Joint control starts with the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
In assessing whether an entity has joint control of an arrangement, an entity shall assess first whether all the parties, or a group of the parties, control the arrangement. When all the parties, or a group of the parties, considered collectively, are able to direct the activities that significantly affect the returns of the arrangement (ie the relevant activities), the parties control the arrangement collectively. (IFRS 11 B5 – B8)
An entity shall assess whether it has joint control of the collectively controlled arrangement. Joint control exists only when decisions about the relevant activities require the unanimous consent of the parties that collectively control the arrangement.
Assessing whether the arrangement is jointly controlled by all of its parties or by a group of the parties, or controlled by one of its parties alone, can require judgement.
Sometimes the decision-making process that is agreed upon by the parties in their contractual arrangement implicitly leads to joint control. In other circumstances, the contractual arrangement requires a minimum proportion of the voting rights to make decisions about the relevant activities, as such this will not lead to joint control in a frequent manner.
This is part of the following definitions relating to IFRS 11 Joint arrangement:
Joint arrangement – An arrangement of which two or more parties have joint control.
Joint operation – A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.
Joint operator – A party to a joint operation that has joint control of that joint operation.
Joint venture – A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
Joint venturer – A party to a joint venture that has joint control of that joint venture.
Party to a joint arrangement – An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement.
Separate vehicle – A separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality.
Joint control summarised
Joint control is the contractually agreed sharing of control of an arrangement. Joint control exists only when decisions about the relevant activities, i.e. those that significantly affect the returns of the arrangement, require the unanimous consent of the parties sharing the control of the arrangement.
Therefore, decisions relating to fundamental changes in the activities of the arrangement or applying only in exceptional circumstances (i.e. protective rights) are not considered in this assessment. [IFRS 10 B26, IFRS 11 7, IFRS 11 9, IFRS 11 B6 and IFRS 11 B9]
An enforceable contractual arrangement can be evidenced in several ways, but it is often in writing and usually in the form of a contract or documented discussions between the parties. Statutory mechanisms can also create enforceable contractual arrangements on their own or in conjunction with contracts between parties. [IFRS 11 5, IFRS 11 B2]
The contractual arrangement sets out the terms on which the parties participate in the activity that is the subject of the joint arrangement and generally deals with matters such as:
- the purpose, activity and duration of the joint arrangement;
- the governing body’s members’ appointment process;
- the decision-making process;
- the capital or other contributions required of the parties; and
- the sharing of assets, liabilities, revenues, expenses and profits or losses arising from the joint arrangement. (IFRS 11 B3)
For joint arrangements structured through a separate vehicle, at least some aspects of the contractual arrangement may be incorporated in the articles of association, charter or by-laws of that vehicle. (IFRS 11 B3)
In practice, the contractual arrangement may include clauses on the resolution of disputes, such as arbitration, so that decisions can be made in the absence of unanimous consent of the parties that have joint control.
However, the existence of such clauses does not automatically preclude the arrangement from being assessed as a joint arrangement. (IFRS 11 B10)
The assessment of joint control requires judgement and consideration of all facts and circumstances. A change in the facts and circumstances will require re-assessment of whether joint control still exists. (IFRS 11 12, IFRS 11 13, IFRS 11 BC23)
In a joint arrangement, any party with joint control can prevent any of the other parties from making unilateral decisions without its consent. However, not all parties to the arrangement need to share control over the arrangement for it to be considered a joint arrangement.
IFRS 11 specifies the accounting not only for those parties that have joint control, but also for those parties that participate in, but do not have joint control over, the arrangement. (IFRS 11 B9)
See also: The IFRS Foundation