12011 Europe, Middle East, India and Africa tax policy outlook
Applying IFRS
Impact of the new joint arrangements and consolidation standardsAugust 2011
Final joint arrangements and consolidation standards
Mining & Metals
22
What you need to know• IFRS 10 hasanewdefinitionofcontrolandhas
additional requirements that could impact any previous assessmentofcontrolandjointcontrol
• IFRS 11describestheaccountingforarrangementsinwhich there is joint control; proportionate consolidation isnotpermittedforjointventures(asnewlydefined)
• IFRS 12requiresnewandexpandeddisclosuresforjointarrangements,aswellasforsubsidiaries,associates and structured entities, which will impact processes and systems
IntroductionWhat’s happened?The International Accounting Standards Board(IASB)recentlyissued a new standard — IFRS 11 Joint Arrangements. They also issued two other new standards — IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests in Other Entities. Thesenewstandardsareeffectiveforannualperiodsbeginningonorafter1January2013,andmustbeappliedretrospectively.
Inthispublication,weconcentrateonsomeoftheimplicationsofIFRS10andIFRS11thatarespecifictotheminingandmetalssector.Foramorecompletesummaryofthesenewstandardsandtheimpactsonyourbusiness,refertoourpublication,IFRS Developments — IASB issues three new standards: Consolidated Financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities,Issue1(May2011)and our publication IFRS Practical matters — What do the new consolidation, joint arrangements and disclosures accounting standards mean to you? (May2011).Thesepublicationsareavailableatwww.ey.com/IFRS.
What’s the impact?• Aconfusingpartofthechangesistheuseofterminologythatis
common in practice versus that within the new accounting standards.Thewayinwhichanumberofcommontermsarenowbeingdefinedmaynotbeobvious
• Someproportionatelyconsolidatedjointlycontrolledentities(JCEs)maynowbeclassifiedasjointventuresandwillhavetobeaccountedforusingtheequitymethod
• Conversely,someequityaccountedJCEsmaynowbeclassifiedas joint operations and an entity will need to recognise its assets, liabilities,revenuesandexpensesand/oritsrelativesharethereof
• Thesechangeswillimpactthepresentationoffinancialstatements, and in some instances, there may also be measurementdifferenceswhichwillaffectprofitorlossand/ornet assets
• Accountingandconsolidationsystems,businessprocessesandcontrols may need to be updated, and there may be impacts on otherareasofthebusiness,suchascovenants,remunerationstructures, etc.
Thesearchforgrowthisleadingminingandmetalsentitiestoincreasetheirappetiteforrisk.Thisismanifestingitselfbybringing in partners to source new projects, improve utilisationofexpensiveinfrastructure,helpmanagetechnicalorpoliticalrisk,orcomplywithlocalregulations.Tothisend,joint arrangements have always been, and continue to be, a common structure in the mining and metals sector. The majorityofminingandmetalsentitiesarepartytoatleastonejointarrangement.Infact,inthefive-monthperiodendingMay2011,49%ofallM&Atransactionswithinthesector involved projects with multiple parties.
However,forsomejointarrangements,theaccountingisabouttochangesignificantly,andnotallarrangementscommonly described as ‘joint ventures’ or ‘jointarrangements’willcontinuetobeaccountedforas inthepast,socarefulassessmentwillberequired.
3Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
Contents1. Overview
2. Clarifying the confusion ... new terms, new concepts
3. Newdefinitionofjointcontrol
3.1 Determinationofcontrol—impactofchangestotheconsolidationstandard
3.2 Whatarerelevantactivities?
3.3 ‘Unanimousconsent’—whatdoesthismean?
4. Differences between joint ventures and joint operations
4.1 Jointoperations
4.2 Jointventures
4.3 Clarifyingtheaccounting…whatisproportionateconsolidation?
4.4 Theimpactofachangeinclassificationupontransition
5. Gross vs net — what should I recognise?
5.1 Operatorsofjointarrangements
5.2 Non-operators
5.3 Jointandseveralliability
6. So what if I don’t have joint control or control?
6.1 Identifyingandassessingtherightsandobligations
7. New disclosures … more information; impact on processes and systems
8. Final thoughts
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4 Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
Many read the headline “Proportionate consolidation is no longer permitted for joint ventures” and interpret this to mean that all interests in joint arrangements must now be accounted for using the equity method — this is not correct.
1. OverviewIFRS11prescribestheaccountingfora‘jointarrangement’,whichisdefinedasacontractualarrangementoverwhichtwoormoreparties have joint control, as illustrated in diagram 1. It is important thatentitiesunderstandtheimplicationsandinterplayofboth IFRS10andIFRS11toensuretheproperassessmentof,andaccountingfor,currentandfuturejointarrangements.
