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

Kappa and Lambda have joint control of a separate vehicle, Sigma. The contract states that Kappa and Lambda are entitled to all of Sigma's output in proportion to 50:50 and that Sigma sells its output only to them at prices that cover its costs. Sigma depends on the parties for cash to settle its liabilities. Which statement is correct about how Kappa should classify its interest?

The interest is a joint operation. Although Sigma is a separate entity, the parties take substantially all its output and it relies on them for cash to settle liabilities, so in substance they have rights to assets and obligations for liabilities. Legal form alone does not determine classification under IFRS 11.

  1. AJoint operation, because the parties take substantially all the output and are in substance liable for Sigma's liabilitiesCorrect
  2. BJoint venture, because Sigma is a separate legal entity
  3. CJoint venture, because Kappa and Lambda each hold 50%
  4. DAssociate, because Kappa has significant influence only

Explanation

IFRS 11 requires consideration of other facts and circumstances beyond legal form. Where parties are entitled to substantially all the economic benefits of the assets and the arrangement depends on them for settling liabilities, they have rights to assets and obligations for liabilities, indicating a joint operation. Legal form alone, or the equal holding, does not decide classification. Kappa has joint control, not just significant influence.

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