Joint Arrangements (Ind AS 111) Scope, Assessment, Types of Joint Arrangements

Ind AS 111, “Joint Arrangements,” establishes principles for the financial reporting by entities that have an interest in arrangements that are controlled jointly (i.e., joint control) with one or more other entities. It identifies two types of joint arrangements: joint ventures and joint operations. The classification depends on the parties’ rights and obligations arising from the arrangement. In a joint operation, parties have rights to the assets and obligations for the liabilities relating to the arrangement and recognize their share of assets, liabilities, revenues, and expenses. In a joint venture, parties have rights to the net assets of the arrangement and account for their interest using the equity method in accordance with Ind AS 28, “Investments in Associates and Joint Ventures.”

Ind AS 111 requires entities to assess the structure, legal form, contractual terms, and other facts and circumstances of the arrangement to classify it accurately. This Standard emphasizes substance over form, requiring detailed judgment to determine the type of joint arrangement and the appropriate accounting treatment. The aim is to provide financial statement users with relevant information about an entity’s involvement in joint arrangements, including the nature, risks, and financial effects.

Joint Arrangements (Ind AS 111) Scope:

Ind AS 111, “Joint Arrangements,” applies to entities that are parties to joint arrangements. The scope of this standard is to provide financial reporting guidance for entities that engage in joint arrangements with other parties, focusing on the rights and obligations that arise from such arrangements. Joint arrangements are defined based on the contractual arrangement and the existence of joint control.

Scope Inclusions:

1. Joint Operations:

Entities participating in a joint operation recognize their direct rights to the assets, and obligations for the liabilities, associated with the arrangement. They account for their share of assets, liabilities, revenues, and expenses in accordance with the terms of the joint arrangement.

2. Joint Ventures:

Entities participating in joint ventures recognize their investment using the equity method according to Ind AS 28, “Investments in Associates and Joint Ventures.” A joint venture is a joint arrangement whereby the parties have rights to the net assets of the arrangement.

Scope Exclusions:

• Business combinations accounted for under Ind AS 103, “Business Combinations,” are excluded from the scope of Ind AS 111. However, joint arrangements may be relevant in identifying whether control exists in various investment scenarios.
• Ind AS 111 does not apply to the accounting for investments in associates, which are covered by Ind AS 28, nor does it apply to investments in subsidiaries accounted for under Ind AS 110, “Consolidated Financial Statements.”
• Financial instruments, including those that may give rise to joint control, are excluded from the scope of Ind AS 111 and are instead covered by Ind AS 109, “Financial Instruments.”

Joint Arrangements (Ind AS 111) Assessment:

The assessment of whether an arrangement constitutes a joint arrangement under Ind AS 111 involves evaluating whether there is joint control, and if so, determining the type of joint arrangement it is (joint operation or joint venture). This assessment is critical as it affects the accounting treatment in the financial statements of the parties involved.

1. Identifying a Joint Arrangement

A joint arrangement is an arrangement of which two or more parties have joint control. The initial step is to identify if the arrangement is structured through a separate vehicle and if the contractual arrangement gives the parties joint control over the arrangement.

2. Assessing Joint Control

Joint control exists only when decisions about the relevant activities (those that significantly affect the returns of the arrangement) require the unanimous consent of the parties sharing control. The assessment includes considering:

• Contractual Arrangement: Review the contractual agreement to determine if there is a sharing of control. The agreement should specify how strategic financial and operating decisions are made, requiring unanimous consent.
• Existence of Joint Control: There must be evidence that the parties are required to act together to control the arrangement. This involves shared power to govern the financial and operating policies so as to obtain benefits from the activities.

3. Determining the Type of Joint Arrangement

Once joint control is established, the next step is to classify the joint arrangement as either a joint operation or a joint venture based on the rights and obligations of the parties:

• Joint Operations: Parties to the joint operation have rights to the assets, and obligations for the liabilities, relating to the arrangement. Look for evidence that the parties have direct rights and obligations for the assets and liabilities.
• Joint Ventures: Parties have rights to the net assets of the arrangement. This typically involves setting up a separate vehicle (e.g., a company, partnership, or other entity) that is jointly controlled, where the parties do not have direct rights to the assets or direct obligations for the liabilities but have rights to the net assets.

4. Evaluating the Structure, Legal Form, Terms, and Facts and Circumstances

The classification is not solely based on the legal form of the arrangement. Instead, it involves a deeper analysis of:

• The Structure of the Joint Arrangement: Whether the arrangement is structured through a separate vehicle.
• Legal Form of the Separate Vehicle: Legal form and its implications on the rights and obligations of the parties.
• Terms of the Contractual Arrangement: Specific rights and obligations outlined in the agreement regarding the assets and liabilities.
• Facts and Circumstances: Other relevant facts and circumstances that could impact the classification, such as regulatory or financial requirements.

5. Continuous Assessment

The classification of a joint arrangement as a joint operation or a joint venture is not static and should be reassessed if the facts and circumstances underlying the arrangement change.

Types of Joint Arrangements:

1. Joint Operations

In a joint operation, the parties that have joint control of the arrangement (joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. Each party to the joint operation:

• Recognizes its share of the assets co-controlled, including its share of any assets held jointly.
• Recognizes its share of the liabilities for which it is jointly responsible.
• Recognizes its share of the revenue from the sale of the output by the joint operation, and its share of the expenses incurred by the joint operation.

Joint operations are characterized by the fact that the activities are conducted through the joint arrangement itself, and the parties have direct rights and obligations for the assets and liabilities. The accounting for a joint operation involves recognizing each of these elements in the participants’ own financial statements.

2. Joint Ventures

In a joint venture, the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Joint ventures are typically structured through a separate legal entity, in which each venturer has an equity interest.

• The joint venture operates autonomously, with a distinct legal and financial structure.
• The parties (joint venturers) recognize their investment in the joint venture and account for it using the equity method as prescribed by Ind AS 28, “Investments in Associates and Joint Ventures.” Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the joint venture.