2. Clarifying the confusion ... new terms, new conceptsIFRS11hastakensomecommonlyusedtermsandgiventhemdifferentmeanings.Thisisalreadycausingconsiderableconfusion.Forexample,whatmanyinthesectorwouldrefertoasjointventuresarenowcollectivelyreferredtoas‘jointarrangements’;theterm‘jointventure’isnownarrowlydefinedinIFRS11.
Likewise,theterm‘proportionateconsolidation’hasbeen(andstillis)usedtocasuallydescribeallmethodsofjointventureaccountingwhereanentityrecognisesitsshareoftheassetsandliabilitiesofthejointventure.However,fromanaccountingperspective,thistermmeanssomethingquitespecificandisnotreflectiveoftheaccounting treatment that currently applies to jointly controlled assets(JCAs)andjointlycontrolledoperations(JCOs)under IAS31,andthatwhichwillapplytojointoperationsunderIFRS11.
DuetothechangeindefinitionsandthemisunderstandingofwhatproportionateconsolidationandJCA/JCOaccountingis,itmaynotbeclearwhattheimpactofthisnewstandardis.
*The reference to “a group of the parties” refers to a situation in which there is joint control between two or more parties, but other parties to the joint arrangement are passive investors (i.e., there are other parties in the arrangement who do not have joint control). While such investors are technically within the scope of IFRS 11, they account for their investment in accordance with the relevant standards.
Diagram 1
Is it a joint arrangement?
Outside the scopeofIFRS11
(notajointarrangement)
Jointarrangement
No
No
Yes
Yes
Dothedecisionsabouttherelevantactivities require the unanimous consentofallthepartiesthat
collectivelycontrolthearrangement?
Doesthecontractualarrangementgivealltheparties(oragroupofthe
parties)*controlofthejointarrangementcollectively?
Althoughthetitleofthestandardhaschanged(i.e.,from ‘jointventures’to‘jointarrangements’)andmightindicateotherwise,IFRS11doesnotbroadenthescopeofthestandardwhencomparedwithIAS31.Itstillonlyappliestojointarrangements where there is joint control. However, the changes introducedbyIFRS10andIFRS11mayleadtoadifferentconclusion as to which arrangements are considered to be under joint control and those which are not.
5Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
3. New definition of joint controlJointcontrolisdefinedas“…thecontractuallyagreedsharingofcontrolofanarrangementwhichexistsonlywhenthedecisionsabouttherelevantactivitiesrequiretheunanimousconsentofthepartiessharingcontrol”.IFRS11describesthekeyaspectsofjointcontrolasfollows:
• Contractually agreed — contractual arrangements are usually, but notalways,written,andsetoutthetermsofthearrangements
• Control and relevant activities — IFRS 10 describes how to assess whetherapartyhascontrol,andhowtoidentifytherelevantactivities
• Unanimous consent — exists when the parties to an arrangement have collective control over the arrangement, but no single party has control
Thenewrequirementswithinthisdefinitionrelatetotheassessmentofcontrolandrelevantactivities.Unanimousconsentisnotnew,however,additionalguidancehasbeenaddedtoclarifywhen it exists.
3.1 Determination of control — impact of changes to the consolidation standard
Itiscommonintheminingandmetalssectorforoneofthepartiestobeappointedastheoperatorormanagerofthejointarrangement(‘theoperator’),towhomsomeofthedecision-makingpowersmightbedelegated.Currently,manyconsiderthattheoperator does not control a joint arrangement, but simply carries outthedecisionsofthepartiesunderthejointventure(oroperating)agreement(JOA),i.e.,actsasanagent.Underthenewstandards, it may be concluded that the operator actually controls thearrangement.Thisisbecausewhendecision-makingrightshavebeen delegated, IFRS 10 now provides new requirements on how to assess whether an entity is acting as principal or agent, which is then used to determine which party has control.
Carefulconsiderationwillberequiredtoassesswhetheranoperatoractsasaprincipal(and,therefore,maypotentiallycontrolthearrangement)orasanagent.Inthelattersituation,theoperatoronlyrecognisesitsinterestsinthejointarrangement(theaccountingforwhichwilldependuponwhetheritisajointoperationorjointventure)anditsoperator/managementfee.
Thefactorstobeconsideredinmakingthisassessmentinclude:
• Scopeoftheoperator’sdecision-makingauthority
• Rightsheldbyothers(e.g.,protective,removalrights)
• Exposuretovariabilityinreturnsthroughtheremunerationof the operator
• Variablereturnsheldthroughotherinterests(e.g.,directinvestmentsbytheoperatorinthejointarrangement)
Below,weconsidereachofthesefactors.Itisimportanttonotethat assessing whether an entity is a principal or an agent will requireconsiderationofallfactorscollectively.
a) Scope of decision-making authority
Thescopeofanoperator’sdecision-makingauthorityisevaluatedbyconsideringtherangeofactivitiesitispermittedtodirectandthediscretionithaswhenmakingdecisionsaboutthoseactivities.
