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.

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:

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.