Jointly controlled assets and jointly controlled operations are joint ventures that do not involve the establishment of a separate entity.
The accounting for an interest in jointly controlled assets is similar to the proportional consolidation model applied for jointly controlled entities.
Each party to a jointly controlled asset should recognise:
its share of the jointly controlled asset, classified according to the nature of the asset;
any liabilities the venturer has incurred;
its proportionate share of any liabilities that arise from the jointly controlled assets;
its share of expenses from the operation of the assets; and
any income arising from the operation of the assets.
In the case of a jointly controlled operation, each venturer uses its own property, plant and equipment and carries its own inventory. It also incurs its own expenses and liabilities and raises its own finance.
The venturer should recognise 00% of the assets it controls and the liabilities it incurs as well as its own expenses and its share of income from the sale of goods or services from the joint venture.
IAS provides a choice between proportional consolidation and the equity method to account for a venturer’s interest in a jointly controlled entity.
14.3.1 Proportional consolidation method The venturer recognises separately its share of each of the following:
jointly controlled assets;
liabilities for which it is jointly responsible;
income; and expenses.
14.3.2 Equity method
As an alternative to proportional consolidation, a venturer may recognise its interest in a jointly controlled entity using the equity method. This involves recognising its share of the joint venture’s profit after tax as a separate line item in the income statement, and also its share of the joint
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venture’s net assets (plus any attributable goodwill) as a separate line item on the balance sheet.
14.3.3 Application
The following table summarises the accounting for the various types of joint undertakings:
Joint control No joint control Separate
entity
Jointly controlled entity: use either proportional consolidation or equity method
Investment:
If control, apply IAS 27 consolidation;
If significant influence, apply IAS 28 equity accounting;
Otherwise, apply IAS 9 and account for at fair value.
No separate entity
Jointly controlled asset or operation:
apply the accounting described in Section 4.
Undivided interest:
Current asset – share of any working capital;
Non-current asset – share of producing property at historical cost less accumulated amortisation and impairment;
Liabilities – only to the extent that the investor is liable under the terms of the agreement.
14.3.4 Investments and undivided interests If there is no joint control (or control), a mining entity’s interest in an investee is accounted for either as an investment (if it involves a separate legal entity) or as an undivided interest in assets.
If the investor has significant influence over the investee, IAS 28 Investments in Associates applies and equity accounting must be used.
In all other cases, the investments are carried at fair value under IAS 9 Financial Instruments:
Recognition and Measurement.
Undivided interests are very similar to jointly controlled assets and operations, except that the investor does not have joint control over the assets or operation. Undivided interests typically involve shared infrastructure assets.
Investors in undivided interests should normally recognise their share of any working capital as a single current asset and their share of producing property as a single non-current asset. The latter does not qualify as property, plant and equipment
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but is accounted for in a similar way − ie, at historical cost less accumulated amortisation and impairment. Liabilities are recorded separately to the extent that the investor is liable under the terms of the agreement.
4.4 General considerations
14.4.1 Transactions between joint venture and venturer
A venturer must eliminate any material unrealised profits and losses arising from transactions between it and the joint venture. Any adjustments made to eliminate unrealised profits are based on the proportion attributable to the venturer’s own interest. If a venturer transfers an asset to the joint venture at a loss and this is indicative of its market value, the full amount of the loss is recognised – because this is an indication of an impairment loss or a reduction in the net realisable value of the item.
14.4.2 Contributions of assets to a joint venture
Contributions to a joint venture entity are transfers of assets by venturers in exchange for an interest in the joint venture. Such contributions may take various forms: for example, plant and mineral leases (sometimes with additional cash). They may be made either upon establishing the joint venture or subsequently.
With a jointly controlled asset, the contribution of assets results in a partial disposal of that asset by the contributing venturer; the gain or loss is recognised in the income statement. The other venturers’ interests are recorded at their share of the fair value of the asset on the date of contribution.
With a jointly controlled entity, any equity interest that a venturer receives is based on the fair value of the assets contributed. Any equity interest the other venturers receive is based on the value of what they have contributed. If a venturer receives monetary or non-monetary assets in addition to receiving an equity interest in the jointly controlled entity, an appropriate portion of the gain or loss on the transaction is recognised by the venturer in profit or loss.