Anoperatordoesnotusuallyhavediscretiontomakechangeseither to the activities it is permitted to direct, or to the decisions it ispermittedtomakewithoutthepriorapprovalofthenon-operatorparties. However, consideration must be given as to how broad or narrowitsdiscretioniswithinthedecision-makingrightsthathavebeen delegated. In addition, consideration must also be given to the levelofinvolvementtheoperatorhadindeterminingthescopeofits authority. That involvement may indicate the operator had the opportunity and incentive to obtain the ability to direct the relevant activities, which could indicate the operator is acting as a principal.
Forexample,iftheoperatorwasthemainpartyinvolvedinsettingup the joint arrangement and also the primary party in determining whatdecision-makingrightsitwouldhaveasoperator,andthesewere designed to be quite broad, it may indicate that the operator is a principal.
6 Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
b) Rights held by others
The operator also has to consider whether other parties hold rights thatwouldaffectanypowersdelegatedtoit.Forexample,aremovalrightheldbynon-operatorpartiesmightaffecttheoperator’sdecision-makingability.
Ifanon-operatorpartyholdsaremovalright(thatis,asinglenon-operatorpartycandecidetoremovetheoperator),andthatrightissubstantive(e.g.,withoutcause),thentheoperatorwouldbeanagent.However,iftheexerciseofthatremovalrightrequiresagreementbymorethanoneofthenon-operatorparties,thenitisnot conclusive as to whether the operator is a principal or an agent. The more parties that would have to agree to remove the operator (andthemorerestrictivetheconditionsforremoval),thelessimportantthatremovalrightiswhendeterminingiftheoperatorisa principal.
c) Remuneration of the operator
IFRS 10 describes how to evaluate remuneration arrangements (includingillustrativeexamples),butdoesnotincludeanybrightlineindicators.Thefeereceivedbytheoperatormustbecommensuratewiththeservicesprovided,andincludeonly‘market’terms,fortheoperator to be considered an agent. However, the magnitude and variabilityofremunerationcouldstillresultintheoperatorbeingaprincipal,evenifthesetwocriteriaaremet.Thegreaterthefee,andexposuretovariability,relativetotheexpectedreturnsfromthe joint arrangement, the more indicative it is that the operator is a principal.
However,thepresenceofavariablereturndoesnotautomaticallyleadtoaconclusionofanoperatorbeingaprincipal.Anoperatorcanreceiveavariablefeeforprovidingservicesandstillbeconsideredanagent,soitmaybedifficulttodistinguishanagencyrelationshipfromthatofaprincipal.Forexample,anoperatorneedstoevaluatewhetheritsexposuretovariabilityofreturnsisdifferentfromthatoftheotherinvestors,andifso,whetherthismightinfluenceitsactions.
d) Variable returns held through other interests
Whenanoperatorholdsotherinterestsinajointarrangementoverandabovetheremunerationitreceivesforbeingtheoperator,thismay indicate it is not an agent. It is common in the mining and metalssectorforoperatorstoalsohaveadirectfinancialinterestinthejointarrangement.Byvirtueofholdingthisotherinterest,thestandardindicatesthatdecisionsmadebytheoperatormaydifferfromthoseitwouldhavemadeifitdidnotholdtheotherinterest.
Inevaluatingitsexposuretovariabilityofreturnsfromotherinterests,IFRS10requiresanoperatortoconsiderthefollowing:
(a)Thegreaterthemagnitudeof,andvariabilityassociatedwith,itseconomicinterests,consideringitsremuneration(asdiscussedabove)andotherinterests,inaggregate,themorelikelytheoperator is a principal
(b)Themorethattheoperator’sexposuretovariabilityofreturnsdiffersfromthatoftheotherinvestors,themorelikelythatthismightinfluenceitsactions,andthemorelikelythattheoperatoris a principal
Whilethisevaluationismadeprimarilyonthebasisofreturnsexpectedfromtheactivitiesofthejointarrangement,theoperatormustalsoconsideritsmaximumexposuretovariabilityofreturns,takingintoaccountremunerationandotherintereststhatitholds.
7Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
WhilecertainaspectsofjointcontrolareunchangedfromIAS31,care is required in determining whether the arrangement is still considered to be under joint control under IFRS 11. This is becausethereferenceto‘control’inthenewdefinitionof‘jointcontrol’isbasedonthenewdefinitionofcontrolinIFRS10.
UnderIAS31,manyconsideranoperatortobeactingasanagent, a view which is based on the way these roles are generally perceived,andreferredto,inthesector.However,entitieswillneedtocarefullyassessthenatureoftheirarrangementsanddetermine whether this conclusion remains true, based on how guidance in IFRS 10 helps to delineate principal versus agent.
How we see it
3.2 What are relevant activities?
Relevantactivitiesarethoseactivitiesofthearrangementwhichsignificantlyaffectthereturnsofthearrangement.Determiningwhattheseareforeacharrangementwillrequiresignificantjudgement.
