this guidance to be most relevant, while others applied the relative fair value approach as they considered the business combination principles only applied where control was obtained, not joint control. A smaller group only applied business combinations accounting principles to those issues not covered in other standards. There was concern that, without clarification, such diversity may continue under IFRS 11. The matter was referred to the IFRS Interpretations Committee and then to the IASB, which has now issued an exposure draft (ED) of a proposed amendment to IFRS 11. The amendment proposes that, where a joint operator acquires an interest in a joint operation in which the activity of the joint operation represents a business, it must apply the relevant principles on business combinations accounting as set out in IFRS 3 Business Combinations and other standards. In addition, the joint operator must also provide the relevant business combinations disclosures required by those standards. For some entities, the proposed amendment will represent a significant change to current practice. In this edition of IFRS Developments, we summarise the proposed changes and explore some of the potential implications for oil and gas entities. We also highlight some areas where uncertainty remains and which, if left unaddressed, may contribute to ongoing diversity. 1 International Accounting Standards Board

An overview of the proposed amendment In addition to specifying that the relevant principles of business combinations accounting apply, the proposed amendment then specifically lists the following four principles: Measure identifiable assets acquired and liabilities assumed at their acquisition-date fair values (unless an exception is given in IFRS 3 or other standards) Recognise acquisition-related costs as expenses in the period in which the costs are incurred and the services are received (unless they represent equity or debt raising costs) Recognise deferred tax assets and liabilities that arise from the initial recognition of assets and liabilities (excluding the initial recognition of goodwill) Recognise the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed (if any), as goodwill It is unclear why the IASB specifically listed these four principles in the ED. While we believe it is likely that the IASB s intention was for all relevant IFRS 3 business combinations principles to apply, and that the four principles were simply listed as examples, there is a risk some may interpret this to mean these are the only relevant principles. Alternatively, there is a possibility that the other principles in IFRS 3 may be viewed as less important. We discuss the impact of this potential lack of clarity in more detail later in the publication. Scope The proposed amendment would apply to the acquisition of an interest: In an existing joint operation that is a business Or On the formation of a joint operation when an existing business is contributed It would not apply to the formation of a joint operation where this coincides with the formation of a business, e.g., when an entity forms a joint operation, and the assets (and liabilities, if relevant) being contributed did not represent a business previously, but when combined in the joint operation would now create a business (from the perspective of the joint operation). Effective date The proposed amendment would apply prospectively to those acquisitions in scope that occur on or after the effective date and therefore comparatives will not need to be restated. To illustrate, if the effective date were to be 1 January 2015, an entity would only apply this proposed amendment to any acquisitions in scope which occurred on or after 1 January 2015. The 2014 and prior comparatives would not have to be restated. This transition approach was recommended to avoid the use of hindsight which an entity may be likely to apply if it had to retrospectively determine the acquisition-date fair values of assets and liabilities that had been acquired prior to the effective date. The IASB has not yet indicated what the effective date will be. However, it has specifically requested feedback on this. The challenges While the proposed amendment may seem relatively straight forward, it presents a number of challenges. Some of the challenges will arise simply as a result of now having to apply business combinations accounting, while others relate to the nature of the proposed amendment itself. For some entities, the proposed amendment will require a significant change in accounting practices. There are also some related considerations where the accounting is not entirely clear. We will explore these further below. Business versus asset One of the key judgements that is relevant to all business combinations, and will be relevant in determining which arrangements will be impacted by the proposed amendment, is whether the activities of the joint operation, or the set of activities and assets contributed to the joint operation on its formation, represent a business as defined by IFRS 3. In 2009, the revised business combinations standard became effective and it introduced a new definition of a business and guidance for its identification. IFRS 3 defines a business as: An integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. Further guidance in the standard explains that a business consists of inputs and processes applied to those inputs that have the ability to create outputs. Although businesses usually have outputs, outputs are not required for an integrated set of activities to qualify as a business. 2 An output is defined as being the result of inputs and processes applied to those inputs that provide or have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to investors or other owners, members or participants. 3 Despite the revised IFRS 3 having been applied for more than three years in the oil and gas sector, the assessment of whether a set of activities and assets represent a business is still highly judgemental and some diversity in practice among IFRS reporters has emerged. 2 IFRS 3.BC7 3 IFRS 3.BC7(c) IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 2

