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ACCA Strategic Professional · Strategic Business Reporting (International) · Associates and joint arrangements

Alpha and Beta set up an arrangement through a separate legal entity, Gamma Ltd. Alpha and Beta each own 50% of Gamma's shares and have joint control by contract. Gamma's legal form gives the owners rights only to the net assets, the contract does not change this, and no other facts indicate rights to assets or obligations for liabilities. How should Alpha classify and account for its interest in Gamma in its consolidated financial statements?

Alpha classifies Gamma as a joint venture and applies the equity method. The separate legal entity gives the parties rights only to net assets, and nothing in the contract or other facts changes that. Proportionate consolidation is not allowed, and joint control means Alpha does not control Gamma.

  1. AJoint venture, accounted for using the equity methodCorrect
  2. BJoint operation, recognising its share of assets, liabilities, revenue and expenses
  3. CJoint venture, accounted for using proportionate consolidation
  4. DSubsidiary, fully consolidated with a 50% non-controlling interest

Explanation

Under IFRS 11, a separate vehicle whose legal form, contractual terms and other facts give the parties rights only to net assets is a joint venture. A joint venture is accounted for under IAS 28 using the equity method. Proportionate consolidation is no longer permitted, and there is no control so no subsidiary.

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