Examplesofdecisionsaboutrelevantactivitiesinclude,butarenotlimitedto:
• Establishingoperatingandcapitaldecisionsofthearrangementincludingbudgets—forexample,foraminingandmetalsarrangement,approvingthecapitalexpenditureprogrammeforthe next year
And
• Appointingandremuneratingajointarrangement’skeymanagement personnel or service providers and terminating theirservicesoremployment—forexample,appointingacontractminertoundertakeminingoperations.
3.1.1 So what happens if you have control?
Theimpactofcontrollinganarrangementdependsonanumber offactors.
Themostimportantofthesewillbeidentifyingandassessing the rights and obligations the contractual arrangement provides the parties, as well as assessing whether the arrangement is a business.
a) Identifying and assessing rights and obligations
• Rights to the underlying assets and obligations for the underlying liabilities of the arrangement:Whiletheprincipal/agentassessment may lead to a conclusion that an operator has control,thefactthateachpartyhasspecificrightsto,andobligationsfor,theunderlyingassetsandliabilities,meanstheoperator does not control anything over and above its own direct interestinthoseassetsandliabilities.Therefore,itstillonlyrecognises its interest in those assets and liabilities. This accountingappliesregardlessofwhetherthearrangementisinaseparate vehicle1 or not, as the contractual terms are the primary determinantoftheaccounting.
• Rights to the net assets of the arrangement: This only occurs where, at a minimum, the arrangement is structured through a separate vehicle. In this instance, the operator consolidates the entityandrecognisesanynon-controllinginterest.
b) Is the arrangement a business?
Theotherrelevantfactoriswhetherthearrangementisabusiness,as this determines whether, upon obtaining control, the requirementsofIFRS3Business Combinationsapply.AlloftherequirementsofIFRS3applyiftheentitycontrolsthearrangementwhere it has rights to the net assets, and that arrangement is a business.However,ifthatcontrolledarrangementisnotabusiness,theentityidentifiesandrecognisestheindividualassetsacquiredandliabilitiesassumedbasedontheirrelativefairvalue,anddoesnot recognise any goodwill.
For arrangements where there are rights to the assets and obligationsfortheliabilities,itisnotclearwhetherIFRS3appliesandwhethergoodwillcouldberecognised(evenifoutsidethescopeofIFRS3).ThisissuehasrecentlybeenreferredtotheIFRSInterpretationsCommittee.Wediscussthisfurtherinsection4.1.1ofthispublication.
1IFRS11definesaseparatevehicleas“Aseparatelyidentifiablefinancialstructure,includingseparatelegal
entitiesorentitiesrecognisedbystatute,regardlessofwhetherthoseentitieshavealegalpersonality.”
8 Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
2IFRS10definesprotectiverightsasthosedesignedtoprotecttheinterestsofthepartyholdingthose
rights without giving that party power over the entity to which those rights relate and that relate to fundamentalchangestotheactivitiesofaninvesteeorapplyinexceptionalcircumstances.
3.3 ‘Unanimous consent’ — what does this mean?
Whiletherequirementforunanimousconsentisnotnew,IFRS11doesprovideadditionalguidancethatclarifieswhenunanimousconsentexists,andoverwhichactivitiesitisrequired.Unanimousconsentmeansthatanypartywithjointcontrolcanpreventanyoftheotherparties,oragroupofparties,frommakingunilateraldecisions about relevant activities.
Sometimesthedecision-makingprocessagreedbetweenthepartiesintheJOAimplicitlyleadstojointcontrol.Forexample,ina50%/50%jointarrangement,theJOAspecifiesthatatleast51%ofthevotingrightsarerequiredtomakeadecisionaboutrelevantactivities.Therefore,thepartieshaveimplicitlyagreedthattheyhave joint control because decisions about relevant activities cannot be made without both parties agreeing.
However,inotherinstances,theJOAmayrequireaminimumproportionofthevotingrightstomakedecisions.Unlessitisobvioushowthisminimummustbeachieved,ortheJOAspecifieswhich parties are required to unanimously agree, then there would not be joint control.
IFRS11providessomeexamplestoillustratethispoint:
3.3.1 Unanimous consent over which decisions?
Tohavejointcontrol,unanimousconsentisrequiredfordecisionsabout the relevant activities.Ifunanimousconsentrelatesonlytodecisions that give a party protective rights2, or over administrative matters only, and not to decisions about the relevant activities, that party does not have joint control. For example, a veto right that preventsajointarrangementfromceasingbusinesswouldlikelybea protective right, and not a right that creates joint control. However,ifthevetorightsrelatetorelevantactivitiessuchasapproving the capital expenditure budget, then those rights may create joint control.
