29 January 2013

EFRAG: Draft comment letter on acquisition of an interest in a joint operation

EFRAG published its draft comment letter on the IASB's Exposure Draft ED/2012/7 Acquisition of an Interest in a Joint Operation. Comments on the letter are invited by 20 March, 2013.

The ED provides guidance on accounting for the acquisition of an interest in a joint operation whose activity is a business as defined in IFRS 3 'Business Combinations'. The IASB proposes to amend IFRS 11 so that a joint operator should apply the relevant principles for business combinations accounting in IFRS 3 and other relevant IFRSs when accounting for such acquisitions. Neither IFRS 11 'Joint Arrangements' nor IAS 31 'Interests in Joint Ventures' explicitly addresses this type of transaction.

EFRAG agrees that diversity in practice exists on how joint operators account for the acquisition of an interest in a jointly controlled operation, particularly when the activity of the jointly controlled operation under IAS 31 constitutes a business, as defined in IFRS 3. This diversity is likely to continue given that IFRS 11 (which superseded IAS 31) does not address accounting for the acquisition of a joint operation. Therefore, EFRAG supports the IASB’s efforts to address the issue.

EFRAG agrees with the IASB’s proposal on the basis that it addresses current diversity in practice on how to account for acquisitions of interests in a joint operation whose activity constitutes a business.

However, EFRAG is concerned that considerable judgement is required in practice to distinguish a joint operation from a joint venture. Requiring the application of the principles on business combinations accounting would put considerable stress on how the definition of a ‘joint operation’ and a ‘business’ is understood by preparers and auditors.

EFRAG notes that acquisitions of interests in joint operations might often involve (i) contributions of assets, businesses or (parts of) subsidiaries, (ii) loss of control over those, and/or (iii) increasing the joint operator interest in the joint operation.

The ED does not specifically address the accounting for the loss of control over a business that is contributed to a joint operation, in exchange for an interest in that joint operation, nor the acquisition of an additional interest in the same joint operation. We believe that these types of transactions should be addressed comprehensively to avoid new uncertainty and diversity in practice.

Furthermore, EFRAG is also concerned that the ED leaves open a number of cross-cutting issues all related to the different aspects of the transactions referred to above. In this respect, we recommend the IASB to further explore the interaction of the ED with existing requirements in IFRSs and other amendments currently being developed by the IASB.

Press release

Draft comment letter

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