Sunday 20 April 2014
The issues relate to several requests with regard to the application of the requirements of IFRS 11.
At its November 2013 meeting, the Interpretations Committee identified the following two priority issues for further consideration among various implementations issues: (Issue 1) whether an assessment of ‘other facts and circumstances’ should take into account facts and circumstances that do not involve contractual and (legal) enforceable terms; and (Issue 2) how the parties to a joint operation should recognise assets, liabilities, revenues and expenses, especially if the parties’ interests in the assets and liabilities differ from their ownership interest in the joint operation.
At the January 2014 Interpretations Committee meeting, the staff presented an analysis of Issue 1. This analysis covered the following five sub-issues:
With regard to Issue 1A, the Interpretations Committee tentatively decided not to add Issue 1A to its agenda.
With regard to the other issues considered, the Interpretations Committee noted that it is important to understand how and why particular facts and circumstances create rights and obligations that result in the joint arrangement being classified as a joint operation.
The Interpretations Committee asked the staff to develop examples to analyse this matter. These examples should include fact patterns illustrating Issues 1B–1E and consider the application of IFRS 11 to some common joint arrangement structures. The Interpretations Committee also requested that this analysis consider the implications for accounting within separate financial statements. After it has considered this further analysis, the Interpretations Committee will decide whether to recommend adding examples or other guidance to the Standard.
At its January 2014 meeting, the Interpretations Committee discussed how and why ‘other facts and circumstances’ might create rights and obligations that result in a joint arrangement being classified as a joint operation. The Interpretations Committee considered an analysis of various examples aimed at illustrating the application of the related guidance in IFRS 11 and noted that the analysis can be useful in understanding the guidance in IFRS 11. However, the Interpretations Committee noted that the examples are fact-specific and thought that adding illustrative examples to IFRS 11 might not be the most effective way of clarifying the issues raised.
The Interpretations Committee noted that ‘other facts and circumstances’ need to be assessed when the joint arrangement is structured through a separate vehicle, but neither the legal form of that vehicle nor the contractual agreement result in the parties having direct rights to the assets and direct obligations for the liabilities of the joint arrangement. It noted that the purpose of assessing ‘other facts and circumstances’ is to consider whether the substance of the joint arrangement gives the parties rights to the assets and obligations for the liabilities relating to the joint arrangement. Some members of the Interpretations Committee described this as a ‘substance over form’ approach.
The Interpretations Committee, when considering the concept of ‘substance over form’, observed that in order for ‘other facts and circumstances’ to result in the parties having obligations for the liabilities of a joint arrangement, it is necessary to demonstrate that cash cascades from the parties through legal or contractual obligations to ensure the settlement of the liabilities of the joint arrangement on a continuous basis. The Interpretations Committee therefore thought that the parties’ intention to support the joint arrangement was insufficient to establish obligations for the liabilities of the joint arrangement. Notwithstanding this observation, the Interpretations Committee noted that the concept of ‘substance over form’ may not be consistently understood or applied in practice. Consequently, the Interpretations Committee decided to consult the IASB on this matter before progressing this issue further.
The staff will report the result of the consultation with the IASB at a future meeting.
The Interpretations Committee decided to consult the IASB
The Interpretations Committee tentatively decided not to address one issue
The Interpretations Committee identified priority issues among various implementation issues
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