Forsomeminingandmetalsoperations,decision-makingmayvaryoverthelifeoftheprojecte.g.,duringtheexplorationandevaluationphase,thedevelopmentphaseand/ortheproductionphase. For example, during the exploration and evaluation phase, onepartytothearrangementmaybeabletomakeallofthedecisions, whereas once the project enters the development phase, decisions may then require unanimous consent. To determine whether the arrangement is jointly controlled, it will be necessary todecidewhichoftheseactivitiese.g.,explorationandevaluationand/ordevelopment,mostsignificantlyaffectthereturnsofthearrangement. This is because the arrangement will only be consideredtobeajointarrangementifthoseactivitieswhichrequireunanimousconsentaretheonesthatmostsignificantlyaffectthereturns.Thiswillbeahighlyjudgementalassessment.
Thenew(andclarified)requirementsforassessingwhetherunanimous consent is required over relevant activities may mean some arrangements that have previously been assessed as havingjointcontrolnownolongersatisfytherequirements,andhence, will not be considered joint arrangements.
How we see it
Example A Example B Example CRequirement 75%votetodirect
relevant activities75%votetodirectrelevant activities
Majorityvotetodirect relevant
activitiesParty A 50% 50% 35%Party B 30% 25% 35%Party C 20% 25% n/aOther n/a n/a WidelydispersedConclusion EventhoughA
canblockanydecision, A does not control the arrangement,
because A needs B to agree —
thereforejoint control between
A and B.
No control (or joint control)
because multiple combinations
could be used to reach agreement
No control (or joint control)
because multiple combinations could be used
to reach agreement
9Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
It is important to note that not all current JCEs will automatically be considered
joint ventures under IFRS 11 — detailed analysis will be required.
4. Differences between joint ventures and joint operationsOnce it has been established there is joint control, joint arrangementsarethenclassifiedaseither:jointoperationsor joint ventures.
4.1 Joint operations
JCAs and JCOs:Thesearenowcalled‘jointoperations’under IFRS11.TheaccountingforthesearrangementswillgenerallybethesameasunderIAS31.Thatis,thejointoperator(nowdefinedasapartythathasjointcontrolofajointoperationandnottobeconfusedwiththeoperatorofthejointarrangement)continuestorecogniseitsassets,liabilities,revenuesandexpenses,and/oritsrelativesharesthereof,ifany.Asmentionedpreviously,peopleoftenincorrectlyrefertothisaccountingasproportionateconsolidation,wheninfactitisnot.Weconsiderthisissuelaterinthis publication.
JCEs — rights to assets and obligations for liabilities:ItisalsopossiblethatcurrentJCEsmaybeclassifiedasjointoperationsunderIFRS11.Regardlessoflegalstructure,wherethepartyhasrightstotheassetsandobligationsfortheliabilitiesoftheunderlyingjointarrangement,itwillbeclassifiedandaccountedforasajointoperation,andaccountedforasabove.
4.1.1 Does IFRS 3 apply to joint operations?
OneareawherethereiscurrentlyalackofclaritywhenaccountingforacquisitionsofinterestsinJCAsandJCOs,andunlessresolved,willpresentsimilarissuesforjointoperations,iswhethertheprinciplesofIFRS3apply.
• OneviewisthatIFRS3doesnotapply.ThisisonthebasisthateventhoughtheactivityoftheJCA/JCOorjointoperationmayconstituteabusiness,theventurer/jointoperatordoesnotcontrol that business — they only have joint control.
• TheotherviewisthatIFRS3isapplicable.Thisisonthebasisthattheunitofaccountforassessingcontrolistheventurer’s/jointoperator’sowninterestinthebusinessoftheJCA/JCOorjoint operation, and the entity controls this.
Thislackofclarityhasleadtodiversityinpractice.ThisissuewasrecentlyreferredtotheIFRSInterpretationsCommittee(theCommittee)andconsideredattheirJuly2011meeting(agendapaper9).Atthedateofthispublication,thisissuewasstillbeingconsideredbytheCommittee.
4.2 Joint ventures
JCEs — rights to net assets:Inthisinstance,thearrangementwillbeclassifiedandaccountedforasajointventure.Thejointventurer(nowdefinedasapartywhohasjointcontrolofajointventure)willthenberequiredtoapplyequityaccountingtoaccountforthisinvestment. This is because proportionate consolidation is no longerpermittedforjointventures.
Join
t Arr
ange
men
tsJo
int V
entu
res
Joint ventures
Equitymethod
Parties with joint control have rightstothenetassetsofthe
arrangement
Recognise its assets, liabilities, revenue, and expenses,and/orits
relativesharesthereof
Jointly controlled assets
Equitymethodorproportionate consolidation
Jointly controlled entities
IAS
31IF
RS
11
Jointly controlled operations
Recognise its assets, liabilities, expenses, and
itsshareofincome
Joint operations
Recognise its assets, liabilities, revenue,andexpenses,and/or
itsrelativesharesthereof
The parties with joint control have rights to the assets and obligationsfortheliabilitiesof
the arrangement
Diagram 2
Our experience shows that practice in this area is indeed diverse andtherearevaryingviewsastowhetherIFRS3shouldorshould not apply. It will not be a simple exercise to resolve and significantresearchandoutreachwillberequired.
