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TMI BlogJoint ArrangementsX X X X Extracts X X X X X X X X Extracts X X X X ..... arrangement has the following characteristics: (a) The parties are bound by a contractual arrangement (see paragraphs B2- B4). (b) The contractual arrangement gives two or more of those parties joint control of the arrangement (see paragraphs 7-13). 6 A joint arrangement is either a joint operation or a joint venture. Joint control 7 Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. 8 An entity that is a party to an arrangement shall assess whether the contractual arrangement gives all the parties, or a group of the parties, control of the arrangement collectively. All the parties, or a group of the parties, control the arrangement collectively when they must act together to direct the activities that significantly affect the returns of the arrangement (ie the relevant activities). 9 Once it has been determined that all the parties, or a group of the parties, control the arrangement collectively, joint control exists only when decisions about the relevant activities require the unanimous consent of the parties tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es establish different joint arrangements to deal with specific activities that form part of the agreement. Even though those joint arrangements are related to the same framework agreement, their type might be different if the parties' rights and obligations differ when undertaking the different activities dealt with in the framework agreement. Consequently, joint operations and joint ventures can coexist when the parties undertake different activities that form part of the same framework agreement. 19 If facts and circumstances change, an entity shall reassess whether the type of joint arrangement in which it is involved has changed. Financial statements of parties to a joint arrangement Joint operations 20 A joint operator shall recognise 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 incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e over the joint venture, in which case it shall account for it in accordance with Ind AS 28. Separate financial statements 26 In its separate financial statements, a joint operator or joint venturer shall account for its interest in: a) a joint operation in accordance with paragraphs 20-22; (b) a joint venture in accordance with paragraph 10 of Ind AS 27, Separate Financial Statements. 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 paragraph 10 of Ind AS 27. Appendix A Defined terms This appendix is an integral part of the Ind AS. joint arrangement An arrangement of which two or more parties have joint control. joint control The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. joint operation A joint arra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the parties participate in the activity that is the subject of the arrangement. The contractual arrangement generally deals with such matters as: (a) the purpose, activity and duration of the joint arrangement. (b) how the members of the board of directors, or equivalent governing body, of the joint arrangement, are appointed. (c) the decision-making process: the matters requiring decisions from the parties, the voting rights of the parties and the required level of support for those matters. The decision-making process reflected in the contractual arrangement establishes joint control of the arrangement (see paragraphs B5-B11). (d) the capital or other contributions required of the parties. (e) how the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement. Joint Control (paragraphs 7-13) B5 In assessing whether an entity has joint control of an arrangement, an entity shall assess first whether all the parties, or a group of the parties, control the arrangement. Ind AS 110 defines control and shall be used to determine whether all the parties, or a group of the parties, are exposed, or have rights, to variable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though A can block any decision, it does not control the arrangement because it needs the agreement of B. The terms of their contractual arrangement requiring at least 75 per cent of the voting rights to make decisions about the relevant activities imply that A and B have joint control of the arrangement because decisions about the relevant activities of the arrangement cannot be made without both A and B agreeing. Example 2 Assume an arrangement has three parties: A has 50 per cent of the voting rights in the arrangement and B and C each have 25 per cent. The contractual arrangement between A, B and C specifies that at least 75 per cent of the voting rights are required to make decisions about the relevant activities of the arrangement. Even though A can block any decision, it does not control the arrangement because it needs the agreement of either B or C. In this example, A, B and C collectively control the arrangement. However, there is more than one combination of parties that can agree to reach 75 per cent of the voting rights (ie either A and B or A and C). In such a situation, to be a joint arrangement the contractual arrangement between the parties would need to spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either joint operations or joint ventures. When an entity has rights to the assets, and obligations for the liabilities, relating to the arrangement, the arrangement is a joint operation. When an entity has rights to the net assets of the arrangement, the arrangement is a joint venture. Paragraphs B16-B33 set out the assessment an entity carries out to determine whether it has an interest in a joint operation or an interest in a joint venture. Classification of a joint arrangement B15 As stated in paragraph B14, the classification of joint arrangements requires the parties to assess their rights and obligations arising from the arrangement. When making that assessment, an entity shall consider the following: (a) the structure of the joint arrangement (see paragraphs B16-B21). (b) when the joint arrangement is structured through a separate vehicle: (i) the legal form of the separate vehicle (see paragraphs B22-B24); (ii) the terms of the contractual arrangement (see paragraphs B25-B28); and (iii) when relevant, other facts and circumstances (see paragraphs B29-B33). Structure of the joint arrangement Joint arrangements not structured through a separate vehicle B16 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assets, and obligations for the liabilities, relating to the arrangement (ie the arrangement is a joint operation); or (b) rights to the net assets of the arrangement (ie the arrangement is a joint venture). The legal form of the separate vehicle B22 The legal form of the separate vehicle is relevant when assessing the type of joint arrangement. The legal form assists in the initial assessment of the parties' rights to the assets and obligations for the liabilities held in the separate vehicle, such as whether the parties have interests in the assets held in the separate vehicle and whether they are liable for the liabilities held in the separate vehicle. B23 For example, the parties might conduct the joint arrangement through a separate vehicle, whose legal form causes the separate vehicle to be considered in its own right (ie the assets and liabilities held in the separate vehicle are the assets and liabilities of the separate vehicle and not the assets and liabilities of the parties). In such a case, the assessment of the rights and obligations conferred upon the parties by the legal form of the separate vehicle indicates that the arrangement is a joint venture. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntractual arrangements of parties to a joint venture. The examples of the contractual terms provided in the following table are not exhaustive. Assessing the terms of the contractual arrangement Joint operation Joint venture The terms of the contractual arrangement The contractual arrangement provides the parties to the joint arrangement with rights to the assets, and obligations for the liabilities, relating to the arrangement. The contractual arrangement provides the parties to the joint arrangement with rights to the net assets of the arrangement (ie it is the separate vehicle, not the parties, that has rights to the assets, and obligations for the liabilities, relating to the arrangement). Rights to assets The contractual arrangement establishes that the parties to the joint arrangement share all interests (eg rights, title or ownership) in the assets relating to the arrangement in a specified proportion (eg in proportion to the parties' ownership interest in the arrangement or in proportion to the activity carried out through the arrangement that is directly attributed to them). The contractual arrangement establishes that the assets brought into the arrangement or s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e financing to, the joint arrangement. The provision of such guarantees, or the commitment by the parties to provide them, does not, by itself, determine that the joint arrangement is a joint operation. The feature that determines whether the joint arrangement is a joint operation or a joint venture is whether the parties have obligations for the liabilities relating to the arrangement (for some of which the parties might or might not have provided a guarantee). B28 When the contractual arrangement specifies that the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement, they are parties to a joint operation and do not need to consider other facts and circumstances (paragraphs B29- B33) for the purposes of classifying the joint arrangement. Assessing other facts and circumstances B29 When the terms of the contractual arrangement do not specify that the parties have rights to the assets, and obligations for the liabilities, relating to the arrangement, the parties shall consider other facts and circumstances to assess whether the arrangement is a joint operation or a joint venture. B30 A joint arrangement might be structured in a se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pects of the arrangement: * The parties agreed to purchase all the output produced by entity C in a ratio of 50:50. Entity C cannot sell any of the output to third parties, unless this is approved by the two parties to the arrangement. Because the purpose of the arrangement is to provide the parties with output they require, such sales to third parties are expected to be uncommon and not material. * The price of the output sold to the parties is set by both parties at a level that is designed to cover the costs of production and administrative expenses incurred by entity C. On the basis of this operating model, the arrangement is intended to operate at a break-even level. From the fact pattern above, the following facts and circumstances are relevant: * The obligation of the parties to purchase all the output produced by entity C reflects the exclusive dependence of entity C upon the parties for the generation of cash flows and, thus, the parties have an obligation to fund the settlement of the liabilities of entity C. * The fact that the parties have rights to all the output produced by entity C means that the parties are consuming, and therefore have rights to, all the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of goodwill, as required by Ind AS 103 and Ind AS 12 Income Taxes for business combinations; (d) recognising the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed, if any, as goodwill; and (e) testing for impairment a cash-generating unit to which goodwill has been allocated at least annually, and whenever there is an indication that the unit may be impaired, as required by Ind AS 36 Impairment of Assets for goodwill acquired in a business combination. B33B Paragraphs 21A and B33A also apply to the formation of a joint operation if, and only if, an existing business, as defined in Ind AS 103, is contributed to the joint operation on its formation by one of the parties that participate in the joint operation. However, those paragraphs do not apply to the formation of a joint operation if all of the parties that participate in the joint operation only contribute assets or groups of assets that do not constitute businesses to the joint operation on its formation. B33C A joint operator might increase its interest in a joint operation in which the activity of the joint operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te C1 * C1A * C1AA * (*Refer Appendix 1) C1AB Annual Improvements to Ind AS (2018) added paragraph B33CA. An entity shall apply those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 April, 2019.] Appendix 1 Note: This Appendix is not a part of the Indian Accounting Standard. The purpose of this Appendix is only to bring out the major differences, if any, between Indian Accounting Standard (Ind AS) 111 and the corresponding International Financial Reporting Standard (IFRS) 11, Joint Arrangements, issued by the International Accounting Standards Board. Comparison with IFRS 11, Joint Arrangements 3[1 Paragraph C1 of Appendix C of IFRS 11 refers to Effective date that has not been included since the same is not relevant as the date of application is notified under the Companies Act. Paragraphs C1A and C1AA related to transitional provisions have not been included since, transitional provisions wherever considered appropriate have been included in Ind AS 101, First-time Adoption of Indian Accounting Standards, corresponding to IFRS 1, First-time Adoption of International Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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