IFRS 11 Joint Arrangements for Accounting Services in Dubai

Joint operation or joint venture? Understanding how accounting services in the UAE classify and account for joint arrangements matters for any business co-investing with another party. This guide covers investments in joint arrangements, which fall into either a joint operation or a joint venture under IFRS 11, Joint Arrangements.

IFRS 11 was introduced in 2011 and became effective from 1 January 2013, replacing the older guidance in IAS 31 and SIC-13, both of which are no longer applicable.

The Role of IFRS 11

The main goal of IFRS 11 is to strengthen financial reporting principles for arrangements that are jointly controlled. To do this, IFRS 11:

• Defines what joint control actually means
• Requires classification of the specific type of joint arrangement
• Sets out how to recognize the interest in a joint arrangement based on that classification

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What Joint Control Is and How to Identify It

Under IFRS 11, joint control is the contractually agreed sharing of control of an arrangement, existing only when decisions about important activities require unanimous agreement of those sharing control. Two elements are essential:

1. Contractual Arrangement

The contractual arrangement should always be documented in writing, whether as a formal agreement or other documented records of the parties involved. In some cases, statutory or legal provisions can be sufficient to establish the contractual arrangement.

2. Sharing of Control

This element is satisfied when all parties acting together can direct the arrangement’s important decisions. No single party can unilaterally control the arrangement on its own.

Worked Example: Identifying Joint Control

Three entities co-invest in a venture. The largest holds 50% of shares, and the other two hold 25% each. The contract requires 75% approval for key decisions. The majority shareholder alone can’t make decisions, since 50% falls short of the 75% threshold, but it can block any decision, since no combination reaching 75% is possible without its participation. This is genuine joint control, though which specific combination of parties must actually agree needs to be clearly established in the contract. If the contract instead required only 50% approval, the majority shareholder alone would hold unilateral control, and joint control wouldn’t exist at all.

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Classification of Joint Arrangements

An investor with an interest in a joint contract must classify the arrangement correctly, since the two types are accounted for very differently:

Joint Venture

Parties with joint control have rights to the arrangement’s net assets. Participants in a joint venture are called joint venturers.

Joint Operation

Parties with joint control have rights to the assets and obligations for the liabilities relating to the arrangement. This structure is called a joint operation.

How to Tell the Difference

Classification depends on the rights and obligations arising from the arrangement, heavily influenced by whether the arrangement is structured through a separate vehicle. Some vehicles are separate legal entities, such as companies, while others are recognized through statute without necessarily being a distinct legal person.

Not Structured Through a Separate Vehicle

Arrangements without a separate vehicle are straightforward to classify, they’re joint operations.

Structured Through a Separate Vehicle

Arrangements structured through a separate vehicle can be either joint ventures or joint operations. Determining which requires examining:

• The arrangement’s legal form
• The terms of the contract
• Other relevant facts and circumstances

For example, two entities invest funds in a separate legal entity, holding 50% each. Because the vehicle is legally separate from its owners, its assets and liabilities generally belong to the vehicle itself, pointing toward joint venture treatment. However, if the contract specifically states both entities have direct interests in the vehicle’s assets and are jointly liable for its liabilities in proportion to their interests, it’s a joint operation instead, despite being structured through a separate legal entity. As a general pattern, once parties create a separate legal entity and share joint control without this kind of specific contractual override, the arrangement usually ends up classified as a joint venture.

How Joint Ventures Are Accounted For

Under IFRS 11, investments in joint ventures must be accounted for using the equity method set out in IAS 28, Investments in Associates and Joint Ventures. Under this method, the investment is initially recognized at cost, and its carrying amount is subsequently adjusted to reflect the investor’s share of the joint venture’s profits or losses each period, rather than the investor separately recording its share of the joint venture’s individual assets, liabilities, revenues, and expenses.

How Joint Operations Are Accounted For

Joint operations are accounted for very differently, and this is the part often left unexplained. Rather than using the equity method, a joint operator recognizes, in relation to its interest in the joint operation:

• Its own assets, including its share of any jointly held assets
• Its own liabilities, including its share of any jointly incurred liabilities
• Its revenue from the sale of its share of the output arising from the joint operation
• Its share of the revenue from the sale of output by the joint operation itself
• Its own expenses, including its share of any expenses incurred jointly

In practice, this means a joint operator’s financial statements directly reflect its proportional share of the underlying assets, liabilities, income, and expenses, line by line, rather than a single net investment figure the way the equity method presents a joint venture interest. Getting this distinction right matters considerably, applying the equity method to what’s actually a joint operation, or vice versa, would materially misstate both the balance sheet and the income statement.

Frequently Asked Questions (FAQs)