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ACCA Strategic Professional · Strategic Business Reporting (International) · Group accounting including statements of cash flows

Kappa and Lambda each hold 50% of Omega, a separate legal entity, under a contractual arrangement. The contract states that Omega's relevant activities need unanimous consent of both parties, and that each party has rights to Omega's net assets only; Omega, not the parties, is liable for its obligations. How should Kappa account for its interest in its consolidated financial statements?

Kappa accounts for Omega as a joint venture using the equity method. Unanimous consent over relevant activities establishes joint control, and because the parties hold rights only to net assets, with Omega bearing its own obligations, the arrangement is not a joint operation and is not consolidated.

  1. AAs a joint venture using the equity methodCorrect
  2. BAs a joint operation, recognising 50% of Omega's assets, liabilities, revenue and expenses
  3. CAs a financial asset at fair value through profit or loss under IFRS 9
  4. DAs a subsidiary, consolidating 100% of Omega with a non-controlling interest

Explanation

Unanimous consent shows joint control under IFRS 11. Because the parties have rights only to the net assets, with Omega itself liable for its obligations, the arrangement is a joint venture, accounted for using the equity method under IAS 28. Joint operation treatment would require direct rights to assets and obligations for liabilities, which are absent here.

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