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Reaction towards the proposed changes in ED 9 would suggest that the International Accounting Standards Board should give greater consideration to the amendments it wishes to make to joint venture accounting, argues Fergus Condon.
One could be reminded of the saying 'from little acorns, big oak trees grow' when following the progress of ED 9 from first publication up to the closure of the comment period which occurred on 11 January last. The objective of the change was to remove one of the alternative accounting treatments in IAS 31 Interests in Joint Ventures and thus reach another milestone on the road to convergence with US GAAP. When the ED was published it appeared as though that objective would be achieved without much opposition; not so when the constituents affected by the subject began writing their comment letters!
So what does ED 9 say? The ED establishes the core principle that parties to a joint arrangement are to recognise their contractual rights and obligations on the basis of the substance of those contractual rights and obligations arising under a joint arrangement rather than the arrangement's legal structure. The three types of arrangement identified are substantively the same as those outlined in IAS 31 though there have been changes to the definitions and terminology.
ED 9 defines a joint arrangement as a contractual agreement whereby two or more parties undertake an economic activity together and share decision-making relating to that activity. Such joint arrangements are to be classified as joint operations, joint assets or joint ventures, based on the substance of the contractual rights and obligations.
'Joint operation' (previously a jointly controlled operation) is one in which the parties to the arrangement use their own assets and other resources and share revenues and expenses incurred in common in undertaking an activity. As each party controls...