Home' A Plus Magazine : Jan 2013 Contents The Hong Kong Institute of CPAs
issued three new standards
during 2012: HKFRS 10
Statements, HKFRS 11 Joint Arrangements
and HKFRS 12 Disclosures of Interests in
Other Entities. These standards aim to
increase the consistency, transparency and
comparability of accounting and disclosures
of relationships between entities.
They also intend to better reflect the
economic substance of these arrangements.
Thus the assessment of accounting is
required to extend beyond the legal
structure and well into the nature of rights
and obligations under the arrangements.
This article specifically focuses on
HKFRS 11, which replaces HKAS 31 Interests
in Joint Ventures and SIC 13 Jointly Controlled
Entities -- Non-Monetary Contributions by
One of the significant differences
between HKFRS 11 and HKAS 31 lies in the
question of what drives accounting for
arrangements between two or more parties.
In HKAS 31, the legal form of the entity
through which arrangements were struc-
tured was the sole driver of accounting.
On the other hand, in HKFRS 11, ac-
counting is driven by the core principles
that parties should recognize their rights
and obligations, using either proportionate
consolidation (gross accounting of rights to
assets and obligations for liabilities) or the
equity method (accounting for net assets
arising from arrangements).
As a consequence, HKFRS 11 eliminates
the accounting policy choice when account-
ing for investments in structures defined as
In this article, we first identify the entities
most likely to be affected, especially those
doing business via joint ventures in China; ex-
plain the main modifications in identification,
classification and measurement; and analyse
both the financial and business implications.
Entities most likely to be affected by changes
include those that operate in construction,
real estate, oil and gas or mining industries
that commonly participate in joint arrange-
ments. In addition, many companies doing
business in China will be affected, whatever
the sector. China is the country with the sec-
ond largest number of joint venture transac-
tions (after the United States), given the high
level of foreign direct investments.
Because Beijing requires Chinese
company participation or control in
some sectors, especially regulated and
defensive industries such as automotive,
energy, financial services, pharmaceutical
and telecommunications, most foreign
companies set up a joint venture structure.
Even when they are not required, joint
ventures are considered when a Chinese
partner has certain strengths, such as
central or local government support, brand
reputation, land, licences, distribution and
access to suppliers, which reduce start-up
costs and improve the foreign investor's
chances of success.
The popularity and attractiveness of joint
transactions in China makes HKFRS 11 a
bigger challenge in this part of the world.
A "joint arrangement" is defined in HKFRS 11
as a contractual arrangement in which two
or more parties have joint control. The scope
of HKFRS 11 remains the same despite the
change in the standard's terminology from
"joint ventures" to "joint arrangements" that
might suggest otherwise. The term "joint
venture" is commonly used in practice;
however, HKFRS 11 narrowly defines it as just
one of two types of joint arrangements.
The initial step is for entities to determine if
an arrangement is within or outside the scope
of HKFRS 11. The question is whether there
is joint control, which HKFRS 11 defines as
"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." Given this definition, management
will need to carefully assess the three key
aspects of joint control: (1) contractually
agreed, (2) control and relevant activities and
(3) unanimous consent.
For instance, it is the norm that
contractual agreements are written, but not
always. Sometimes, only general principles
are agreed on but not specific terms that
could help in assessing whether there is
joint control. This is especially common in
China, where the legal framework is not as
well established as international standards.
There are also the complications rising from
related party transactions with government
entities that are implicit rather than explicit
in contractual agreements.
Impact of new HKFRSs on
joint arrangements in China
Lee Yin-toa and Laurence Carabin explain how recently effective
standards affect the disclosure of relationships between entities
44 January 2013
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