The International Accounting Standards Board (IASB) issued a new set of consolidation rules. These rules are effective for annual periods beginning on or after 1 January 2013, for European entities for annual periods beginning on or after 1 January 2014.
Impact. The new set of rules might have a significant impact on the accounting treatment for existing Joint Ventures. Consequently, key financial figures of the shareholders might be affected. The two most important accounting impacts are the following:
- Under the current accounting regime, the shareholder is entitled to proportionately consolidate the Joint Venture, i.e. to recognize its pro rata interest in the Joint Venture’s assets, liabilities, profits and losses in the consolidated financial statements.
Under the new rules, the pro rata consolidation is not an option any longer. The Joint Venture has to be recorded at acquisition costs, and adjusted for post-acquisition changes in the Joint Venture’s equity.
- Under the current and the new rules, a Joint Venture is an entity that is controlled jointly by its shareholders. However, the criteria for the determination of "joint control" will change. Currently "joint control" generally is assessed on the basis of the shareholders’ legal rights (i.e. voting rights). Under the new rules, additional criteria will become relevant, in particular, the shareholder’s exposure to variable returns and its ability to leverage its legal rights to affect the returns from the Joint Venture.
It might turn out that under the new definition of "joint control," the deemed Joint Venture is not considered to be controlled jointly, but by one party only. In this case, the controlling shareholder has to include all of the Joint Venture’s assets, liabilities, profits and losses in its consolidated financial statements. The non-controlling shareholder has to evaluate its participation at equity.
Example. An example calculation illustrating the impacts of the new rules in the consolidated financial statements is attached hereto as Annex.
Recommendation. It is recommended to assess these impacts prior to the end 2013 and to determine whether it is necessary to modify certain parameters of the Joint Venture Agreement to achieve the desired accounting treatment. This also might be necessary for tax purposes (e.g. for the determination of the equity ratio under German interest ceiling rules).
Please click here to view example.