Joint Arrangements in the Oil and Gas

Joint Arrangements in the Oil and Gas
Industry: The IFRS 11 dimension
A Joint Venture is a joint arrangement whereby the parties that have joint control of the
arrangement (i.e. joint venturers) have rights to the net assets of the arrangement.
Joint ventures (joint arrangements) are
commonly used by oil & gas
companies as a way to share the
higher risks and costs associated with
the industry or as a way of bringing in
specialist skills to a particular project.
The legal basis for a joint arrangement
may take various forms; establishing a
joint venture might be achieved
through a formal joint venture
contract, or the governance
arrangements set out in a company's
formation documents might provide
the framework for a joint
arrangement. The feature that
distinguishes a joint arrangement from
other forms of cooperation between
parties is the presence of joint control.
An arrangement without joint control
is not a joint arrangement.
IFRS 11 takes a different approach to
categorizing joint arrangements,
focusing on the rights and obligations
of the party to the joint arrangement,
whereas IAS 31 is driven by the
structure of the joint arrangement and
the choice of accounting method
allowed by IAS 31 for jointly
controlled entities is removed in IFRS
11. IFRS 11 referenced IAS 28 –
Revised 2011 (Investment in
Associates and Joint Venture), which
require the equity method for
accounting for joint ventures. This
implies that Proportionate
Consolidation is no longer
required/permitted.
IFRS 11classifies joint arrangements
into two types - Joint Operations and
Joint Ventures. A Joint Operation is a
joint arrangement whereby the
parties that have joint control of the
arrangement (i.e. joint operators)
have rights to the assets, and
obligations for the liabilities, relating
to the arrangement. A Joint Venture
is a joint arrangement whereby the
parties that have joint control of the
arrangement (i.e. joint venturers)
have rights to the net assets of the
arrangement.
In the previous standard - IAS 31,
joint arrangements are divided into
three categories: jointly controlled
operations, jointly controlled assets
and jointly controlled entities.
Typically, arrangements classified as
jointly controlled operations or jointly
and report. However, the details of
the arrangement would be a vital
tool in determining the method of
accounting of such arrangements,
and especially where a separate
entity is created to carryout activities
of the joint arrangements.
The approach is to first determine
whether there is a joint arrangement.
The Standard explains that two
characteristics are necessary to fulfil
the definition of a joint arrangement.
First, the parties to the joint
arrangement are bound by a
contractual arrangement. Second,
the contractual arrangement gives
two or more of those parties joint
control of the arrangement. Joint
Control here is “the contractually
IFRS 11 takes a different approach to
categorizing joint arrangements, focusing on
the rights and obligations of the party to the
joint arrangement, whereas IAS 31 is driven by
the structure of the joint arrangement and the
choice of accounting method allowed by IAS
31 for jointly controlled entities is removed in
IFRS 11
controlled assets under IAS 31 are
not structured through a separate
vehicle and, therefore, they will be
classified as joint operations under
IFRS 11. Each party to a joint
operation accounts for its share of
the joint operation's assets, liabilities,
revenue and expenses under IFRS 11.
Accordingly, it is not expected that
there will be a significant change to
the accounting for arrangements
previously classified as jointly
controlled operations or jointly
controlled assets under IAS 31.
Most Nigerian upstream oil and gas
companies are in either Joint
Operation or Joint Venture; in some
contracts it could be both and IFRS
11 makes it simply easy to classify
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”. What
constitute 'relevant activities' in the
oil industry are those activities that
significantly affects the returns of the
arrangement. However if there are
changes in facts and circumstances,
an entity should reassess whether it
still has joint control of the
arrangement.
The facts and circumstances in an oil
and gas contractual agreement is
very critical in determining the type
of joint arrangement in which it is
involved by assessing its rights and
obligations. It is possible that a joint
arrangement previously accounted
for as a jointly controlled entity under
IAS 31 may be classified as a joint
operation under IFRS 11. The
Standard sets out four separate
aspects to be considered in
determining whether a joint
arrangement is a joint operation or a
joint venture, and this can be
translated into a four-step approach,
as shown in the link
http://www.deloitte.com/ng/fourstep
It will not always be necessary to go
through all four steps. Indeed, for
some joint operations, the analysis
will be complete after Step one.
In accounting for joint arrangement,
a party with an interest in a joint
venture has an interest in a vehicle
that is separate from the investing
entity, but does not have rights to the
assets, or obligations for the
liabilities, of that vehicle. The
requirement of IFRS 11 to use the
equity method for such interests
reflects this. A joint venturer shall
recognise its interest in a joint
venture as an investment and shall
account for that investment using the
equity method in accordance with
IAS 28 Investments in Associates and
Joint Ventures unless the entity is
exempted from applying the equity
method as specified in that standard.
A party that participates in, but does
not have joint control of, a joint
venture shall account for its interest
in the arrangement in accordance
with IFRS 9 Financial Instruments,
unless it has significant influence over
the joint venture, in which case it
shall account for it in accordance
with IAS 28 (as amended in 2011).
Under the approach taken in IFRS 11,
a party with joint control of a joint
operation has (legally or in substance)
rights to the assets and obligations
for the liabilities of the joint
operation. The requirement of IFRS
11 to recognise directly the assets,
obligations, revenues and expenses
of the joint operator reflects this.
Accordingly, it is not expected that
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there will be a significant change to
the accounting for arrangements
previously classified as jointly
controlled operations or jointly
controlled assets under IAS 31
Finally, the disclosure requirements
from IAS 31 are not reflected in IFRS
11. Instead, the disclosure
requirements for parties with joint
control of a joint arrangement are
specified in IFRS 12 Disclosure of
Interests in Other Entities.
On transition, there are three
scenarios when accounting
adjustments may be required; Joint
ventures- changing from
proportionate consolidation to the
equity method, Joint operations –
changing from the equity method to
accounting for assets and liabilities,
Separate financial statements – joint
operations - changing from a
separate investment to accounting
for individual assets and liabilities.
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