The Accounting Adviser
Time for Transition: Old arrangements, new challenges
Will IFRS 11 affect your business?
By Sharlene Wilson, Partner, Accounting Advisory Services
If you are party to an arrangement in which you have joint control, then you will know about the new standard on joint arrangements. But as you are now into the period of adoption, have you completed your analysis of what it means for your accounting, or have you been assuming that no changes will be required?
The new standard is challenging, no longer relying solely on the legal form of the arrangement. Instead, there are a series of steps to the analysis, and many factors to potentially consider – requiring time and resource. And once your analysis of joint arrangements is complete, the related disclosure standard has its own challenges and may require additional data collection too.
How does this affect you?
- The accounting policy choice under the old standard (equity accounting or proportionate consolidation) has been removed. But more importantly for your transition, the new standard drives the accounting through a series of tests to determine who has rights to the assets and obligations for the liabilities of the arrangement – so you may need to fundamentally change your accounting. If under the new standard you need to apply the equity method to an interest that was previously proportionately consolidated, then this will collapse the gross reporting of related assets, liabilities and transactions to a one-line basis. Conversely, if you previously chose the equity method, then you will be required to gross up your reporting of related assets, liabilities and transactions if your arrangement is determined to be a joint operation.
- Do not assume that the accounting outcome is obvious because the arrangement is structured through a separate entity. Consider the following questions:
- Does the structure confer separation of rights and obligations between the partners and the arrangement?
- Is there an agreement between the partners and the arrangement that in effect overrides the legal structure and gives the partners rights and obligations?
- The final test in the series of tests to determine the appropriate accounting is the consideration of ‘other facts and circumstances’. This test is particularly relevant when the activities of an arrangement are primarily designed to provide output to the partners – e.g. when the partners are committed to purchase output from the arrangement. Other important facts and circumstances to consider include any liquidity and financing arrangements, transfer pricing and the level of output sold to the partners compared with third parties.
- Under the new standard, more extensive information needs to be disclosed. These disclosures are all on a gross basis – i.e. 100 percent of the arrangement’s assets and liabilities and not your percentage interest in the assets and liabilities – for joint ventures. Some of this information may not be readily available under your current processes and systems.
Please contact us if you would like to discuss how the new standard on joint arrangements will affect your organization. Determining the appropriate accounting is the first step to determining the wider impacts on your organization. Our team understands that implementing a new standard is more than an accounting exercise – it will have significant impacts on your entire organization, including P&L volatility, tax implications, systems and processes and the potential need to recalculate internal management information, KPIs and forecasts.