The objective of IFRS 11 is to establish principles for ‘Financial Reporting’ by
entities that have an interest in arrangements that are controlled jointly
(i.e. Joint Arrangements).
International Financial Reporting Standards
What is IFRS 11?
IFRS 11 Joint Arrangements prescribes the financial reporting by entities that have an interest in arrangements that are controlled jointly by two or more parties.
Issued by the International Accounting Standards Board (IASB) in May 2011 and effective for annual periods beginning on or after 1 January 2013, IFRS 11 replaced IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities — Non-Monetary Contributions by Venturers.
The standard establishes principles for classifying joint arrangements into two types – joint operations and joint ventures and specifies the corresponding accounting treatment for each. A key change from IAS 31 was the elimination of proportionate consolidation as an option for jointly controlled entities, requiring use of the Equity Method for joint ventures.
Issued By
International Accounting Standards Board (IASB) – May 2011
Effective Date
Annual periods beginning on or after 1 January 2013 (earlier application permitted)
Replaces
IAS 31 Interests in Joint Ventures and SIC-13
Core Principle
An entity accounts for its interests based on its rights and obligations arising from the arrangement
Scope of IFRS 11
IFRS 11 applies to all entities that are parties to a joint arrangement. Understanding what qualifies as a joint arrangement is the essential starting point.
What is a Joint Arrangement?
A joint arrangement is an arrangement of which two or more parties have joint control. It is characterised by two core features:
First, the arrangement is bound by a contractual agreement – this can be in the form of a formal contract, articles of incorporation, or other legal forms. The contractual arrangement must specify the terms on which the parties participate. Second, the contractual agreement gives two or more parties joint control of the arrangement.
Definition of Joint Control
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
This means no single party unilaterally controls the arrangement. Parties with joint control are called “joint operators” or “joint venturers” depending on the arrangement type.
The concept of joint control is defined in IFRS 10 Consolidated Financial Statements and applied within IFRS 11.
Exclusions from Scope
IFRS 11 does not apply to an entity’s interests in jointly controlled operations or assets where the entity is not a party to the joint arrangement itself. Additionally, the standard excludes interests held in joint arrangements accounted for as investments under IFRS 9.
Types of Joint Arrangements
IFRS 11 identifies exactly two types of joint arrangements, replacing the three-category structure under IAS 31.
Joint Operation
A joint arrangement whereby the parties that have joint control have rights to the assets, and obligations for the liabilities, relating to the arrangement.
- Parties called joint operators
- No separate legal entity typically required
- Each party recognises its share of assets, liabilities, revenue, and expenses directly
- Common in oil & gas exploration, construction consortia
- Proportionate recognition method applies
Joint Venture
A joint arrangement whereby the parties that have joint control have rights to the net assets of the arrangement.
- Parties called joint venturers
- Structured through a separate legal entity (vehicle)
- Party recognises its interest as a single investment
- Accounted for using the equity method per IAS 28
- Common in real estate, manufacturing, strategic alliances
Key Insight: The classification is not driven by the legal structure of the arrangement alone – it is determined by the rights and obligations the parties have in that arrangement.
An arrangement structured through a separate legal entity can still be classified as a joint operation if analysis of the entity’s rights and obligations points in that direction.
Classification Framework
Classifying a joint arrangement as either a joint operation or a joint venture requires a structured assessment process. IFRS 11 provides a clear decision hierarchy.
The Three-Step Classification Process
Is the arrangement carried out through a separate legal vehicle (e.g., company, partnership, trust)? If no, the arrangement is automatically a joint operation. If yes, proceed to step 2.
Does the legal form of the separate vehicle confer rights to assets and obligations for liabilities on the parties? Certain legal forms such as unlimited partnerships, may create a joint operation despite the use of a separate vehicle.
Assess the contractual arrangement. Does it give parties direct rights to assets and obligations for liabilities? Consider: whether parties are entitled to the output, whether they are obligated to fund the entity’s liabilities, and other relevant facts and circumstances (e.g., the entity is designed so that parties are substantially the only source of cash flows).
Classification Indicators Summary
| Factor | Points to Joint Operation | Points to Joint Venture |
|---|---|---|
| Separate legal entity | No separate vehicle used | Structured through a separate vehicle |
| Legal form | Legal form confers direct rights to assets/liabilities | Legal form separates parties from assets/liabilities |
| Output rights | Parties have rights to all or substantially all output | Entity sells output to third parties; parties share net assets |
| Cash flow obligation | Parties have continuous obligation to fund the entity | Entity generates its own cash flows; parties receive dividends |
| Liability obligation | Parties directly obligated for liabilities incurred | Liability limited to equity investment |
| Other facts & circumstances | Entity designed to depend on parties for funding | Entity is self-sustaining and independent |
Accounting Treatment
The accounting model flows directly from the classification. Joint operations and joint ventures have fundamentally different accounting treatments.
Accounting for Joint Operations
A joint operator recognises in relation to its interest in a joint operation its own share of:
Its assets, including its share of any assets held jointly; its liabilities, including its share of any liabilities incurred jointly; its revenue from the sale of its share of the output arising from the joint operation; its share of the revenue from the sale of the output by the joint operation; and its expenses, including its share of any expenses incurred jointly.
A joint operator accounts for the assets, liabilities, revenues, and expenses relating to its interest in a joint operation in accordance with the IFRS(s) applicable to those assets, liabilities, revenues, and expenses such as IAS 16 for property, plant and equipment.
Equity Method for Joint Ventures (IAS 28)
A joint venturer recognises its interest in a joint venture as an investment and accounts for it using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures.