The proposed amendment to IFRS 11 would mean more transactions would need to be assessed to determine whether they represented the acquisition of a business or an asset. Hence, this assessment would require more time and effort. The IASB is expected to initiate its post-implementation review of IFRS 3 in the first half of 2013. While it is our view that the definition of a business in the revised IFRS 3 is wider and will generally mean more acquisitions are likely to be considered businesses, given the diversity we observe in practice among IFRS reporters, we believe it is critical that, as part of its review, the IASB provides additional guidance in order to reduce this diversity. Which transactions are in scope? An oil and gas entity may increase its interest in a joint operation over time by making subsequent acquisitions. For example, through a farm-in arrangement, an entity may initially acquire a 20% interest in a joint operation. Then, for various reasons, the entity may undertake a further farm-in at a later date to increase its interest in that same joint operation by another 30%, thereby taking its total interest to 50%, while still maintaining joint control. This would mean the arrangement would remain a joint operation in the scope of IFRS 11. The proposed amendment states that it applies where an entity acquires an interest in a joint operation. This raises the question as to whether the proposed amendment only applies to the acquisition of the initial interest in the joint operation, i.e., the first 20% in our example above or whether it should apply to each individual acquisition, i.e., each separate tranche, that is the first 20% and then the subsequent 30%. Early informal discussions on this issue, both within the oil and gas sector and more broadly, have revealed that differing views are already emerging. We discuss farm-in transactions in more detail later in this publication. As differing views are already emerging on the scope of the proposed amendment, if it was the IASB s intention for these requirements to apply to each tranche separately, we believe additional guidance should be added to clarify this. Impact of applying business combinations accounting For those entities that had not previously applied a business combinations approach, the key implications of now having to apply such an approach include: Increased time, cost and effort the fair value of the identifiable assets acquired and liabilities assumed needs to be determined for both a relative fair value approach and a business combinations approach, which will generally require greater time, cost and effort for the business combinations approach. This is because in applying the relative fair value approach, many entities have historically determined the fair value of all assets and liabilities (excluding mineral rights/assets), recognised those amounts as part of the acquisition entries and then allocated any residual to the mineral rights/assets. They have generally tended not to dedicate a great deal of effort to separately value the mineral rights/assets, nor to identify and value other assets such as the value of reserves/resources beyond proven and probable and/or acquired exploration potential. A business combinations approach would require all assets to be fair valued, including mineral rights/assets and the other identifiable intangible assets. Valuing such assets is more complicated and therefore more time-consuming and costly. In addition, if the requirement is to have to apply these principles to each tranche, further fair value exercises will be required if and when the entity increases its interest in the joint operation at a subsequent date(s). Balance sheet and profit or loss profiles would change the changes arise because: Assets and liabilities would initially be recognised at different amounts compared to a relative fair value approach Deferred tax balances would need to be recognised as the initial recognition exemption will not be available Transaction costs would have to be expensed rather than capitalised Goodwill may be recognised Increased complexity of record-keeping in some instances, the joint arrangement operator/manager maintains the ledgers of each of the parties to the joint arrangement. This process would become more complex especially if the parties acquire their interests at different times. IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 3

