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Joint Ventures


Introduction

In 2005, the IASB decided to include the project regarding Joint Ventures in its agenda. The project is part of the 2006 Memorandum of Understanding between the IASB and FASB. It is included in the short-term convergence projects in order to reduce differences between IFRSs and U.S. GAAP.
In September 2007, the IASB published its proposals in ED 9 Joint Arrangements, in consultation until 11 January 2008.


Objective

The project’s objective is to develop an IFRS that enhances:
— the accounting for  the JV agreement by establishing a principle-based approach whereby an entity recognizes in its financial statements the rights and obligations arising under the contract; and
— the quality of the information being reported on to allow investors to gain a better understanding of the nature and financial effects of the activities that an entity carries out through joint arrangements.


Summary

The main proposals of the IASB dealt with the classification of the so-called joint arrangements in three types: joint operations, joint assets and joint ventures. To determine which category a joint arrangement is part of, it is necessary to consider the substance of the agreement and not merely the form. In joint operations and joint assets, the investor, by contract, acquires an interest in a particular activity (or a portion of an activity) and/or assumes a certain liabilities (or a portion of a liability), while in the joint ventures, the investor acquires the right to obtain a share of profits generated by the group of assets and liabilities jointly controlled by all venturers.
The investor in a joint operation or joint asset recognizes, directly in its financial statements, the assets (or the portion of assets) acquired, liabilities (or the portion of liabilities) assumed as a result of the contract, including the costs and revenues (or the portion of the costs and revenues), while the investor in a joint venture recognizes, in its consolidated financial statements, its investment in the JV using the equity method. Therefore, the proportional consolidation of JV is no longer allowed. It is assumed that a business subject to joint control is a JV, unless the circumstances (ie contractual rights and obligations) prove otherwise.


IASB Work Plan

On 12 May 2011, the IASB issued IFRS 11 Joint Arrangements. It replaces IAS 31 Interests in Joint Ventures.

For more information, please refer to the IASB website.



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