20 December 2007
Sir David Tweedie
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
Dear Sir David
ED 9 Joint Arrangements
The Group of 100 (G100), an organization representing the interests of CFOs of Australia's major business enterprises, is pleased to provide comments on ED 9. The G100 supports a substance over form approach and agrees that the method of accounting for interests that are essentially similar should not depend on the legal form of the arrangement. However, for joint arrangements which are unincorporated joint ventures the substance of the joint venture is such that they are regarded as an integral part of the business operations and are managed on this basis.
The G100 finds the proposals unusual in the context of the IASB's projects seeking convergence with US GAAP. The removal of proportionate consolidation is expected to add to these differences rather than reduce them as under US GAAP this method is able to be applied by entities in the extractive industries.
|Q1.||Do you agree with the proposal to change the way joint
arrangements are described? If not, why?
No. The proposals do not recognize that a joint arrangement may operate on the basis of achieving a designated level of voting on issues etc by participants and is not reliant on all participants voting in favour of a proposal in making decisions.
The existence of joint control and voting arrangements is established by the parties at the inception of the joint arrangement and the proportional interest of each party does not necessarily impact on the existence of joint control.
|Q2.||Do you agree that a party to a joint arrangement should recognize
its contractual rights and obligations relating to the arrangements? If
so, do you think that the proposals in the exposure draft are consistent
with and meet this objective? If not, why? What would be more
The proposals are consistent with the objective stated. However, it is important that the recognition criteria for assets and liabilities are satisfied when accounting for the contractual rights and obligations relating to the joint arrangement.
The G100 considers that some clarification is necessary in respect of
the application of the control concept in relation to joint arrangements
and the interpretation/application of decision-making tests. For
example, day to day decision making is invariably ceded to the operator
and venture level decisions about budgets/forecasts/planning options are
more operational regarding maximizing venture outcomes than genuinely
strategic. (Otherwise the entity would be operating a business not a
venture e.g. ventures rarely buy and sell other ventures or develop new
products for different markets). For most resource projects the real
strategic decision comes at the time of making the project development
decision. After that all parties are basically committed until the
expiration of the life of the venture and the principal strategic
decision is for the investor to decide whether or not to continue to
hold its interest in the venture.
|Q3.||Do you agree that proportionate consolidation should be
eliminated, bearing in mind that a party would recognize assets,
liabilities, income and expenses if it has contractual rights and
obligations relating to individual assets and liabilities of a joint
arrangement? If not, why?
The G100 does not object to the removal of the term 'proportionate consolidation' as used in respect of interests in joint arrangement. However, if a party to a joint arrangement is to recognize assets, liabilities, income and expenses arising from its contractual rights and obligations relating to the joint arrangement the outcome is likely to be similar to that achieved by applying the proportionate consolidation method.
While we support the search for a better description of the method
the G100 believes that the methodology should be retained pending
research on developing a more transparent and relevant method of
accounting for interests in joint arrangements. We do not consider that
mandating the equity method of accounting for joint arrangements
delivers transparency about these investments and relevant information
|Q4.||Do you agree with the disclosures proposed for this draft IFRS?
If not, why? Are there any additional disclosures relating to joint
arrangements that would be useful for users of financial statements?
While supporting the disclosure proposed in paragraph 39(a) the G100 does not support the disclosures in paragraph 39 in respect of material joint ventures which are more detailed than those required by IAS 28 'Investments in Associates' for investments that are equity accounted.
The G100 believes that where the equity method is applied the disclosures should be consistent with those required by IAS 28 'Investments in Associates' in respect of equity-accounted investees. As such, the level of disclosure should be the same in respect of all investments where the equity method is applied. The rationale for requiring different disclosures for different arrangements for which the equity method is required is not explained in ED 9. (On a matter of drafting, BC22 refers to joint arrangements whereas paragraph 39 refers to joint ventures. It is unclear whether this difference is intentional).
However, it is not clear from the proposals, how the reporting of production and reserves by companies engaged in extractive activities would be impacted where equity accounting is required instead of proportional consolidation.
It is important that commercial substance is paramount in the way
production/reserves/revenue and costs are reported as that is how the
markets understand things ' the legal form of the arrangement is
irrelevant. We believe that information about a company's economic
interest in reserves/production is more important to investors than the
'mechanics' of the arrangements. Upsetting the current reporting of
production and reserves as a result of a change in this standard would
be a poor outcome from the perspective of investors in companies engaged
in these activities.
|Q5.||Do you agree with the proposal to restore to IAS 27 and IAS 28
the requirements to disclose a list and description of significant
subsidiaries and associates? If not, why?
The G100 agrees with the proposal to restore to IAS 27 and IAS 28 the requirements to disclose a list of significant subsidiaries and associates. However, the G100 considers that a description of the activities of these entities is unnecessary.
|Q6.||Do you agree that it is more useful to users if an entity
discloses current and non-current assets and liabilities of associates
than it is if the entity discloses total assets and liabilities? If not,
No. The current disclosures are adequate. The proposals do not explain why the information would be more useful and for what purposes.