Under the equity method, the investment is initially recognised at cost and subsequently adjusted to recognise the investor’s share of the profit or loss of the investee. Distributions received from the investee reduce the carrying amount of the investment.
A joint venturer that is exempt from applying the equity method (e.g., a venture capital organisation meeting certain criteria under IAS 28) may elect to measure its interest at fair value through profit or loss in accordance with IFRS 9.
Transactions Between a Party and a Joint Arrangement
When a joint operator transacts with a joint operation in which it is a party for example, selling or contributing assets – the joint operator recognises gains and losses resulting from such a transaction only to the extent of the other parties’ interests in the joint operation. Similarly, when a joint operator purchases assets from a joint operation, it does not recognise its share of the gains until it resells those assets to a third party.
For joint venturers transacting with a joint venture, IFRS 11 references IAS 28 paragraphs 28–30 for guidance on recognising gains and losses on such transactions, which are restricted to the extent of unrelated investors’ interests.
Acquisition of Interest in a Joint Operation
When an entity acquires an interest in a joint operation that constitutes a business (as defined in IFRS 3), IFRS 11 requires the entity to apply all of the principles in IFRS 3 that do not conflict with IFRS 11. This was clarified by an amendment effective from 1 January 2016, meaning business combination accounting rules apply on acquisition of a joint operation that is a business.
Disclosure Requirements
IFRS 11 itself does not contain extensive disclosure requirements – detailed disclosures are primarily required under IFRS 12 Disclosure of Interests in Other Entities.
However, IFRS 11 requires entities to disclose information that enables users to evaluate the nature, extent, and financial effects of its interests in joint arrangements.
Key Disclosures Under IFRS 12 for Joint Arrangements
| Disclosure Area | Joint Operations | Joint Ventures |
|---|---|---|
| Name and description | Name, nature, and purpose of the joint operation | Name, nature, and purpose of the joint venture |
| Ownership / participation | Proportion of ownership interest held | Percentage of ownership interest |
| Financial information | Aggregated carrying amounts included in line items | Summarised financial information of material JVs |
| Commitments | Unrecognised commitments related to JO | Commitments relating to its interests in joint ventures |
| Contingent liabilities | Contingent liabilities incurred jointly | Share of contingent liabilities of the joint venture |
Aggregated Disclosures: For individually immaterial joint ventures, entities may disclose summarised information in aggregate rather than separately for each arrangement, grouped by nature.
IFRS 11 vs. IAS 31: Key Changes
IFRS 11 represented a significant evolution from IAS 31. Understanding the differences is essential for entities that transitioned to IFRS after 2013.
| Aspect | IAS 31 (Old) | IFRS 11 (Current) |
|---|---|---|
| Classification categories | Jointly controlled entities, jointly controlled operations, jointly controlled assets (3 types) | Joint ventures and joint operations only (2 types) |
| Basis for classification | Primarily legal structure (entity or no entity) | Rights and obligations of the parties (substance over form) |
| Accounting for jointly controlled entities / ventures | Choice: proportionate consolidation OR equity method | Equity method only – no choice permitted |
| Proportionate consolidation | Permitted for jointly controlled entities | Eliminated – not permitted for joint ventures |
| Business combination rules on acquisition | Not specifically addressed | IFRS 3 applies when interest acquired constitutes a business |
| Disclosures | Included within IAS 31 | Moved to IFRS 12 (Disclosure of Interests in Other Entities) |
The elimination of proportionate consolidation was arguably the most significant practical change for many industries, particularly oil and gas and construction, where this method was widely used. Transitioning entities had to restate their financials using the equity method, often resulting in significant balance sheet de-recognition of gross assets and liabilities, with a single net investment line replacing them.
Frequently Asked Questions
Yes. IFRS 11 explicitly acknowledges this. Even when a separate legal vehicle exists, the arrangement may be a joint operation if analysis of the legal form, contractual terms, and other facts demonstrates that parties have direct rights to assets and obligations for liabilities. This most commonly arises with certain partnership structures or where contractual terms override the default legal form implications.
Under the equity method, a joint venturer initially records its investment at cost. Subsequently, the carrying amount is increased or decreased to recognise the venturer’s share of the profit or loss of the joint venture. Distributions received reduce the carrying amount. The venturer also recognises its share of the joint venture’s other comprehensive income (OCI). The carrying amount is tested for impairment under IAS 36.
When an entity acquires an interest in a joint operation that meets the definition of a business per IFRS 3, it must apply all IFRS 3 principles not conflicting with IFRS 11. This means recognising and measuring identifiable assets acquired and liabilities assumed at their acquisition-date fair values, recognising any goodwill or bargain purchase gain, and disclosing the information required by IFRS 3 for business combinations.
Joint control requires unanimous consent of all parties sharing control for decisions about relevant activities. However, not all parties need to have joint control – some may participate in an arrangement without having joint control. The key is that the parties who do have joint control must unanimously agree on decisions over activities that significantly affect the arrangement’s returns.
IFRS 10, 11, and 12 form a suite of consolidation-related standards issued together in 2011. IFRS 10 defines control and consolidation for subsidiaries. IFRS 11 addresses joint arrangements. IFRS 12 contains the disclosure requirements for interests in subsidiaries, associates, joint arrangements, and unconsolidated structured entities. The definition of joint control in IFRS 11 explicitly references and relies on the concept of control from IFRS 10.
(Qualified) Chartered Accountant – ICAP
Master of Commerce – HEC, Pakistan
Bachelor of Accounting (Honours) – AeU, Malaysia