Other business combinations principles - areas where further clarity is required As explained earlier, the proposed amendment generally requires the principles on business combinations accounting to be applied to the acquisition of an interest in a joint operation that is a business; as such, it then specifically lists four principles. As highlighted above, this raises the question whether these are the only principles that need to be applied, or whether these are just examples. We will now explore how this lack of clarity may contribute to divergent interpretations. In some instances, it will be obvious which principles do not apply. For example, an entity would not apply the requirements relating to the recognition of a non-controlling interest. It would only apply the business combinations principles to the interest it acquired and not the remaining interest(s) in the joint arrangement. This is because it does not control these interests. However, in other instances, it is not clear which other business combinations principles apply or not. There are a number of areas where it is not clear what the accounting should be; three areas, in particular, are worth discussing: accounting for bargain purchases; accounting for the consideration transferred; and accounting for step acquisitions. Bargain purchases While one of the four principles listed discusses the recognition of goodwill, it does not make any reference to a gain on a bargain purchase and how it should be accounted for. Therefore, it is unclear whether similar principles in IFRS 3 or another method of accounting are to be applied. Consideration transferred The second area where it is not clear whether or not the other principles in IFRS 3 should apply, is determining the consideration transferred. For example, it does not discuss how contingent consideration (if any) should be treated, or what should happen when there is no consideration. At present, it could be interpreted that the proposed amendment remains silent on this issue as none of the four principles listed mentions this. Contingent consideration IFRS 3 is clear as to how contingent consideration for a business combination that is in the scope of IFRS 3 should be treated. However, in relation to the acquisition of an interest in a joint operation that is a business, it is not clear whether the proposed amendment would require the IFRS 3 contingent consideration principles, or some other principles, to be applied. It is important that this is clarified in the final amendment, particularly if the view is that the IFRS 3 principles do not apply. Clarification is important because: Arrangements involving the acquisition of an interest in a joint operation can take many different forms and may involve a range of variable payments, e.g., certain types of royalty arrangement, net profit payments, and production based payments, some of which may be considered contingent consideration. There is diversity in the accounting for contingent consideration relating to acquisitions that do not fall within the scope of IFRS 3, i.e., they are not businesses for example, acquisitions of property, plant and equipment. Specifically, there are differences in views about when such contingent arrangements should be recognised initially, i.e., at the date the asset is acquired or at some later date, and also where subsequent movements in any liability booked should be recognised, i.e., as either an adjustment to the asset acquired or in profit or loss. Given this diversity in practice, the issue of contingent consideration in the acquisition of property, plant and equipment was separately referred to the IFRS Interpretations Committee and has been on its agenda since early 2011. At the time of writing this publication, this issue was still being considered by the IFRS Interpretations Committee. However, it was tentatively proposing an accounting treatment that would differ from that applied to contingent consideration in a business combination. No consideration The proposed amendment also appears to be silent on the accounting for an interest that is acquired in a joint operation, but for which no consideration has been transferred. This could occur where an assessment of the initial contractual arrangements did not result in joint control as defined in IFRS 11. Hence, the arrangement was not in the scope of IFRS 11. A possible example of this may be an arrangement where there are three parties, each with a one third interest in the joint operation, but the decision-making process only requires any two parties to agree. As there are multiple combinations under which a decision can be reached, joint control as defined in IFRS 11, is not considered to exist. Therefore, the arrangement is not initially in the scope of IFRS 11. However, there may be a subsequent change in facts and circumstances which, in turn, changes the assessment of joint control such that joint control is now considered to exist. This would bring the arrangement into the scope of IFRS 11. Following on from the example above, this could occur if there was a change in the contractual terms which meant the decision-making process now required all three parties to agree. As all parties need to agree to pass a decision, joint control would now be considered to exist. IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 4

