Acquiring Interests In Joint Operations Down To Business
The IASB has recently published amendments to IFRS 11, addressing Accounting for Acquisitions of Interests in Joint Operations, effective for annual periods beginning on or after January 1, 2016.
The amendments address apparent inconsistencies in practice in acquiring for such interests. Up to this point, some issuers have been accounting for the transactions by applying IFRS 3 to the extent it's applicable, measuring identifiable assets and liabilities acquired at their fair values and recognizing any excess purchase price as goodwill, while expensing transaction costs as for business combinations. Others followed a "cost approach" of allocating the total cost of acquiring the interest in the joint operation, including transaction costs, to identifiable assets on the basis of relative fair values, without recognizing goodwill. Others may have followed a hybrid of these two approaches.
The amendments clear up this inconsistency by specifying the following:
When an entity acquires an interest in a joint operation in which the activity of the joint operation constitutes a business, as defined in IFRS 3, it shall apply, to the extent of its share in accordance with paragraph 20, all of the principles on business combinations accounting in IFRS 3, and other IFRSs, that do not conflict with the guidance in this IFRS and disclose the information that is required in those IFRSs in relation to business combinations. This applies to the acquisition of both the initial interest and additional interests in a joint operation in which the activity of the joint operation constitutes a business. The amendments also address situations in which a joint operator increases its interest in an already-held joint operation with activities constituting a business, specifying that in cases where the joint operator continues to have joint control both before and after the transaction, then it doesn't remeasure its previously held interests.
The IASB's rationale for all this is fairly concise, saying simply it considers that separately recognizing goodwill, when present, is preferable to allocating premiums to identifiable assets acquired on the basis of relative fair values; it thinks that an approach limiting the application of business combinations accounting only to issues that aren't addressed elsewhere in IFRS lacks a strong conceptual basis; and that the guidance in IFRS 3 and other IFRSs on business combinations give a comprehensive and consistent set of...
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