How we see it
10 Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
The removal of proportionate consolidation will not affect the accounting currently applied to JCAs/JCOs.
4.3 Clarifying the accounting … what is proportionate consolidation?
As mentioned earlier, there is some misunderstanding as to what proportionate consolidation is under IFRS, and how this compares toJCA/JCOaccountingunderIAS31,andtheaccountingforjointoperationsunderIFRS11.Thisconfusionispartlyduetothetwoapproachesbeingtechnicallydifferent,fromanaccountingperspective, and also partly due to the way the term ‘proportionate consolidation’isusedunderUSGAAP.UnderUSGAAP,proportionateconsolidationisusedtodescribeamethodofaccountingthatwouldbetheequivalentofIFRS’sJCA/JCO(andnowjointoperation)accounting.
As a consequence, there is some unwarranted concern that all interests in joint arrangements will require equity accounting — whichisnotthecase.AndforJCEsthatareclassifiedasjointoperations under IFRS 11, it may not be clear whether the adoption ofIFRS11willimpactthefinancialstatements.
Toillustratethis:
• Whereajointoperatorhasrightstoaspecifiedpercentageof allassets(e.g.50%)andobligationsforthesamespecifiedpercentage(50%)ofallliabilities,therewouldlikelybenodifferencebetweentheaccountingforajointoperationandproportionate consolidation.
• However,wherethejointoperatorhasrightstoaspecifiedpercentageofcertainassetsanddifferingrights(andpercentages)tootherassets,and/ordifferentobligationsforvariousliabilities,thefinancialstatementswouldlookdifferentwhenaccountingforthoseindividualrightsandobligations,ascompared with proportionately consolidating the same percentageofallassetsandliabilities.
4.4 The impact of a change in classification upon transition
JCE (proportionate consolidation) to joint venture: WhereproportionateconsolidationwaspreviouslyusedforJCEsunder IAS31,andsucharrangementsarenowclassifiedasjointventures,the transition to equity accounting under IFRS 11 will result in substantialchangestothefinancialstatementsofthejointventurer.
JCE (proportionate consolidation) to joint operation: As explained above(andillustratedinexample1),itisalsopossiblethatforproportionatelyconsolidatedJCEswhicharenowclassifiedasjointoperations, the accounting may not be identical — particularly whereanentitydoesnothaveauniformpercentageinterestinallassets and liabilities.
4.4.1 Presentation impacts
Thesechangeswillimpactthepresentationofthefinancialstatementsofaffectedentities.Forexample,goingfromproportionate consolidation to equity accounting will cause the investmentinthejointarrangementtogofrombeingpresentedasmultiplelineitemsthroughouttheStatementsofFinancialPositionandPerformance,tosingleequityaccountedlineitems.TherewillalsobeimpactsonkeymetricssuchasEBITDA.Thisisbecause,underproportionateconsolidation,ajointventurer’sshareofanyinterestortaxofthejointarrangementwouldhavebeenpresentedoutsideofEBITDA,whereasunderequityaccounting,such amountswillnowbeincludedinthesinglelineitemwhichformspartofEBITDA.
Example 1: 50% / 50% joint arrangement
* Party A has rights to 100% of the truck ** Party B has obligations for 100% of the debt
Proportionate consolidation
IAS 31 — JCA/JCO accounting | IFRS 11
— JO accountingItem 100%
amountParty A Party B Party A Party B
Truck* 200 100 100 200 -EE&D 1,000 500 500 500 500Debt** (100) (50) (50) - (100)Other liabilities (80) (40) (40) (40) (40)
11Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
5. Gross versus net — what should I recognise?It is clear that a participant in a joint operation is required to recogniseitsrightstotheassets,anditsobligationsfortheliabilities(orsharethereof)ifany,ofthejointarrangement.Thereforeitisimportantthatanentityfullyunderstandswhattheserightsandobligationsareandhowthesemaydifferbetween the parties.
5.1 Operators of joint arrangements
Operatorsofjointarrangementsmayhaveadirectlegalliabilityinrespectoftheentirebalanceofcertainobligationsarisingfromtransactions related to the joint arrangement. These may include, but are not limited to, third party creditors, leases, employee liabilities,etc.Theymayalsohavearightofreimbursement(byvirtueoftheJOA)fromthenon-operatorparties.Theoperatorwouldberequiredtorecognise100%ofsuchliabilitiesandwouldrecogniseareceivablefromthenon-operatorpartiesfortheirshareofsuchliabilities.IFRSprohibitstheoffsettingoftheseliabilitiesagainstthesereceivablesintheStatementofFinancialPosition.Intheprofitorloss,however,wherethesecostsarebeingincurredonbehalfofthenon-operatorparties,i.e.,theoperatorisactingasagent, and such costs are directly recharged, this is considered a reimbursement.Therefore,thereisnoeffectonprofitorlossastherechargeisoffsetagainsttherelatedexpense.
