The document discusses the accounting for joint arrangements by local authorities under IFRS 11, highlighting the differences from IAS 31, particularly in joint control and the requirement for equity accounting. It outlines the types of joint arrangements, defines key terms, and emphasizes the need for local authorities to disclose specific financial information. Additionally, it provides recommendations for local authorities on structuring new joint arrangements and reviewing existing ones to comply with IFRS 11 starting from January 1, 2013.

1. Accounting for joint arrangements
by local authorities under IFRS 11
Spring 2012
Introduction Where, however, the members of the joint venture have
There were 3112 joint arrangements in the United rights to the individual assets and liabilities of the
Kingdom during the period 1990-2010, covering such separate vehicle, the arrangement is classified as a joint
industries as business services, software development and operation and members of the joint arrangement are
wholesale trade in durable goods1. Of these, 1504 (48%) required to show their share of the individual assets,
joint arrangements were structured as separate entities, with liabilities, revenue and expenses in their single entity and
1608 (52%) structured as alliances where assets and consolidated accounts.
operations were shared but no separate entity was formed.
How is IFRS 11 different from
Definition of a joint arrangement IAS 31 'Interests in Joint Ventures'?
Published in May 2011, IFRS 11 'Joint Arrangements' IAS 31 classified joint ventures into jointly controlled
defines a joint arrangement as an arrangement of which operations, jointly controlled assets and jointly controlled
two or more parties have joint control. Joint control is the entities. Under IFRS 11 both jointly controlled operations
contractually agreed sharing of control which exists only and jointly controlled assets are classified as joint
where decisions about the relevant activities require the operations.
unanimous consent of the parties sharing control. Under IAS 31 members of jointly controlled entities were
A joint arrangement will be established by a contractual permitted to use proportionate consolidation or equity
arrangement that binds the parties and provides two or accounting to account for their interests in the jointly
more parties with joint control of the arrangement. Joint controlled entity's assets, liabilities, revenue and expenses.
control can, for example, be established by the entity's Under IFRS 11 the ability to use proportional
articles of association. consolidation for interests in joint ventures is no longer
Relevant activities are defined as activities that permitted. Equity accounting is required.
significantly affect the returns of an arrangement, for
example acquiring or disposing of assets, selling or
What is equity accounting?
purchasing goods and services or obtaining funding.
An arrangement can be a joint arrangement even though Under equity accounting, as defined in IAS 28 'Investments
not all of its parties have joint control of the arrangement. in Associates and Joint ventures', a joint venture member
IFRS 11 distinguishes between parties that have joint will show in its consolidated accounts:
control of a joint arrangement and parties that participate
in, but do not have joint control of, a joint arrangement. • its investment in the joint venture entity, initially
recognised at cost
Requirements of IFRS 11 • its share of profits and losses of the joint venture in
IFRS 11 distinguishes between joint arrangements where a each accounting period
separate vehicle is established which are referred to as 'joint • its share of any dividends received from the joint
ventures' and joint arrangements where no separate vehicle venture in each accounting period (which reduce the
is established, referred to as 'joint operations'. carrying amount of the investment in the joint
IFRS 11 defines a separate vehicle as "a separately venture)
identifiable financial structure, including separate legal • changes in its share of the joint venture's net assets
entities or entities recognised by statute, regardless of arising from items recognised in the joint venture's
whether those entities have a legal personality". other comprehensive income, such as revaluations of
In the case of a 'joint venture' where the members of the plant, property and equipment or foreign exchange
separate vehicle have an ownership interest in the net translation differences.
assets of the vehicle (which will often be the case) IFRS 11
requires members of the joint venture to use 'equity In its single entity accounts the joint venture member will
accounting' to account for their interests in the joint show its investment in the joint venture at cost or more
venture. exceptionally as an available-for-sale financial asset under
IAS 39. Dividends receivable in the period will be reflected
in the Income and Expenditure Account.
1 Thomson Financial SDC Platinum Alliances/Joint Ventures
. database

2. Accounting for profits on sales or Who should I contact?
contributions of assets to a joint For further information please contact:
arrangement
When an entity enters into a transaction with a joint Paul Dossett
operation in which it is a joint operator, such as a Partner
sale or contribution of assets, it is conducting the T 020 7728 3180
transaction with the other parties to the joint operation. As E paul.dossett@uk.gt.com
such, the joint operator shall recognise gains and losses
resulting from such a transaction only to the extent Phillip Woolley
Partner
of the other parties’ interests in the joint operation.
T 0161 953 6430
E phillip.woolley@uk.gt.com
Disclosures
IFRS 12 'Disclosure of Interests in Other Entities' sets out
extensive disclosure requirements in respect of joint
arrangements. For example, local authorities will need to
disclose:
• the nature of the local authority's relationship with
the joint arrangement
• the proportion of ownership interest or participating
shares held by the local authority
• summarised financial information about the joint
venture (eg dividends received, summarised profit or
loss and balance sheet information)
• the nature of any restrictions on the joint venture's
ability to transfer funds to the local authority
• the date of the year-end of the joint venture where
this is not coterminous with the year-end of the local
authority
• commitments that the local authority has relating to
joint ventures, separated from other commitments
made by the local authority
• contingent liabilities relating to the local authority's
interest in the joint venture.
Effective Date
IFRS 11 is effective for accounting periods beginning on or
after 1st January 2013. Provided it is adopted by the
CIPFA Code local authorities will need to apply IFRS 11 to
their 2013-14 accounts, including restating any 2012-13
figures to be consistent with IFRS 11.
Issues for local authorities to consider
We recommend that local authorities:
• consider the structuring of new joint arrangements so
that they are accounted for as joint ventures under
IFRS 11, rather than as joint operations which will
impact on prudential borrowing levels
• review the accounting treatment of existing joint
arrangements to ensure it is consistent with IFRS 11
• consider how IFRS 11 will affect the figures relating
to joint ventures in the 2012-13 accounts.
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