In this instance, the entity is technically obtaining or acquiring an interest in a joint operation, but no consideration has been transferred. We believe the proposed amendment is not sufficiently clear as to whether IFRS 3 s principles are to be applied to both bargain purchases and to the determination of consideration transferred. Therefore, diversity in practice may arise. In finalising this amendment, we would recommend the IASB clarify this point to reduce any uncertainty. Transactions where an entity notionally moves from joint control to control The third area of uncertainty in the proposed amendment relates to those transactions where an entity notionally moves from joint control to control. From time to time, an oil and gas entity may acquire an initial interest and/or a subsequent interest, in a joint operation, e.g., via a farm-in arrangement, while continuing to maintain joint control. It may then acquire a further interest which notionally moves it from joint control to control. For example, the entity may have farmed in for an original 50% interest in a joint operation and then undertakes a further farm-in to acquire the remaining 50% such that it now owns 100% of the assets and liabilities of the arrangement. It could be argued that this situation is somewhat similar to a business combination achieved in stages (as referred to in IFRS 3). This is where an acquirer obtains control of an acquiree in which it held an equity interest immediately before the acquisition date. In this situation, the acquirer is required to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in full in profit or loss. This raises the question whether the same principles also apply to transactions where an entity notionally moves from joint control to control of a joint operation that is a business. This question was raised by a constituent in the initial deliberations by the IFRS Interpretations Committee. While the IFRS Interpretations Committee staff acknowledged that it was a valid issue, they believed it went beyond the scope of the guidance being developed on these acquisitions. This was because it was not related to the acquisition of an interest in a joint operation, but to the loss of joint control or the disposal of an interest in a joint operation. They did, however, indicate that it should be considered separately at some point in the future. There is significant diversity in views about whether IFRS 3 s principles on business combinations achieved in stages should apply to transactions where a joint operator notionally goes from joint control to control of a joint operation that is a business. Some believe the transaction simply involves the entity acquiring an additional interest in a number of assets and/or liabilities in which it already had a direct interest and that the nature of the interest has not changed. Therefore, only partial gain/loss recognition is required. Others believe the nature of the investment has changed as the entity now has control over the business. Therefore full gain/loss recognition is more appropriate. While we understand that the IFRS Interpretations Committee sees this issue as outside the scope of the proposed amendment, we believe it is critical that all issues relating to transactions involving joint operations are addressed. Therefore, we strongly recommend the IASB address this issue through another avenue, on a timely basis, to help avoid further diversity. Impact on farm-in arrangements As mentioned, one area of accounting common to the oil and gas sector is farm-in arrangements. A farm-in involves the transfer of part of an oil and gas interest in consideration for an agreement by the transferee (farmee) to meet, absolutely, certain expenditure which would otherwise have to be undertaken by the owner (farmor). A farm-in is characterised by the farmor giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations, which are instead met by the farmee. Depending on how the farm-in is structured, these arrangements can result in the acquisition of an interest in a joint arrangement, and such arrangements may potentially be classified as joint operations. Given this, the effect of the proposed IFRS 11 amendment will need to be considered. There are many issues to consider, some of which we discuss below. Business versus asset Farm-in transactions generally occur in the exploration or development phase of an oil and gas project. As discussed above, there are divergent views about how the definition of a business should be interpreted and applied to the acquisition of an interest in a joint operation in these phases. As such, this will add to the complexity of accounting for farm-ins. IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 5

Transactions in scope An entity may decide to undertake a further farm-in at a later date to increase its interest in that same joint operation, while still maintaining joint control. Depending on how the IASB decides to address the issue, i.e., whether the proposed amendment applies only to the initial acquisition, or it applies separately to each individual acquisition, the accounting for farm-ins may be affected. Determining the date at which to recognise the transaction Farm-in transactions can take many different forms; some involve the farmee obtaining its interest in the project upfront, whereas in others, the farmee only receives its interest once it has completed the required activities. The farmee will need to assess if, and when, joint control commences, as this will impact: Whether the arrangement is in the scope of IFRS 11 and therefore, whether it is impacted by the proposed amendment to IFRS 11 When the farmee is considered to have acquired its interest, as it will be this date at which the business combinations accounting principles will need to be applied, i.e., it will be the fair value of the assets and liabilities acquired at this date that will need to be determined Joint control is defined as the contractually agreed sharing of control of an arrangement and it will only exist 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. When it comes to farm-in