FYI Article – Joint Arrangements and Investments: Embrace the Changes
In September 2014, the Accounting Standards Board (AcSB) issued Section 3056, Joint Arrangements (which replaced Section 3055, Interests in Joint Ventures) and amended Section 3051, Investments in Part II of the CPA Handbook – Accounting.
What Has Changed?
Method of Accounting for Interests in Joint Arrangements
Under Section 3055, an investor could choose to account for its interests in joint ventures (now called joint arrangements) using the proportionate consolidation, equity or cost method. This accounting policy choice continued the differential reporting option from pre-changeover standards in Part V of the Handbook. Section 3056 eliminates this free choice in accounting for joint arrangements.
Jointly controlled operations and jointly controlled assets
Section 3056 requires an investor with an interest in jointly controlled operations or jointly controlled assets to recognize its interest in the individual assets, obligations, revenues and expenses of the joint arrangement. This accounting would be similar to the proportionate consolidation method of accounting from Section 3055 but may produce different results depending on the details of the joint arrangement. However, in many cases, accounting for the investor’s interest in assets and liabilities would produce the same accounting result as proportionate consolidation.
Jointly controlled enterprises
Section 3056 allows an investor to account for an interest in a jointly controlled enterprise using either the equity method or the cost method. Section 3056 also permits, but does not require, the investor to undertake additional analysis of its interests in all jointly controlled enterprises to determine whether it has an interest in net assets or in individual assets and liabilities. When an investor performs this optional analysis and determines that its interest in a jointly controlled enterprise represents an interest in individual assets and liabilities, the investor is required to account for that interest in each of those assets and liabilities. As a result of feedback received on the Exposure Draft, “Joint Arrangements and Investments,” issued in August 2013, additional application guidance for investors in jointly controlled enterprises who choose to perform the analysis, as described above, was added to Section 3056.
Under the Exposure Draft proposals, investors would have been required to analyze each interest in a jointly controlled enterprise in order to determine whether it represented an interest in net assets or in individual assets and liabilities. However, after considering comment letters and other feedback received on the Exposure Draft, the AcSB decided to simplify the proposals. Permitting the use of the cost or equity methods to account for all jointly controlled enterprises means that the additional analysis is optional rather than required.
The changes regarding investments in jointly controlled enterprises were the only significant changes to the Exposure Draft proposals. In accordance with its due process requirements, the AcSB discussed whether to re-expose the proposals as a result of these changes. The AcSB decided this was not necessary because the changes respond to concerns raised by respondents to the Exposure Draft, simplify the proposals and provide additional guidance. The AcSB thought that it was unlikely that it would learn anything new by re-exposing the proposals.
Contributions and Transactions
For contributions to a joint arrangement, the requirement in Section 3055 to defer and amortize the portion of a gain that does not relate to the amount of cash received or fair value of other assets received has not been included in Section 3056 because it did not meet a cost/benefit test. The AcSB received feedback from preparers and users of private enterprises’ financial statements that this deferral added additional complexity to the accounting and was not well understood.
Amendments to Section 3051
The AcSB also decided to amend certain paragraphs in Section 3051 to provide clearer guidance on how to account for transactions (including contributions) between an entity and an equity accounted investee. The AcSB decided that gains and losses for interests in the net assets of a joint arrangement accounted for using the equity method should be recognized and measured consistently with other investments accounted for using the equity method. Therefore, guidance on contributions and transactions between an investor and an equity-accounted investee that is consistent with the guidance in Section 3056 was added to Section 3051.
The scope of Section 3051 was clarified to specify that it includes investments subject to significant influence and certain other non-financial instrument investments (such as works of art and other tangible assets held for investment purposes) but does not include other investments (such as investments held by investment companies). The scope was also amended to clarify that a different accounting policy choice can be made for each of the following types of investments:
- subsidiaries that are not consolidated;
- investments subject to significant influence; and
- interests in the net assets of a joint arrangement.
Transitional Provisions and Effective Date
Section 3056 includes specific transitional proposals for changes from the proportionate consolidation method to the equity or cost method and for changes from the equity or cost method to accounting for the investor’s interests in the individual assets and liabilities of a joint arrangement. The amendments to Section 3051 permit prospective application in accordance with Section 1506, Accounting Changes.
The new standards are effective for fiscal years beginning on or after January 1, 2016. Earlier application is permitted.
For additional information on the revised guidance, see the Joint Arrangements project page.
Grace Lang, CPA, CA, CPA (Illinois)
Principal, Accounting Standards Board
Phone: +1 (416) 204-3478