23 April 2013

Deloitte commented on acquisition of an interest in a joint operation

Deloitte commented on the IASB's proposals in ED/2012/7 'Acquisition of an Interest in a Joint Operation'. Deloitte agrees with the application of the principles of IFRS 3 Business Combinations, but supports the IFRS Interpretations Committee in producing additional guidance on the 'business' concept.

Deloitte welcomes the IASB’s initiative to address the lack of guidance in IFRS 11 in this area and agree that application of the principles of IFRS 3 is an appropriate methodology when the joint operation constitutes a business. However, Deloitte notes that distinguishing between transactions on this basis (as would also be the case under the similar proposals of Exposure Draft ED 2012/6 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture) places additional emphasis on the definition of a business.

As such, Deloitte supports the work of the IFRS Interpretations Committee to produce additional guidance on the meaning and application of this concept as part of the IASB’s post-implementation review of IFRS 3.

However, Deloitte notes that the scope of the exposure draft is limited and, as such, does not provide guidance on a number of common transactions in which interests in joint operations are acquired. Deloitte believes that these common transactions should be addressed as a matter of urgency. In addition, the implications of the proposals for other transactions (particularly the contribution of an existing business to a joint operation) need to be made clearer.

Deloitte agrees with the inclusion of the acquisition of an interest in a joint operation on its formation (as well as the acquisition of an interest in an existing joint operation) within the scope of the proposals, because Deloitte agrees that the guidance in IFRS 3 is equally relevant to both transactions. However, Deloitte recommends that proposed paragraph B33B be amended to state more clearly what is encompassed by the term ‘acquisition of an interest in a joint operation on its formation’ (presumably, contribution of an existing business to a joint operation and contribution of cash or other assets when another party contributes an existing business).

However, that this would appear to result in consideration for an acquisition being measured at the full fair value of an existing business contributed to a joint operation (i.e., an exception to the partial gain or loss recognition requirements of paragraph B34), in individual assets and liabilities within the business being remeasured to their fair values on contribution to the joint operation and in the recognition of goodwill relating to the previously controlled business. If this is the intention of the Board, it should be stated clearly with an appropriate justification in the Basis for Conclusions. In addition, Deloitte believes that a numerical example of such a transaction would be a helpful companion to the example included in the ED (as a point of detail, Deloitte also suggests that that example should specify that the joint operation in which an interest is acquired constitutes a business).

Deloitte also notes that the exposure draft provides no guidance on the treatment of a number of common transactions:

• acquisition of an interest in a joint operation that either does not constitute a business or that constitutes a business created on formation (it would be useful to state that a cost allocation approach is required for such acquisitions and the Basis for Conclusions should address why the Board believes that it is appropriate to exclude the latter transaction from the scope of the proposed changes);
• the gain or loss to be recognised on contribution of an asset (or group of assets) that does not constitute a business on formation of a joint operation (it would be useful to clarify whether the requirements of paragraph B34 apply to such a contribution); and
• the acquisition of an additional share of a joint operation to which the investor is already party (such transactions are common in the mining industry in some jurisdictions). It is unclear whether and how the proposed amendments are intended to apply to these transactions.

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