You wish to know more about Joint Arrangements as per IFRS 11. This quick post will highlight the characteristics and objectives of joint arrangements as per IFRS 11.
The Objective of Joint Arrangements as per IFRS 11
The objective of the IFRS 11 joint arrangement is to lay down the principles for financial reporting that have an interest in specific arrangements controlled jointly.
IFRS 11 clearly defines a joint arrangement in which two (or more) parties will have joint control.
There are two main characteristics of the same. First, as you move forward, you will learn more about it.
The Two Characteristics of Joint Arrangements as per IFRS 11
Firstly, the parties will enter into a contractual arrangement. Therefore, there will be a contract, and all the decisions will be documented.
It would help if you remembered that only one party could not decide on its own. Let’s take an example here:
If one company has a share of 50 percent in a joint venture, then two other companies have about 25 percent each. Now, the contract says that there should be 75% agreement to make crucial decisions. It does not mean the 50% shareholder will get the upper hand. They would also need the acceptance of one of the other two companies.
The larger group needs the support of either of the two companies with a 25 percent share. It means there is collective control, which will also be mentioned in the contract.
Secondly, there should be unanimous consent. No single entity can block a decision. The contract needs to specify the conditions/agreed terms.
Here’s another example to explain this arrangement. There are three shareholders: X, Y, and Z. A has a 45% share, B has a 45% share, and C has a 10% share. There is a contractual agreement that only 100% votes from all the shareholders will be viable. In this case, unanimous consent will be a necessity.
Shareholders X or Y, or Z cannot make a decision separately. Instead, all three shareholders must accept the decision unanimously. This is because the contract states that all of them have joint control.
Types of Joint Arrangements
There are two types of joint arrangements.
1. Joint operations
2. Joint Ventures
How are they different? When a specific entity has rights to all the assets, the arrangement is called a joint operation. This is because there are not only rights to assets but also obligations of liabilities of Joint Arrangement.
When a specific entity has the right to all the net assets, it is known as a joint venture.
Now that you understand the basics of joint arrangements as per IFRS 11, it will be easy to grasp thein-depth concepts related to this subject.