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Differences exist between US GAAP and IFRS in the accounting for joint arrangements.

12.9.1 Joint arrangements—definition and types

Differences in the definition and types of joint arrangements may result in different arrangements being considered joint ventures, which could affect reported figures, earnings, ratios, and covenants.
US GAAP
IFRS
The term joint venture refers only to jointly controlled entities, where the arrangement is carried on through a separate entity.
Joint control is not defined in US GAAP. However, the definition of joint control from a non-authoritative AcSEC Issue Paper is widely applied in practice (see EM 6.2.2). Joint control exists when the investors are able to participate in all of the significant decisions of an entity and unanimous consent over all significant decisions by all the venturers (investors) is required.
A corporate joint venture is defined as a corporation owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.
Most joint venture arrangements give each venturer (investor) participating rights over the joint venture (with no single venturer having unilateral control), and each party sharing control must consent to the venture’s operating, investing, and financing decisions.
A joint arrangement is a contractual agreement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control of an economic activity. Unanimous consent is required for the relevant activities (as discussed in SD 12.4) of the parties sharing control, but not necessarily of all parties in the arrangement.
IFRS classifies joint arrangements into two types:
  • Joint operations, which give parties that have joint control of the arrangement the direct rights to the assets and obligations for the liabilities
  • Joint ventures, which give the parties that have joint control of the arrangement the rights to the net assets of the arrangement. This typically involves establishing a separate legal entity.

12.9.2 Joint arrangements—accounting

Under IFRS, classification of a joint arrangement as a joint venture or a joint operation determines the accounting by the investor. Under US GAAP, in order for an arrangement to be accounted for by the investor as a joint venture it must meet the accounting definition of a joint venture (i.e., a corporate joint venture as defined in ASC 323-10-20). There is no definition of a joint arrangement, nor is there a concept of a joint operation in US GAAP..
US GAAP
IFRS
At the formation of a joint venture, an entity first assesses whether the joint venture is a VIE. If the joint venture entity is a VIE and is required to be consolidated by one of the investors, the accounting model discussed in SD 12.4 is applied (and the joint venture entity does not meet the definition of a joint venture). Joint ventures often have a variety of service, purchase, and/or sales agreements, as well as funding and other arrangements that may affect the entity’s status as a VIE. Equity interests are often split 50-50 or near 50-50, making nonequity interests (i.e., any variable interests) highly relevant in consolidation decisions. Careful consideration of all relevant contracts and governing documents is critical in the determination of whether a joint venture is within the scope of the variable interest model and, if so, whether consolidation is required.
If the joint venture is not a VIE, the investor should assess if it is required to consolidate the joint venture under the VOE model. If the investor is not required to consolidate the joint venture under either the VIE model or the VOE model, the investor should determine if the entity meets the definition of a joint venture. If so, the investor would apply the equity method to recognize the investment in a jointly controlled entity. Proportionate consolidation is generally not permitted except for unincorporated entities operating in certain industries. A full understanding of the rights and responsibilities conveyed in management, shareholder, and other governing documents is necessary. See EM 6.3 for additional information.
When an investor is evaluating whether it has entered into a joint venture arrangement, the investor should consider whether the arrangement is instead a collaborative arrangement, which may be accounted for differently under ASC 808. See EM 6.2.4 and CG 8.3 for additional information.
IFRS 11 establishes two types of joint arrangements. The classification of a joint arrangement as a joint venture or a joint operation determines the investor’s accounting. An investor in a joint venture must account for its interest using the equity method in accordance with IAS 28.
An investor in a joint operation accounts for its share of assets, liabilities, revenues, and expenses based on its direct rights and obligations in accordance with the relevant guidance applicable to the specific assets, liabilities, revenues, and expenses.
If the arrangement is not structured through a separate vehicle, it is a joint operation. Each party in a joint operation usually uses its own resources and carries out its own part of a joint operation separate from the activities of the other party or parties. Each party incurs its own expenses and raises its own financing.
If the joint operation constitutes a business, the investor must apply the relevant principles on business combination accounting contained in IFRS 3, Business Combinations, and other standards, and disclose the related information required under those standards.
A joint operator that increases its interest in a joint operation that constitutes a business should not remeasure previously held interests in the joint operation when joint control is retained. Similarly, when an entity that has an interest (but not joint control) obtains joint control, previously held interests are not remeasured.

12.9.3 Joint arrangements—contributions

Differences exist in the accounting for contributions to a jointly controlled entity under IFRS and US GAAP. US GAAP provides prescriptive guidance under ASC 610-20 for circumstances in which an investor contributes nonfinancial assets that are not a business. IFRS does not have such specific guidance.
US GAAP
IFRS
If an investor contributes a subsidiary (or group of assets) that is a nonfinancial asset or in substance nonfinancial asset that is not a business to a joint venture, the investor should record its joint venture investment at fair value in accordance with ASC 610-20, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets. The US GAAP model is control-based; therefore, repurchase arrangements (e.g., call options, forward agreements, put options) may preclude derecognition because while physical possession (i.e., risks and rewards) has transferred, another party has the right to dictate the future ownership of the asset, which indicates that control has not transferred.
When an investor contributes a subsidiary or group of assets that constitute a business to a joint venture, the investor should apply the deconsolidation and derecognition guidance in ASC 810-10-40 and record any consideration received for its contribution at fair value (including its interest in the joint venture). This generally results in a gain or loss on the contribution.
A venturer that contributes nonmonetary assets that do not represent a business—such as shares; property, plant, and equipment; or intangible assets—to a jointly controlled entity in exchange for an equity interest in the jointly controlled entity generally recognizes in its consolidated income statement the portion of the gain or loss attributable to the equity interests of the other unrelated venturers, except when:
  • The significant risks and rewards of ownership of the contributed assets have not been transferred to the jointly controlled entity,
  • The gain or loss on the assets contributed cannot be measured reliably, or
  • The contribution transaction lacks commercial substance.
When an investor contributes a business, a policy choice is currently available for full gain or loss recognition (IFRS 10 approach) or partial gain or loss recognition (IAS 28 approach). See note about ongoing standard setting below.
IAS 28 provides an exception to the recognition of gains or losses only when the transaction lacks commercial substance.
Note about ongoing standard setting
In September 2014, the IASB published amendments to IFRS 10 and IAS 28 to resolve the conflict between the requirements on accounting for this type of transaction. The published amendments clarify that a full gain or loss is recognized by the investor upon the contribution of a business, and a partial gain or loss is recognized upon the contribution of assets that do not meet the definition of a business. The amendments can be adopted immediately, but the IASB has deferred the mandatory effective date of the amendment indefinitely, pending finalization of its research project on the equity method.
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