Any unrealised gains or losses on non-monetary assets contributed to a jointly controlled entity are eliminated against the underlying assets under
the proportionate consolidation method or against the investment under the equity method.
14.4.3 Accounting policies
A venturer reviews the accounting policies used to prepare a joint venture’s financial statements to confirm that they are consistent with its own policies. This is done when the amounts are considered significant to the venturer’s affairs.
For a mining entity, such a review typically concentrates on the following items:
depreciation policy;
inventory valuations;
restoration and rehabilitation provisions;
the treatment of exploration and evaluation expenditure; and
other significant financial reporting matters covered in this document.
The venturer notionally restates the financial statements of the joint venture, when necessary, to comply with its own accounting policies before applying proportional consolidation or equity accounting.
4.5 Carried interests
A carried interest arises where one venturer (the carrying party) agrees to pay for another venturer’s (the carried party’s) share of development costs.
The carrying party is compensated by receiving an additional share of the commodity produced until the carried costs have been recovered, together with the agreed return on those costs.
The appropriate accounting treatment for a carried interest varies depending on the facts and circumstances.
The carrying party should generally capitalise the costs incurred in respect of the carried interest and amortise them on a units-of-production basis over the additional share of the minerals to which it is entitled. Hence, the capitalised cost is reclassified to inventory as the mineral is received from the carried party.
For the carried party, the arrangement is in substance a financing transaction. It retains an interest in the deposit but has arranged for the carrying party to finance part of its share of the development expenditure, which will be repaid in minerals rather than in cash.
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Therefore, the carried party should normally recognise a liability in respect of the commodities it expects to deliver in return. A revaluation of this liability is appropriate if the volume of the commodities to be delivered is fixed.
An alternative view is that the carried party has transferred the right to a defined volume of future production and should not recognise any assets, expenses or liabilities in respect of the carried costs. In this case, the carried party should consider whether this is an impairment indicator for its residual interest in the deposit.
4.6 IASB developments
The IASB is undertaking a project on joint venture accounting, aiming to reduce differences between IFRS and US GAAP. In December 2005, the IASB tentatively decided to eliminate proportional consolidation for jointly controlled entities and therefore to allow only equity accounting.
The IASB has also expressed a view that the accounting treatment should not depend on the legal form, but on the substance of a joint venture.
The scope of its project has been expanded to consider the definition of a joint venture and its main characteristics, because it felt the current standard did not adequately address the difference between a joint venture entity and a direct interest in the underlying individual assets and liabilities of a joint arrangement. Direct interests are arrangements in which the participants continue to hold direct rights in assets contributed and assume direct responsibilities for obligations arising from the joint economic activity. For example, the participants may provide direct financing by advancing funds, might lease assets to the arrangement under operating leases or might render services and technical assistance with resources and employees that remain under the participants’ unilateral control. In contrast, an indirect interest is one in which participants do not have control over the underlying single assets and are not responsible for underlying liabilities;
rather they have only a right to share in the net outcome expected to be generated by that business’s operations.
The IASB expects to publish an exposure draft later in 2007 and an amended standard in 2008.
The proposals are expected to require entities to
account for their direct interests in the individual assets and liabilities of a joint arrangement and to equity account for indirect interests in joint ventures that constitute a business.
4.7 Presentation and disclosure
There is a requirement to disclose the accounting policy used to account for interests in joint ventures.
Interests in significant joint ventures and the ownership interest in jointly controlled entities should be listed and described.
Contingent liability disclosures should include:
any contingencies that the venturer has incurred in relation to the joint venture;
the venturer’s share of contingencies that have been incurred jointly with other venturers;
the venturer’s share of contingent liabilities of the joint venture itself; and
contingencies that arise from being
contingently liable for the liabilities of the other venturers.
The following capital commitments should be disclosed:
commitments of the venturer for the interest in the joint venture;
the venturer’s share of commitments that have been incurred jointly with other venturers; and the venturer’s share of the commitments of the joint venture itself.
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5 B us in es s c o m b in at io ns
Increasing globalisation and consolidation of the mining industry has meant that merger and acquisition transactions are commonplace in the industry. The transaction process can be complex.
There are a range of issues that need to be considered in accounting for transactions in accordance with IFRS Business Combinations.