Answer to Question #294575 in Accounting for lloyd

Question

IFRS 11 - Classifying Joint Arrangement Practice Exercise 2

 

For each of the following scenario, identify which type of joint arrangement qualifies based on the given facts.

 1.        Entities A and B (the parties) set up a separate vehicle (entity X) together with a JOA4.2.

Shareholders' agreement and JOA establish rights and obligations and expressly specify that

- Each party has a 50% interest in entity X and appoints one director

- Unanimous consent is required for all resolutions to be passed

- The rights and obligations arising from the activities of entity X are to be allocated directly to parties A and B in specified proportions.

 

Answer 1

Entity X should be classified as a joint operation in the books of Parties A and B, rather than a joint venture, for the following reasons:

1. Entity X is a company in its own right (i.e., created using a separate vehicle).
2. There is joint control by Parties A and B, evidenced by the need for the unanimous consent of ALL parties when decisions are being made concerning Entity X's operations. This is in line with the provisions of paragraphs B7-B13 of IFRS 11.
3. Parties A and B have the right to Entity X's assets, and obligation to its liabilities - as stipulated by paragraph B27 of IFRS 11.

References

International Accounting Standards Board (IASB). (2021). IFRS 11 - Joint Arrangements. Author; London, United Kingdom. https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards/english/2021/issued/part-a/ifrs-11-joint-arrangements.pdf.