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FROM: MAR-APR 2008 ISSUE | BY STEPHEN SPECTOR
The Accounting Standards Board (AcSB) recently released an exposure draft of Handbook section 3056 entitled Joint Arrangements. When finalized, the recommendations will replace section 3055, and will be the same as International Financial Reporting Standard 9 (IFRS 9) recently proposed by the International Accounting Standards Board (IASB) as ED 9.
The biggest change is the replacement of the proportionate consolidation method of accounting for jointly controlled entities with the equity method. Adoption of this change will mean that U.S., Canadian, and IFRS GAAP regarding joint ventures are the same.
IFRS would be deemed Canadian GAAP for publicly accountable enterprises for years beginning on or after January 1, 2011. Given the lead-time between the IASB implementation of IFRS 9 (expected to be 2009) and the Canadian implementation of IFRS, section 3056 will permit, but not require, the adoption of the new recommendations prior to the complete changeover to IFRS. Doing so will require that the guidance for joint venture transactions in paragraphs 3055.26-.40 be retained until section 3056 is fully effective.
What is Different?
ED 9 has more extensive disclosure requirements than section 3055, and uses the term “joint arrangement” to describe all arrangements in which parties share decision-making. The term “joint venture” is used strictly for an arrangement in which the parties do not have rights to individual assets or obligations for liabilities of the venture. Rather, each party is entitled to a share of the outcome of the joint venture’s activities. Section 3055 uses the term “joint venture” for all contractual arrangements in which parties have joint control.
ED 9 requires equity accounting for joint arrangements that meet the new definition of a joint venture. For other types of arrangements such as joint operations and joint assets, an entity accounts for its interest in the individual assets, liabilities, revenues and expenses. This produces a similar result to proportionate consolidation, although the underlying principle is different. Currently, section 3055 requires proportionate consolidation for all types of joint ventures.
Why Make Changes Now?
The changes arise from two perceived weaknesses in IAS 31 and section 3055. The first is that the form of the arrangement is the primary determinant of the accounting methodology. Accounting for interests in joint arrangements can differ depending on whether or not a legal entity is established.
Secondly, IAS 31 permits a choice of accounting treatment. Entities can opt to use the equity method or proportionate consolidation, which means similar transactions may be accounted for in different ways.
Following IAS 31 or section 3055 can lead to the recognition of assets that are not controlled and liabilities that are not obligations. When a party has joint control of an entity, it shares control of the activities of the entity. Individual parties do not control each asset, nor have an obligation for each liability; rather, each party has control over its investment.
If a party uses proportionate consolidation to account for its interest in a jointly controlled entity, it recognizes a proportion of items that it does not control as assets a liabilities nd. As such, the amounts recognized are not a true representation of the entity’s assets and liabilities. ED 9 and section 3056 will eliminate proportionate consolidation, and the term “joint arrangement” will be used, meaning shared decision-making by all parties, and the term joint control is retained for joint ventures.
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