Joint Arrangements in the Oil and Gas Industry: The IFRS 11 dimension A Joint Venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. Joint ventures (joint arrangements) are commonly used by oil & gas companies as a way to share the higher risks and costs associated with the industry or as a way of bringing in specialist skills to a particular project. The legal basis for a joint arrangement may take various forms; establishing a joint venture might be achieved through a formal joint venture contract, or the governance arrangements set out in a company's formation documents might provide the framework for a joint arrangement. The feature that distinguishes a joint arrangement from other forms of cooperation between parties is the presence of joint control. An arrangement without joint control is not a joint arrangement. IFRS 11 takes a different approach to categorizing joint arrangements, focusing on the rights and obligations of the party to the joint arrangement, whereas IAS 31 is driven by the structure of the joint arrangement and the choice of accounting method allowed by IAS 31 for jointly controlled entities is removed in IFRS 11. IFRS 11 referenced IAS 28 – Revised 2011 (Investment in Associates and Joint Venture), which require the equity method for accounting for joint ventures. This implies that Proportionate Consolidation is no longer required/permitted. IFRS 11classifies joint arrangements into two types - Joint Operations and Joint Ventures. A Joint Operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A Joint Venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. In the previous standard - IAS 31, joint arrangements are divided into three categories: jointly controlled operations, jointly controlled assets and jointly controlled entities. Typically, arrangements classified as jointly controlled operations or jointly and report. However, the details of the arrangement would be a vital tool in determining the method of accounting of such arrangements, and especially where a separate entity is created to carryout activities of the joint arrangements. The approach is to first determine whether there is a joint arrangement. The Standard explains that two characteristics are necessary to fulfil the definition of a joint arrangement. First, the parties to the joint arrangement are bound by a contractual arrangement. Second, the contractual arrangement gives two or more of those parties joint control of the arrangement. Joint Control here is “the contractually IFRS 11 takes a different approach to categorizing joint arrangements, focusing on the rights and obligations of the party to the joint arrangement, whereas IAS 31 is driven by the structure of the joint arrangement and the choice of accounting method allowed by IAS 31 for jointly controlled entities is removed in IFRS 11 controlled assets under IAS 31 are not structured through a separate vehicle and, therefore, they will be classified as joint operations under IFRS 11. Each party to a joint operation accounts for its share of the joint operation's assets, liabilities, revenue and expenses under IFRS 11. Accordingly, it is not expected that there will be a significant change to the accounting for arrangements previously classified as jointly controlled operations or jointly controlled assets under IAS 31. Most Nigerian upstream oil and gas companies are in either Joint Operation or Joint Venture; in some contracts it could be both and IFRS 11 makes it simply easy to classify 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”. What constitute 'relevant activities' in the oil industry are those activities that significantly affects the returns of the arrangement. However if there are changes in facts and circumstances, an entity should reassess whether it still has joint control of the arrangement. The facts and circumstances in an oil and gas contractual agreement is very critical in determining the type of joint arrangement in which it is involved by assessing its rights and obligations. It is possible that a joint arrangement previously accounted for as a jointly controlled entity under IAS 31 may be classified as a joint operation under IFRS 11. The Standard sets out four separate aspects to be considered in determining whether a joint arrangement is a joint operation or a joint venture, and this can be translated into a four-step approach, as shown in the link http://www.deloitte.com/ng/fourstep It will not always be necessary to go through all four steps. Indeed, for some joint operations, the analysis will be complete after Step one. In accounting for joint arrangement, a party with an interest in a joint venture has an interest in a vehicle that is separate from the investing entity, but does not have rights to the assets, or obligations for the liabilities, of that vehicle. The requirement of IFRS 11 to use the equity method for such interests reflects this. A joint venturer shall recognise its interest in a joint venture as an investment and shall account for that investment using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures unless the entity is exempted from applying the equity method as specified in that standard. A party that participates in, but does not have joint control of, a joint venture shall account for its interest in the arrangement in accordance with IFRS 9 Financial Instruments, unless it has significant influence over the joint venture, in which case it shall account for it in accordance with IAS 28 (as amended in 2011). Under the approach taken in IFRS 11, a party with joint control of a joint operation has (legally or in substance) rights to the assets and obligations for the liabilities of the joint operation. The requirement of IFRS 11 to recognise directly the assets, obligations, revenues and expenses of the joint operator reflects this. Accordingly, it is not expected that Deloitte Academy The place to be Do you want to get ahead of your contemporaries? Is the understanding of IFRS your objective? Do you want to complement your theoretical knowledge of IFRS with technical and practical skills?, Deloitte Academy is the place to be. Deloitte Academy offers Programs such as Deloitte Graduate Academy(DGA), Deloitte Professional Academy(DPA) and Deloitte Executive Academy(DEA) to help individuals & companies navigate through pressing issues. © 2012 Akintola Williams Deloitte For more information: Please contact Nnanna Israel on 0805 659 8405 or at innanna@deloitte.com there will be a significant change to the accounting for arrangements previously classified as jointly controlled operations or jointly controlled assets under IAS 31 Finally, the disclosure requirements from IAS 31 are not reflected in IFRS 11. Instead, the disclosure requirements for parties with joint control of a joint arrangement are specified in IFRS 12 Disclosure of Interests in Other Entities. On transition, there are three scenarios when accounting adjustments may be required; Joint ventures- changing from proportionate consolidation to the equity method, Joint operations – changing from the equity method to accounting for assets and liabilities, Separate financial statements – joint operations - changing from a separate investment to accounting for individual assets and liabilities. This publication contains general information only and Akintola Williams Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. 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