A look at sections 3051 and 3056.
IN August 2013, the Accounting Standards Board (AcSB) released an exposure draft (ED) entitled Joint Arrangements and Investments. This was only the second major change to ASPE standards since they came into effect in 2011. The ED proposed revisions to section 3051, Investments, and the replacement of section 3055, Joint Ventures, with a new section 3056 entitled Joint Arrangements. Given the close relationship with Part III of the Handbook dealing with not-for-profit organizations, the ED specified that not-for-profit organizations would apply amended section 3051 when they had significant influence over a profit-oriented enterprise, but section 3056 would not apply to not-for-profit organizations.
Section 3056 is centred on the key concepts in IFRS 11, Joint Arrangements, while at the same time, based on existing section 3055. Overall, the ED reduced the accounting policy options for joint arrangements so that, in the words of the AcSB, “… the accounting more faithfully represents the nature of the investment.”
Section 3056
Changes have been made to terminology: the term “joint venture” would be replaced with “joint arrangement” and the term “venturer” would be replaced with “investor in a joint arrangement.”
The option to account for a joint venture using one of the proportionate consolidation method, equity method, or cost method would be altered, with proportionate consolidation being eliminated as a permissible alternative (consistent with IFRS 11). Instead, an investor in a joint arrangement would account for its interest according to its rights and obligations in the joint arrangement:
- An investor in a jointly controlled operation or a jointly controlled asset has rights to the individual assets and obligations for the individual liabilities relating to the joint arrangement and would account for its interest in the joint arrangement by recognizing its share of assets controlled, liabilities incurred, revenues, and expenses.
- An investor in a jointly controlled enterprise that has rights to the net assets of the joint arrangement would account for that interest in the net assets using either the equity method or cost method. Alternatively, if the investor has rights to the individual assets and obligations, it would recognize its share of assets controlled, liabilities incurred, revenues, and expenses.
For contributions to a joint arrangement, the requirement 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 that do not represent a claim on the assets of the joint arrangement would be removed. Instead, an investor with an interest in the net assets of a joint arrangement would account for its contributions to, and transactions with, the joint arrangement in accordance with amended section 3051.
Section 3051
The scope of section 3051 would be modified to clarify 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 subsidiaries and interests in joint arrangements).
Instead, accounting for investments in subsidiaries and joint arrangements is addressed in two separate EDs: Joint Arrangements and Investments (as discussed in this article), as well as in the ED entitled Consolidations. Between the two of them, these proposed standards provide an enterprise with an accounting policy choice to use the equity method or the cost method in accordance with section 3051 for certain investments.
Section 3051 would also permit gains and losses on transactions between investors and equity accounted investees to be recognized in income to the extent of the interests of the non-related investors.
Effective Date
The AcSB plans to issue section 3056 and the amendments to section 3051 in a package with other major improvements to accounting standards for private enterprises in the second half of 2014. The effective date of the standards included in these improvements will be no earlier than fiscal years beginning on or after January 1, 2016.
