Question

QUESTION 3 (IFRS 11) (10)
Two real estate companies (the parties) set up a separate vehicle (entity X) for the purpose of acquiring and operating a shopping centre. The contractual arrangement between the parties establishes joint control of the activities that are conducted in entity X. The main feature of entity X’s legal form is that the entity, not the parties, has rights to the assets, and obligations for the liabilities, relating to the arrangement. These activities include the rental of the retail units, managing the car park, maintaining the centre and its equipment, such as lifts, and building the reputation and customer base for the centre as a whole.
The terms of the contractual arrangement are such that:-
a) entity X owns the shopping centre. The contractual arrangement does not specify that the parties have rights to the shopping centre.

b) the parties are not liable in respect of the debts, liabilities or obligations of entity X. If entity X is unable to pay any of its debts or other liabilities or to discharge its obligations to third parties, the liability of each party to any third party will be limited to the unpaid amount of that party’s capital contribution.

c) the parties have the right to sell or pledge their interests in entity X.

d) each party receives a share of the income from operating the shopping centre (which is the rental income net of the operating costs) in accordance with its interest in entity X.
Required:
Explain and motivate the accounting treatment of the shopping centre joint arrangement in terms of IFRS11: Joint arrangements. (10)

Answer 1

Question Explain and motivate the accounting treatment of the shopping centre joint arrangement in terms of IFRS11: Joint arrangements.

Answer: Before answering to the question, let's discuss, what IFRS 11 deals with? IFRS 11 establishes the principles for particular type of entities or organisations in which these entities have an interest in arrangements which are being controlled jointly termed as Joint Arrangements. A Joint arrangement is an arrangements under which either two or more parties have Joint Controlling over the functions & activities.

The aforesaid arrangement of joint controlling is easiest method of accounting under which liability of the colloborators are limited to the extent of Unit X formed for the purpose ie liability is limited & the profits share will be included in their respective returns of Income. All the activities will be under Joint control while Unit is identified seperate unit. Parties to the joint arrangement will have rights to the net assets of entity X only, instead of assets or obligations for the liabilities. Hence through this legal mechanism one is in most advantageous position. The Parties recognises their rights only towards the Net Assets ie. Total Assets-Total Liabilities (Exclusing Equity) as Investments and account for them as per the Equity Method of Investments.