While,inmostcircumstances,theabilityofthenon-operatorpartiestopaytheirshareofthecostsincurredbytheoperatorwillnotbeindoubt, particularly where cash calls are paid in advance, there may be instances where they are unable to pay. Here the operator might not be able to recognise a corresponding receivable and reimbursement, and consequently, this would negatively impact its financialstatements.
5.2 Non-operators
Non-operatorswouldrecogniseapayabletotheoperator,whichwouldbeaccountedforasafinancialinstrumentunderIAS32Financial Instruments: Presentation/IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments and notunderthestandardwhichrelatestothetypeofcostbeingreimbursed.Thiswouldmeandifferentmeasurementand/ordisclosurerequirementswouldapply.Forexample,thenon-operator’sshareofemployeeentitlementsrelatingtotheoperator’semployeeswhoworkonthejointprojectwouldnotbeaccountedforunderIAS19Employee Benefits.
WhereinvestmentsinJCEsthatwereproportionatelyconsolidated are material, and such arrangements are now classifiedasjointventures,therewillbeasignificantimpactonthepresentationofthefinancialstatementsofaffectedentities.Insomecases,theremayalsobemeasurementdifferenceswhichwillaffectprofitorlossand/ornetassets.SignificantchangeswillalsooccurwhereanequityaccountedJCEisnowconsidered to be a joint operation as the joint operator would now recognise its assets, liabilities, revenues and expenses, and/oritsrelativesharesofthoseitems,ifany.
AsaresultofthechangesintroducedbyIFRS11toclassifyajoint arrangement, we would caution entities against voluntarily changingfromproportionateconsolidationtotheequitymethod,whilestillunderIAS31,untiltheyhavefullyanalysedtheclassificationunderthenewstandard.
How we see it
4.4.2 Measurement impacts
Insomecases,theremayalsobemeasurementdifferenceswhichwillaffectprofitorlossand/ornetassets.Forexample,underproportionateconsolidation,anylossesfromajointarrangementwould have been recognised as incurred. However under equity accounting,theconceptof‘waterlineaccounting’wouldonlyseesuch losses continue to be recognised up until the point at which the investment in the joint arrangement is reduced to nil.
Formoreinformationonthepracticalimplicationsofthesechangesforyourbusinesse.g.,onaccountingsystemsandprocesses,managementinformationandkeyperformanceindicators,etc.,refertoourIFRS Practical matterspaperreferencedatthestartofthis publication.
12 Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
5.3 Joint and several liability
It is also possible that there may be liabilities in the arrangement where the obligation is joint and several. That is, an entity is not onlyresponsibleforitsproportionateshare,butitisalsoliableforthe other party‘s share should they be unable to pay. A common exampleofthisintheminingandmetalssectorisrehabilitationobligations.
Intheseinstances,eachpartynotonlytakesupitsproportionateshareoftherehabilitationobligation,itisalsorequiredtoassessthelikelihoodthattheotherpartywillnotbeabletomeettheirshare.Whereitisonlypossible(orremote)thattheotherpartywillnot be able to pay, the entity is not required to do anything in addition.Wherethereisapossibleobligationthattheentitywillhavetocovertheobligationsoftheotherparty,orthereissomeindication that they may not be able to pay, but it is not probable (i.e.,morelikelythannot)thattheycannotpay,thentheentitywould have to disclose this possible obligation as a contingent liability. However, where it is probable that the other party cannot meetsomeof,ortheentire,obligation,theentitywouldneedtoassess what additional amount they would have to recognise.
ItwillbecriticalforpartiestojointarrangementstoundertakeadetailedreviewoftheirJOAs,includinganysubsequentamendmentsoraddendums,toensuretheyfullyunderstandtherights and obligations therein, and how these are shared amongst the parties.
Inmanyinstances,therequirementfortheoperatortorecognise100%ofcertainliabilities,andthenaseparatereceivablefromthenon-operatorparties,andsimilarlytheaccountingforjointandseveralliabilities,willnotnegativelyimpacttheoperator’s(orentity’s)netassetpositionornetprofitorloss.However,recenteventsillustratethatnon-operator/otherpartiesmaynotalwaysbeabletomeettheirshareofobligationsofthejointarrangement.
How we see it
6. So what if I don’t have joint control or control?Theaccountingimpactofdeterminingthataninterestinanarrangement does not provide the party with joint control or control dependsonanumberoffactors.Again,themostimportantofthesefactorswillbetherightsandobligationsthecontractualarrangement provides the parties.
6.1 Identifying and assessing the rights and obligations
• Rights to the underlying assets and obligations for the underlying liabilities of the arrangement:Despitenothavingjointcontrol(orcontrol)thepartystillhasrightsto,andobligationsfor,theunderlyingassetsandobligations.Therefore,itwouldcontinuetorecognise its interest in those assets and liabilities. This accountingwouldapplyregardlessofwhetherthearrangementisin a separate vehicle or not, as the contractual terms are the primarydeterminantoftheaccounting.