arrangements, an entity will need to determine whether and when it is able to demonstrate that it is part of the unanimous decision-making process in relation to the relevant activities. This may or may not coincide with the point when the farmee is actually granted its percentage share in the arrangement. Also, for arrangements where the farmee is only considered to acquire its interest in the joint operation once all activities are completed and joint control only exists from that date, it will need to decide how it will account for any expenditure it incurs and pays for, on the farmor s behalf, up to that date. Determining consideration transferred Farm-in arrangements can be structured in numerous ways, some requiring payment of a fixed monetary amount upfront and/or in the future. Others may be more flexible and state, for example, that capital expenditures over the next five years will be paid for by the farmee regardless of what those amounts may be or an additional payment may be contingent on a particular outcome, e.g., the success or failure of certain exploration activities. Consequently, determining the exact timing and amount of the future commitments may be complex. There is some diversity in how these types of arrangements are accounted for. In some cases, it is argued that the liability of the farmee to pay the farmor s share of the future capital expenditure commitments meets the definition of a financial liability under IAS 32 Financial Instruments: Presentation and should be accounted for in accordance with IAS 39 Financial Instruments Recognition and Measurement. There is also some debate about when this liability should be recognised. Some argue that the liability for the future farm-in commitments should be recognised up front at the start of the farm-in, whereas others argue it should be recognised at a later date. In scenarios where the timing and amount of the future payments are uncertain, some argue that such commitments represent a provision that should be recognised under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. There are then some divergent views about when such a provision should be recognised, i.e., what the obligating event is. Given this, we currently observe diversity in the accounting for such commitments. Having said that, while there may be differences in the timing of recognition of these commitments, there is generally consistency in how they are then treated. That is, most farmees apply a cost-based approach when accounting for the expenditures under a farm-in arrangement and generally account for them in the same way as they would for directly incurred E&E or development expenditure. For example, if the farmee expenses directly incurred E&E expenditures, when it recognises the farmor s share of such E&E expenditures, it will also expense them. Whereas, if the farmee capitalises directly incurred E&E expenditures, and/or directly incurred development costs, when it recognises the farmor s share of such costs, it will also capitalise those costs. As discussed above, it is not clear how contingent consideration associated with the acquisition of an interest in a joint operation that is a business should be accounted for. Therefore, it is difficult to say exactly what the impact will be. If, for example, the IASB decides to clarify that the IFRS 3 principles on contingent consideration should apply, this will fundamentally change the accounting for farm-ins that involve future funding commitments which are considered to be contingent consideration. The proposed changes would: Introduce additional complexity to the farmee s accounting, as it would be required to fair value the future commitments, if they are considered to be contingent consideration (which may be complex depending on the nature of the farm-in arrangement) Impact the calculation of any potential goodwill or bargain purchase to be initially recognised in relation to the transaction IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 6

Impact the future balance sheet and profit or loss profile as IFRS 3 requires any contingent consideration to be fair valued at initial acquisition, with any subsequent changes to be recognised in profit or loss. Given the nature of these arrangements, the value of the future funding commitments can vary considerably. Therefore, this would create future volatility in earnings for entities that previously capitalised these future farm-in commitments as part of their oil and gas assets Increased time, cost and effort and changes to balance sheet and profit or loss profiles It is currently common practice for an oil and gas entity to apply a cost-based approach in accounting for farm-ins and therefore, not to apply business combinations accounting principles. For farm-ins in the scope of the proposed amendment, having to apply these principles, including those applicable to contingent consideration, will increase the time, cost and effort required to complete the accounting and may have a significant impact on the balance sheet and profit or loss profiles. Entities will need to understand what the impact will be as part of the process of assessing, and ultimately accounting for, future deals. Transactions where an entity notionally moves from joint control to control If an entity decides to enter into a subsequent farm-in arrangement that leads it to notionally obtaining control over the joint operation, the current uncertainty surrounding how this type of transaction should be accounted for would