Amendments to IFRS 11 Joint Arrangements
We summarise the amendments to IFRS 11 Joint Arrangements and explore some of the potential implications for mining and metals entities.
In May 2011, the International Accounting Standards Board (IASB) issued a new standard, IFRS 11 Joint Arrangements, which became effective from 1 January 2013.
Two of the primary changes were:
- There are now only two types of joint arrangements — joint ventures and joint operations — the latter likely to be more common in the mining and metals sector
- Proportionate consolidation is no longer permitted for arrangements classified as joint ventures; instead, equity accounting has to be applied
IFRS 11 provides guidance on most of the accounting for joint operations, but there are certain issues it does not address.
One such issue is how a joint operator (one of the parties with joint control over a joint operation) should account for the acquisition of an interest in a joint operation that constitutes a business. The predecessor to IFRS 11, IAS 31 Interests in Joint Ventures, was also silent on this issue, leading to diversity in practice.
We believe most mining and metals entities applied full business combinations accounting to acquisitions of interests in joint operations. However, a sizeable minority applied the relative fair value approach, as they considered the business combination principles only applied where control was obtained, not joint control.
A smaller group only applied business combinations accounting to those issues not covered in other standards.
The matter was referred to the IFRS Interpretations Committee and then to the IASB, and as a result, the amendments to IFRS 11 were issued by the IASB in May 2014.
An overview of the amendments
The amendments state that:
- Where a joint operator acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, it must apply all of the principles on business combinations accounting as set out in IFRS 3 Business Combinations, and other standards
- In addition, the joint operator must disclose the information required by IFRS 3 and other IFRSs for business combinations
The amendments clarify that all the principles on business combinations accounting in IFRS 3, and other IFRSs, that do not conflict with the guidance in IFRS 11, are to be applied.
The principles of business combinations accounting that do not conflict with the guidance in IFRS 11 include, but are not limited to:
- Measuring identifiable assets acquired and liabilities assumed at their acquisition-date fair values (unless an exception is given in IFRS 3 or other standards)
- Recognising acquisition-related costs as expenses in the period in which the costs are incurred and the services are received (unless they represent equity or debt-raising costs)
- Recognising deferred tax assets and liabilities that arise from the initial recognition of assets and liabilities (excluding the initial recognition of goodwill)
- Recognising the excess of the consideration transferred over the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed (if any), as goodwill
- Testing for impairment a cash-generating unit to which goodwill has been allocated at least annually, and whenever there is an indication that the unit may be impaired, as required by IAS 36 Impairment of Assets for goodwill acquired in a business combination
While the amendments may seem relatively straightforward, they present a number of challenges for entities that have not previously applied a business combinations approach, as they will require a significant change in accounting practices.
There are also some related considerations where the principles are not entirely clear.
Implications for mining and metals companies
The amendments to IFRS 11 are likely to have significant implications for some mining and metals entities. At the very least, additional steps will be required to analyse future acquisitions of interests in joint operations to determine whether they are in the scope.
For those that are in scope, the requirement to apply business combinations accounting will mean the accounting for the acquisition will become more complex and may lead to different balance sheet and profit or loss profiles.
However, as there are many aspects of the accounting that are still somewhat unclear, it is difficult to fully assess what the actual impact will be.
- The amendments
- The challenges
- The impact on farm-in arrangements