• Rights to the net assets of the arrangement:Thisonlyoccurswhere, at a minimum, the arrangement is structured through a separatevehicle.Inthisinstance,ifthepartyisconsideredtohavesignificantinfluenceoverthearrangement,itaccountsforits interest in accordance with IAS 28 Investments in Associates and Joint Ventures (asamendedin2011)—equityaccounting;otherwiseitaccountsforitsinterestunderIAS32/IAS39/IFRS9—fairvaluethroughprofitorlossorothercomprehensiveincome(unlesstheinvestmentwasheldfortrading).
Giventhattheaccountingforthesecontractualarrangementsdepends on the rights and obligations provided to the parties, it isessentialforanentitytoobtainathoroughunderstandingandcompleteadetailedanalysisoftheirrightsandobligations.
How we see it
13Mining and metalsApplyingIFRS—impactofnewjointarrangementsandconsolidationstandards
IFRS contact
Tracey Waring GlobalMining&MetalsIFRSLeader T:+442079800646 E:[email protected]
7. New disclosures … more information; impact on processes and systemsIFRS12introducesarangeofnewandexpandeddisclosures.Thesewillrequirethedisclosureofsignificantjudgementsandassumptionsmadebymanagementindeterminingwhether:thereis joint control; and an arrangement structured through a separate vehicle is a joint venture or a joint operation. For joint ventures, it willalsorequirethecompilationanddisclosureofadditionalinformation,eitherindividuallyformaterialjointventures,orinaggregatefortheimmaterialjointventures—whichwillimpactanentity’s processes and systems.
Formoreinformationonthepracticalimplicationsofthesechangeson your business e.g., on accounting systems and processes, data accumulation,etc.,refertoourIFRS Practical matters paper referencedatthestartofthispublication.
8. Final thoughtsThe rights and obligations provided to a party under these contractualarrangementswilldrivetheaccounting.Therefore,anentitywillhavetoensureithasadetailedunderstandingofthespecificrightsandobligationsofitsarrangementstobeabletodeterminetheimpactofthesenewstandards.
Giventheuniquenatureofthevariousarrangementsthatcurrentlyexist, and are emerging, an entity will need to individually analyse eachcontracttobeabletocompletethisassessment.Thedifficultyofthistaskwillbeimpactedbythenumberandcomplexityofthearrangements an entity has. Robust systems and processes will need to be developed, not only to complete the initial assessment, butalsotoenabletheongoingassessmentofcurrentarrangements(shouldfactsandcircumstanceschange)andtheassessmentofnew arrangements.
Ernst & Young’s Global Mining & Metals Center Withastrongoutlookinthesector,theglobalminingandmetalsindustryisfocusedonfuturegrowththroughexpandedproduction,withoutlosingsightofoperationalefficiencyandcostoptimization.Thesectorisalsofacedwiththeincreasedchallengeofchangingexpectationsinthemaintenanceofitssociallicensetooperateandmeetinggovernmentrevenue expectations.
Ernst&Young’sGlobalMining&MetalsCenterbringstogetheraworldwideteamofprofessionalstohelpyouachieveyourpotential—ateamwithdeeptechnicalexperience in providing assurance, tax, transactions and advisory services to the mining and metals sector.
TheCenteriswherepeopleandideascometogethertohelpminingandmetalscompaniesmeettheissuesoftodayandanticipatethoseoftomorrow.Ultimatelyitenablesustohelpyoumeetyourgoalsandcompetemoreeffectively.It’showErnst&Youngmakes adifference.
Area contactsGlobal Mining & Metals LeaderMike ElliottTel:[email protected] OceaniaScott GrimleyTel:[email protected]
ChinaPeter MarkeyTel:+862122282616 [email protected]
Japan
Kentaro NakamichiTel:[email protected]
Europe, Middle East, India and Africa LeaderMick BardellaTel:[email protected]
AfricaAdrian MacartneyTel:[email protected]
Commonwealth ofIndependent StatesEvgeni KhrustalevTel:[email protected]
France and LuxemburgChristian MionTel:[email protected]
IndiaAnjani AgrawalTel:[email protected]
United Kingdom & IrelandLee DownhamTel:[email protected]
Americas and United States LeaderAndy MillerTel:[email protected]
CanadaTom WhelanTel:[email protected]
South America and Brazil LeaderCarlos AssisTel:[email protected]
Service line contactsGlobal Advisory LeaderPaul MitchellTel:[email protected]
Global Assurance LeaderTom WhelanTel:[email protected]
Global IFRS LeaderTracey WaringTel:[email protected]
Global Tax LeaderAndy MillerTel:[email protected]
Global Transactions LeaderLee DownhamTel:[email protected]
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