need to be taken into consideration. Contribution of a business to a joint operation It is quite common when acquiring an interest in a joint operation, or on formation of a joint operation, for at least one party to the joint operation to contribute a pre-existing business. As a result, the contributing party loses control of the business, and replaces it with joint control over the same business (and possibly additional assets or businesses). However, the question has arisen as how a party to a joint operation should account for this contribution. The current application guidance for IFRS 11 could be interpreted as requiring partial gain/loss recognition on the loss of control of the business. It requires that when an entity sells or contributes an asset to a joint operation, it must recognise any gain/loss only to the extent of the other parties interests in the joint operation. However, a recent ED 4, which proposes an amendment to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures, would appear to query the accuracy of this interpretation, specifically, whether the term asset includes the concept of a business. The IFRS 10/IAS 28 ED refers to contributions of a business to an associate or joint venture (i.e., the other type of joint arrangement under IFRS 11). While the ED deals with joint ventures and not joint operations, it may provide guidance that could be used by analogy in determining how to account for similar transactions involving joint operations. Prior to this ED, there had been an acknowledged conflict among some other standards and interpretations as to how to account for contributions of businesses to jointly controlled entities (JCEs) (which were a type of joint venture under IAS 31). Specifically, the conflict related to whether an entity, upon losing control of the business, should remeasure its retained interest in the business to fair value and hence recognise the full gain/loss on the transaction, or whether the retained interest should not be remeasured to fair value and only a partial gain/loss recognised. The proposed amendment to IAS 28 will now make it clear that if an entity contributes a business to a joint venture or an associate, regardless of whether it is housed in a subsidiary or not, it must recognise any gain/loss on the transaction in full, i.e., the entity must remeasure any retained interest in that business to fair value at the date it loses control. The proposed amendment to IFRS 10 states that remeasurement of a retained interest in a subsidiary on sale or contribution to a joint venture or associate will only be required where that subsidiary constitutes a business. While these proposed amendments will remove the uncertainty around contributions to joint ventures, the question still remains as to whether it will provide analogous guidance which could affect how entities account for contributions of businesses to joint operations. The question also arises whether the accounting should differ between the consolidated financial statements and the separate financial statements (if applicable). To date, informal discussions on this issue both within the oil and gas sector and more broadly, have already revealed differing views. Some believe it is clear that similar principles to those proposed for contributions of businesses to joint ventures should apply by analogy to contributions of businesses to joint operations, i.e., full gain/loss recognition, as the nature of the investment has changed. However, others believe partial gain/loss recognition is more appropriate, particularly at the consolidated level. This is because the entity is simply reducing its rights to, and obligations for, the same assets and liabilities, and therefore it would be inappropriate to recognise a full gain/loss on this transaction. Given the diversity of views, we believe it is important for the IASB to provide additional guidance, preferably via another amendment, to reduce this. 4 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Proposed amendments to IFRS 10 and IAS 28 IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 7

Final thoughts The amendment proposed to IFRS 11 is likely to have significant implications for many oil and gas entities. At the very least, additional steps will be required to analyse future acquisitions of interests in joint operations, to determine if they are in the scope of the proposed amendment. For those that are in scope, the requirement to have to apply business combinations accounting will mean the accounting for the acquisition of an interest in a joint operation will become more complex and may lead to different balance sheet and profit or loss profiles. However, as there are still many important aspects where the accounting is somewhat unclear, it is difficult to fully assess what the final impact will be. Given the regular occurrence of transactions involving joint operations in the oil and gas sector, all entities should take the time to fully understand the implications of the proposed amendment and assess the potential impact on their businesses. If there are particular concerns about the potential impacts, or there are other areas where uncertainty may exist, entities should take advantage of the comment period available in relation to the proposed amendment and provide comments to the IASB as it works to finalise the amendment. IFRS Developments for Oil & Gas: Accounting for joint operations that are businesses 8

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