Once you have established that you have a joint arrangement (i.e. are within the scope of IFRS 11), you then need to determine what type of joint arrangement you have because the accounting is different. There are two types of joint arrangements: joint operations and joint ventures.
In a ‘joint operation’, the parties with joint control have right to the assets, and obligations for the liabilities of the joint arrangement. These parties are called ‘joint operators’.
Joint operations are not structured through a separate vehicle.
A ‘joint venture’ is a joint arrangement where the parties with joint control have rights to the net assets of the arrangement. These parties are called ‘joint venturers’.
Joint arrangements structured through a separate vehicle such as a company, partnership or trust can be either a ‘joint operation’ or a ‘joint venture’ so further analysis is required to assess rights and obligations of the parties to the joint arrangement, including consideration of:
- The structure and legal form of the arrangement
- Contractual terms of the arrangement, and
- When relevant, other facts and circumstances.
This is illustrated on the decision tree below.
A joint arrangement is only classified as a ‘joint venture’ if at each stage of the above decision tree, there is nothing to indicate that the parties to the joint arrangement have rights and obligations over the gross assets and liabilities respectively.
Decisions about what type of joint arrangement you have can be quite judgemental and the relevant considerations should be disclosed in the financial statements as a significant judgement.
Example 3 – Other facts and circumstances
Investors A and B each own 50% of the shares in Joint Venture Company (company), which is a separate vehicle set up to manufacture materials required by Investors A and B in their own individual manufacturing processes.
Investors A and B operate the facility that produces the materials to the quantity and quality specifications set by themselves and agree that:
- Each of them will purchase all of the output produced by company 50:50
- The company cannot sell any output to third parties unless approved by Investors A and B
- The price of the output to Investors A and B is set to cover production costs and administration expenses incurred by the company
- The company will operate on a break-even basis.
Working through the decision tree above:
- Joint Venture Company is structured through a separate vehicle so further analysis is needed to determine whether it is a joint operation or a joint venture
- The legal form of Joint Venture Company is that the assets and liabilities are those of the company and ordinarily, Investors A and B would simply be
entitled to the net assets of the company, and
- There are no contractual agreements that give Investors A and B rights and obligations over the gross assets and liabilities of the company.
However, the fact pattern notes that:
- Investors A and B have an obligation to purchase all the output of the company. This indicates that the company depends on Investors A and B for cash, and Investors A and B are therefore responsible for the liabilities of the company.
- As Investors A and B have rights to all the output of the company, they are consuming all the assets of the company, which indicates that they have rights to the gross assets, not to the net assets of the company.
In this case, Joint Venture Company is likely to be a joint operation.