Learning Outcomes
After reading this article, you will be able to distinguish between associates and joint arrangements, explain when to use the equity method, differentiate between joint operations and joint ventures as defined by IFRS 11, and apply the appropriate accounting treatments. You will also understand the relevant disclosure requirements under IFRS 12, preparing you to answer scenario-based ACCA SBR questions with clarity and precision.
ACCA Strategic Business Reporting (SBR) Syllabus
For ACCA Strategic Business Reporting (SBR), you are required to understand the appropriate accounting for investments where significant influence or joint control exists, the key differences between joint operations and joint ventures, and the related presentation and disclosure issues. This article specifically covers:
- The identification and classification of associates and joint arrangements
- Application of the equity method for associates and joint ventures
- Determining the existence of joint control and classifying arrangements as joint operations or joint ventures
- Applying the correct accounting methods to joint operations and joint ventures
- The principal disclosure requirements of IFRS 12 regarding interests in other entities
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following statements is true regarding the difference between a joint operation and a joint venture?
- Joint operations always require the establishment of a separate legal entity.
- Joint ventures give parties direct rights to assets, while joint operations give rights to net assets.
- Joint operations involve direct rights to assets and obligations for liabilities; joint ventures give rights to the net assets.
- Both types must use proportionate consolidation.
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Entity A owns 30% of Entity B and has the power to participate in its financial and operating policies but does not control it. How should this investment be accounted for in the consolidated financial statements?
- As a financial asset at fair value
- By proportionate consolidation
- Using the equity method
- Line-by-line consolidation
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True or false? A joint arrangement, where decisions require unanimous consent and the parties have rights to specific assets and obligations for specific liabilities, is classified as a joint venture under IFRS 11.
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What basic disclosure is required by IFRS 12 for an entity’s interests in associates and joint arrangements?
Introduction
Investments in other entities often present complex accounting questions, especially when the degree of control or influence varies. Under IAS 28 and IFRS 11, special rules apply when an entity holds significant influence (but not control) over another (an associate), or when two or more parties share joint control (a joint arrangement). The classification and subsequent accounting for associates, joint operations, and joint ventures are critical for presenting a true and fair view in accordance with IFRS.
Key Term: associate
An entity over which an investor has significant influence but not control, typically presumed when holding 20% or more of the voting power.
ASSOCIATES
Significant influence is the power to participate in an entity’s financial and operating policy decisions but not to control them. IAS 28 presumes significant influence exists at 20% ownership, unless clearly demonstrated otherwise. Indicators include board representation or participation in policy making.
Key Term: significant influence
The power to participate in the financial and operating policy decisions of an investee, but not control those policies.
Accounting for associates is done using the equity method. Under this method, the investment is initially recognized at cost and adjusted for the group's share of post-acquisition profit or loss and other comprehensive income.
Key Term: equity method
A method of accounting whereby the investment is initially recognised at cost and increased or decreased to recognize the investor’s share of the profit or loss and other comprehensive income of the associate or joint venture.
Worked Example 1.1
Entity Alpha holds 25% of the shares in Beta and appoints two board members. Beta reports profits of $200,000 for the year. How should Alpha account for Beta in its consolidated financial statements?
Answer:
Alpha should apply the equity method. It initially recognizes its investment at cost, then increases this by its 25% share of Beta’s profit: $200,000 × 25% = $50,000.
JOINT ARRANGEMENTS: JOINT OPERATIONS VS JOINT VENTURES
Joint arrangements arise when two or more parties have joint control. Per IFRS 11, joint control exists only when decisions about the relevant activities require the unanimous consent of parties sharing control.
Key Term: joint arrangement
An arrangement in which two or more parties have joint control over economic activities.
A joint arrangement will be classified as either a joint operation or a joint venture, depending on the rights and obligations of the parties.
Key Term: joint operation
A joint arrangement where the parties have rights to the assets and obligations for the liabilities relating to the arrangement.Key Term: joint venture
A joint arrangement whereby the parties have rights to the net assets of the arrangement, usually via a separate entity.
Classification Criteria
- Joint Operation: Parties have rights to specified assets and obligations for specified liabilities. May or may not involve a separate legal entity.
- Joint Venture: Parties have rights to the net assets—typically structured as a separate legal entity.
Worked Example 1.2
X Ltd and Y Ltd build and operate a power plant together, under an arrangement requiring unanimous consent for major decisions. Assets and liabilities are held in their own records. Is this a joint operation or a joint venture?
Answer:
This is a joint operation. The parties have direct rights and obligations over the operation’s assets and liabilities, and decisions require unanimous consent.
Accounting for Joint Arrangements
- Joint Operations: Each party includes its share of assets, liabilities, revenue, and expenses directly in their financial statements.
- Joint Ventures: Accounted for using the equity method, as for associates.
Worked Example 1.3
Company C and Company D set up JointCo, a new entity where all decisions require unanimous consent. JointCo owns the project assets and is responsible for debts. C and D each own 50%.
Answer:
This is a joint venture. C and D have rights to the net assets (via ownership in JointCo) rather than direct rights to individual assets and liabilities.
Exam Warning
Joint arrangements with a separate legal entity are not necessarily joint ventures. Always analyse the rights and obligations—not just the structure.
DISCLOSURE REQUIREMENTS (IFRS 12)
Entities must disclose the nature, risks, and financial effects of their interests in associates and joint arrangements, including:
- Name, nature, and classification (associate, joint venture, or joint operation)
- Summarised financial information
- Measurement methods and accounting policies
- Risks associated with involvement
Key Term: IFRS 12
The IFRS standard that prescribes disclosure requirements for interests in subsidiaries, associates, joint arrangements, and unconsolidated structured entities.
Summary
Associates are entities over which significant influence is held, usually accounted for using the equity method. Joint arrangements must first be analysed to assess whether parties have joint control and then classified as joint operations (direct rights and obligations) or joint ventures (rights to net assets). Joint operations are accounted for by recognising direct shares of assets and liabilities; joint ventures use the equity method. Adequate disclosures under IFRS 12 must be made.
Key Point Checklist
This article has covered the following key knowledge points:
- Distinguish between associates, joint operations, and joint ventures
- Identify indicators of significant influence and joint control
- Apply the equity method for accounting for associates and joint ventures
- Recognise when to account directly for assets and liabilities in joint operations
- Understand IFRS 12 disclosure requirements for associates and joint arrangements
Key Terms and Concepts
- associate
- significant influence
- equity method
- joint arrangement
- joint operation
- joint venture
- IFRS 12