Comparison between U.S. GAAP and International ... - Grant Thornton

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Comparison between U.S. GAAP and International Financial Reporting Standards 124 9.2 Joint ventures Note 1: Certain sections of IAS 31 have been amended as a result of amendments to IAS 27. The amendments are effective for annual periods beginning on or after July 1, 2010. If an entity applies IAS 27 for an earlier period, the amendments shall be applied for that earlier period. If an entity applies the amendments before July 1, 2010 it shall disclose that fact. Refer to paragraphs 58A and 58D of IAS 31 for information on effective dates for the amended sections of IAS 31. Note 2: In September 2007, the IASB issued Exposure Draft 9, Joint Arrangements, to replace IAS 31. The objective of the joint venture project is to improve the accounting for, and the quality of the information being reported. The proposed changes include what is defined as joint arrangements – which include joint ventures, joint assets, and joint operations. The most significant change proposed is the requirement to use the equity method of accounting for joint ventures, thus eliminating the choice to use the equity method or proportionate consolidation. A final IFRS is expected to be issued in the first quarter of 2011. IFRS U.S. GAAP Relevant guidance: IAS 31; SIC-13 Relevant guidance: ASC 323, 360, 605, 808, 810-10, and 825 Introduction A joint venture is defined as “a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control” (IAS 31.3). The existence of a contractual arrangement distinguishes interests that have joint control from investments in associates in which the investor has significant influence (IAS 31.9). IAS 31 does not apply to venturer’s interests in jointly controlled entities held by venture capital organisations, mutual funds, unit trusts, and similar entities that on initial recognition are designated as at fair value through profit or loss or are classified as held for trading and accounted for in accordance with IAS 39, Financial instruments: Recognition and Measurement (IAS 31.1). There are three types of joint ventures (IAS 31.7): • Jointly controlled operations – the use of assets and other resources of the venturers rather than the establishment of a corporation, partnership or other entity, or a financial structure separate from the venturers themselves. Each venturer uses its own assets and incurs its own expenses and liabilities. The contractual arrangement normally establishes how the revenue from the sale of joint products and any common expenses will be shared among the venturers (IAS 31.13). • Jointly controlled assets – joint control, and often joint ownership, of assets contributed to, or acquired for the purpose of, the joint venture. The assets are used to obtain benefits for the venturers. These ventures do not involve the establishment of a corporation, A joint venture is generally defined as “An entity owned and operated by a small group of businesses (the “joint venturers”) as a separate and specific business or project for the mutual benefit of the members of the group. The purpose usually is to share risks and rewards in developing a new market, product or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. It also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture” (ASC Master Glossary, “Corporate Joint Venture” and “Joint Venture”). A collaborative arrangement is defined in the ASC Master Glossary as “A contractual arrangement that involves a joint operating activity. These arrangements involve two (or more) parties that meet both of the following requirements: • They are active participants in the activity • They are exposed to significant risks and rewards dependent on the commercial success of the joint operating activity.” A collaborative arrangement in the scope of ASC 808- 10 is not primarily conducted through a separate legal entity. The part of an arrangement conducted in a legal entity should be accounted for under ASC 810-10, ASC 323-10, or other related accounting literature (ASC 808-10-15-4). An investor must first determine whether the joint © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
Comparison between U.S. GAAP and International Financial Reporting Standards 125 IFRS partnership, other entity or financial structure separate from the venturers themselves (IAS 31.18-.19). • Jointly controlled entities – the establishment of a corporation, partnership, or other entity in which each venture has an interest. The jointly controlled entity controls the venture's assets, incurs liabilities and expenses, and earns income (IAS 31.24-.25). U.S. GAAP venture is a variable interest entity. If it is a variable interest entity, the ASC 810-10, “Variable Interest Entities” subsections shall be applied. Jointly controlled operations/collaborative arrangement A venturer shall recognise in its separate financial statements (IAS 31.15): • The assets it controls and the liabilities it incurs • The expenses it incurs and its share of the income earned by the joint venture Participants in a collaborative arrangement within the scope of ASC 808-10 shall report costs incurred and revenue generated: • Transactions with third parties – a participant in a collaborative arrangement must report the costs incurred and revenues generated on sales to third parties at gross or net amounts, depending on whether the participant is the principal or the agent in the transaction, pursuant to ASC 605-45. Accordingly, the participant deemed to be the principal for a particular transaction should report that transaction on a gross basis in its income statement (ASC 808-10-45-1 through 45-2). The equity method of accounting shall not be applied to the activities of collaborative arrangements. • Payments between participants – the income statement presentation of payments between participants pursuant to a collaborative agreement shall be determined as follows (ASC 808-10-45-3 through 45-4): If the payments are within the scope of other authoritative accounting literature on income statement presentation, the participant shall apply the relevant provisions of that literature If the payments are not within the scope of other authoritative accounting literature, the participant shall base its income statement classification by analogy to authoritative literature If the payments are not within the scope of other authoritative accounting literature and there is no appropriate analogy, the participant shall base its income statement presentation of the payment on a reasonable, rational, and consistently applied accounting policy Jointly controlled assets A venturer shall recognise in its separate financial See discussion above for a collaborative arrangement. © 2011 Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd
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