This Comment Letter was sent by BDO Global Coordination B.V. on behalf of BDO International, to the International Accounting Standards Board in January 2008:
Dear Sir,
Exposure Draft 9 Joint Arrangements
We are pleased to have the opportunity to comment on the above Exposure Draft issued by the International Accounting Standards Board (IASB), on behalf of BDO International1.
We welcome the IASB’s project to address the accounting for joint arrangements and generally agree with the definitions of the different types of joint arrangement and how they should be dealt with. However, while we do agree with many of the detailed proposals, we have significant reservations about the ED as a whole.
A key reason for the issue of the ED would appear to be the convergence of IFRS and US GAAP. A significant issue which is not considered in the ED is the potential for some entities in the extractives sector to report under US GAAP using proportionate consolidation. We believe that it is inappropriate to introduce new GAAP differences, which would be the effect should the ED be issued as drafted.
We are also concerned that proposals for Joint Arrangements to be accounted for in a particular way are being issued without a much wider debate about the most appropriate manner in which such arrangements should be accounted for. We believe that it would be appropriate for the IASB to carry out wider research before introducing new requirements, the rationale for which might be seen by some as being little more than adopting certain parts (but not all) of the related US GAAP guidance.
Our specific responses to your questions are set out below.
Question 1 – Definitions and terminology
The exposure draft proposes that the IFRS should be applied to arrangements in which decisions are shared by the parties to the arrangement. The exposure draft identifies three types of joint arrangement - joint operations, joint assets and joint ventures. A party to an arrangement may have an interest in a joint operation or joint asset, as well as an interest in a joint venture. Joint ventures are subject to joint control (see paragraphs 3–6 and 8–20 and Appendix A of the draft IFRS and paragraphs BC16–BC18 of the Basis for Conclusions).
Question 1: Do you agree with the proposal to change the way joint arrangements are described? If not, why?
A move to consider more the substance of the arrangement rather than the legal form is welcome and we generally agree with the principles applied to describe the three different types of joint arrangements.
However we consider that the definitions in ED 9 may not be sufficiently clear to be able to use them in practice. The determination of whether the parties are interested in the outcome from individual assets and liabilities or a group of assets and liabilities may difficult to apply in complex situations especially where there are variable profit sharing arrangements dependent on different activities.
The standard currently gives an example of when the legal form may be looked through which is helpful. However we are concerned that, without further guidance, inconsistencies may arise in the application of these definitions. Furthermore, in our view, rather than looking at when the legal form of an arrangement should be ignored, the standard should give a more positive definition of the substance of a joint venture by considering the aspects of carrying on a business in its own right and whether the parties are jointly interested in that business.
We agree that looking at joint assets and joint operations in the context of the framework definitions is appropriate. However, we are mindful that the definitions of assets and liabilities are currently under review in the framework and as such we urge caution when taking this approach. For example does an asset that is jointly controlled meet the definition of an asset as the entity does not have outright control?
Questions 2 and 3 – Accounting for joint arrangements
The exposure draft proposes:
that the form of the arrangement should not be treated as the most significant factor in determining the accounting.
that a party to a joint arrangement should recognise its contractual rights and obligations (and the related income and expenses) in accordance with applicable IFRSs.
that a party should recognise an interest in a joint venture (ie an interest in a share of the outcome generated by the activities of a group of assets and liabilities subject to joint control) using the equity method. Proportionate consolidation would not be permitted.
(See paragraphs 3–7 and 21–23 of the draft IFRS and paragraphs BC5–BC15 of the Basis for Conclusions.)
Question 2: Do you agree that a party to a joint arrangement should recognise its contractual rights and obligations relating to the arrangement? If so, do you think that the proposals in the exposure draft are consistent with and meet this objective? If not, why? What would be more appropriate?
We generally agree that a party to an arrangement should recognise its rights and obligations relating to that arrangement.
However we are concerned that phrasing the requirements in this manner may lead to inconsistencies with the definition of assets and liabilities in the framework and in particular lead to earlier recognition of assets. Hence in our view the terminology should be changed such that each party should recognise the relevant asset and liabilities which correctly reflect the substance of the arrangement.
Question 3: Do you agree that proportionate consolidation should be eliminated, bearing in mind that a party would recognise assets, liabilities, income and expenses if it has contractual rights and obligations relating to individual assets and liabilities of a joint arrangement? If not, why?
We agree that, technically, it is appropriate to eliminate proportionate consolidation for the accounting of joint ventures as this method does not make a distinction between controlled and jointly controlled assets in the balance sheet.
We are, however, concerned that equity accounting in the income statement does not provide sufficient information on performance of a reporting entity, particularly where a substantial proportion of that entity’ activities are represented by significant interests in joint ventures. However, this might be addressed by providing additional disclosures (see our response below to question 4).
Questions 4–6 – Disclosure
The exposure draft proposes:
- to require an entity to describe the nature of operations it conducts through joint arrangements (see paragraph 36 of the draft IFRS and paragraph BC22 of the Basis for Conclusions).
- to align the disclosures required for joint ventures with those required for associates in IAS 28 Investments in Associates (see paragraphs 39–41 of the draft IFRS and paragraph BC23 of the Basis for Conclusions).
- to require the disclosure of summarised financial information for each individually material joint venture and in total for all other joint ventures (see paragraph 39(b) of the draft IFRS and paragraph BC13 of the Basis for Conclusions).
- as consequential amendments to IAS 27 Consolidated and Separate Financial Statements and IAS 28, to require disclosure of a list and description of significant subsidiaries and associates. Those disclosure requirements were deleted in 2003 as part of the Improvements project. However, the Board understands from users that such disclosures are useful.
- as a consequential amendment to IAS 28, to require disclosure of current and non-current assets and current and non-current liabilities of an entity’s associates. The proposed IFRS would require disclosure of current and non-current amounts, whereas IAS 28 currently requires disclosure of total assets and total liabilities.
Question 4: Do you agree with the disclosures proposed for this draft IFRS? If not, why? Are there any additional disclosures relating to joint arrangements that would be useful for users of financial statements?
We agree with proposed requirements as minimum for giving the required information for the users of financial statements.
However as referred to above in question 3 we believe it would be helpful to have additional disclosures on the performance of joint ventures where they are significant in relation to the results of the group as a whole. In our view in these circumstances the minimum information in IAS 1 for presentation on the income statement should be required for joint ventures in the notes to the financial statements, with additional information being disclosed on the basis of a rationale similar to that set out in IAS 1.83.
Question 5: Do you agree with the proposal to restore to IAS 27 and IAS 28 the requirements to disclose a list and description of significant subsidiaries and associates? If not, why?
We agree with this proposal as the disclosures provide useful information as to structure of the group and its investments in associates.
Question 6: Do you agree that it is more useful to users if an entity discloses current and non-current assets and liabilities of associates than it is if the entity discloses total assets and liabilities? If not, why?
We agree.
We would be happy to discuss our views with you. If you would like to discuss these comments, please contact Helen Thomson of BDO Global Coordination B.V. on +32 2 778 01 30.
Yours faithfully,
BDO Global Coordination B.V.
1BDO International is a world wide network of public accounting firms, called BDO Member Firms, serving international clients. Each BDO Member Firm is an independent legal entity in its own country.
The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands, with an office in Brussels, Belgium, where the Global Coordination Office is located.
Exposure Draft, Comments due 11 January 2008: