Joint arrangements are common in the mining and metals sector, and hence any changes in the accounting for them can have wide-ranging implications, notes EY. In its August 2014 report titled: “Potential implications of the amendments to IFRS 11 Joint Arrangements,” EY reports that IFRS 11 provides guidance on most of the accounting for joint operations, but there are certain issues it doesn’t address.
IFRS 11: Greater clarity needed
According to the EY report, the amendment applies to the acquisition of an interest in an existing joint operation that is a business or on the formation of a joint operation when an existing business is contributed by one of the parties that participates in the joint operation.
The EY report notes that it is common when acquiring an interest in a joint operation, or on formation of a joint operation, for at least one party to contribute a pre-existing business. The report points out that while the amendment to IFRS 11 makes it clear how an entity should account for its acquisition in the joint operation, it is less clear on how the party losing control over the business should account for its contribution.
The report highlights that greater clarity is required on the contribution of a business to a joint operation. Considering the diversity of views on the subject, the EY report suggests that it is important for the IASB to provide additional guidance, preferably via another amendment to reduce such diversity of views.
Joint operations prevalent in mining & metals sector
The EY report explains the two primary changes announced in IFRS 11: (a) Now there are only two types of joint arrangements: joint ventures and joint operations and (b) Proportionate consolidation is no longer permitted for arrangements classified as joint ventures; instead, equity accounting has to be applied.
The EY report notes that joint operations are likely to be more common in the mining and metals sector. It also states that there is significant diversity in views about whether IFRS 3’s principles on business combinations achieved in stages should apply to transactions in which a joint operator goes from joint control of a joint operation to control. The report strongly recommends that the IASB address this issue through another avenue on a timely basis to help avoid further diversity.
According to the EY report, additional steps will be required to analyze future acquisitions of interests in joint operations to determine whether they are in the scope of them. For those that are in the scope, the requirement to apply to business combinations accounting will imply that the accounting for the acquisition will become more complex and may lead to different balance sheet and profit or loss profiles.
The EY report concludes that, considering the regular occurrence of transactions involving joint operations in the mining and metals sector, all entities should take the time to fully understand the implications of the amendment and assess the potential impact on their businesses.