IAS 31 Interests in Joint Ventures was the international accounting standard that told companies how to report their stakes in business arrangements they jointly controlled with one or more other parties. First issued in December 1990 and revised in 2003, it set out when joint control existed, split joint arrangements into three categories, and permitted either proportionate consolidation or the equity method for jointly controlled entities. It was superseded by IFRS 11 and IFRS 12 for annual periods beginning on or after January 1, 2013.
When IAS 31 Applied: The Joint Control Test
Everything in IAS 31 turned on a single threshold question: did the parties share joint control? The standard defined joint control as the contractually agreed sharing of control over an economic activity, where strategic financial and operating decisions required the unanimous consent of every party sharing control. Without that contractual unanimity requirement, the arrangement fell outside IAS 31 and was treated instead as a simple investment, a subsidiary, or an associate subject to significant influence under IAS 28.
The contractual agreement mattered more than the headline percentages. Two companies each holding 50 percent of a venture did not automatically have joint control. If the governing agreement let one party make major decisions unilaterally, the arrangement was a subsidiary for that party and an investment for the other. Only when the contract required both parties to agree on key decisions did joint control exist.
The Three Forms of Joint Arrangement
IAS 31 recognized three categories of joint arrangement, each reflecting a different level of structural integration. The accounting treatment followed the form.
Jointly Controlled Operations
The simplest structure was a jointly controlled operation. Each venturer used its own assets and staff to carry out part of a shared activity, and no separate entity was created. Two construction firms contributing equipment and labor to a shared project is the standard example. Each venturer recognized the assets it controlled, the expenses it incurred, and its share of the revenue earned from the operation directly in its own financial statements. There was no separate entity to consolidate.
Jointly Controlled Assets
Jointly controlled assets involved shared ownership of specific property used for the arrangement, such as a pipeline, specialized machinery, or an oil production facility. Each venturer recognized its share of the jointly controlled asset, any liabilities it had incurred on its own, its share of any jointly incurred liabilities, its income from the arrangement, and its share of the expenses. As with jointly controlled operations, no separate legal entity was required.
Jointly Controlled Entities
The most structured form was the jointly controlled entity, or JCE. This involved a separate legal entity such as a corporation or partnership that maintained its own books, held assets in its own name, and could incur liabilities independently of the venturers. JCEs were the complex case because IAS 31 offered venturers a choice between two accounting methods, and the choice produced materially different financial statements.
Proportionate Consolidation for Jointly Controlled Entities
Proportionate consolidation was the benchmark treatment under IAS 31. The venturer included its proportionate share of the JCE’s individual assets, liabilities, income, and expenses directly in its own financial statements on a line-by-line basis.
A venturer holding a 40 percent interest in a JCE would fold 40 percent of the JCE’s inventory into its own inventory line, 40 percent of the JCE’s debt into its own liabilities, and 40 percent of the JCE’s revenue into its own revenue. The JCE’s financial data merged with the venturer’s own data rather than appearing as a single investment.
The logic was that a venturer with joint control has a direct, enforceable right to a share of the JCE’s individual assets and bears direct responsibility for a share of its liabilities. Reporting only the net investment would obscure that economic reality. The practical consequence was that proportionate consolidation inflated reported assets and liabilities compared with the equity method, which in turn moved ratios like debt-to-equity and return on assets. Analysts comparing companies had to know which method was in use.
The Equity Method Alternative
IAS 31 also permitted the equity method for interests in jointly controlled entities. The venturer recorded its interest as a single investment line on the balance sheet, initially measured at cost.
After initial recognition, the carrying amount was adjusted for the venturer’s share of the JCE’s post-acquisition profit or loss. If a JCE reported net income of $10 million and the venturer held a 30 percent stake, the investment balance increased by $3 million, and that $3 million also appeared as a single line in the income statement, commonly labeled “share of profit of joint venture.” Distributions received from the JCE reduced the carrying amount of the investment rather than being recognized as income.
None of the JCE’s underlying assets, liabilities, or individual revenue and expense lines appeared on the venturer’s statements. The whole interest was compressed into one asset line and one income line. The rationale was that a venturer with joint control has a claim on the net assets of the entity as a whole rather than a direct right to specific individual assets. The resulting balance sheet was cleaner, with lower reported debt, which made the equity method attractive to venturers concerned about leverage ratios.
The existence of two permitted methods for the same type of arrangement was the most criticized feature of IAS 31. Two identical companies with identical JCE interests could produce materially different financial statements depending on which method they chose, and that optionality was a primary reason the IASB eventually replaced the standard.
Scope Exclusion for Investment Entities
IAS 31 carved out an exception for certain types of investor. Interests in joint ventures held by venture capital organizations, mutual funds, unit trusts, and similar entities, including investment-linked insurance funds, were excluded from the standard’s requirements when those interests were measured at fair value through profit or loss. These entities could bypass both proportionate consolidation and the equity method and mark their joint venture interests to market each reporting period. The exclusion applied based on the nature of the entity’s activities, not its size or history.
Disclosures Venturers Had to Make
IAS 31 required venturers to provide several categories of disclosure in the notes to their financial statements so readers could assess the scale and risk of involvement in joint arrangements.
- The aggregate amount of contingent liabilities the venturer incurred in connection with its joint venture interests, its share of contingent liabilities incurred jointly with other venturers, and liabilities arising from potential responsibility for the obligations of other venturers.
- Total capital commitments related to the venturer’s joint venture interests, reported separately from other commitments.
- The names and descriptions of significant joint ventures, the proportion of ownership held in each jointly controlled entity, and the accounting method used.
- Aggregate amounts of current assets, long-term assets, current liabilities, long-term liabilities, income, and expenses related to the venturer’s joint venture interests.
What Replaced IAS 31
IFRS 11 Joint Arrangements superseded IAS 31 for annual periods beginning on or after January 1, 2013. The new standard addressed two specific criticisms of IAS 31: that the legal structure of an arrangement was the sole driver of accounting treatment, and that venturers had a free choice between two methods for jointly controlled entities.1IFRS Foundation. International Financial Reporting Standard 11 – Joint Arrangements
IFRS 11 collapsed IAS 31’s three categories into two. Jointly controlled operations and jointly controlled assets merged into a single category called “joint operations,” while jointly controlled entities became “joint ventures.” Classification now depends on whether the parties have direct rights to the assets and obligations for the liabilities of the arrangement, which makes it a joint operation, or rights to the net assets, which makes it a joint venture.2IFRS Foundation. IFRS 11 Joint Arrangements The distinction looks at the substance of the parties’ rights and obligations rather than just the legal form of the vehicle.
The most consequential change was eliminating proportionate consolidation. For arrangements classified as joint ventures under IFRS 11, the equity method is now mandatory, applied under IAS 28.3IFRS Foundation. IAS 28 Investments in Associates and Joint Ventures Joint operators continue to recognize their share of the arrangement’s individual assets, liabilities, revenue, and expenses directly, much as venturers did under IAS 31’s jointly controlled operations and asset categories.
The disclosure rules previously housed in IAS 31 moved to IFRS 12 Disclosure of Interests in Other Entities and expanded. IFRS 12 requires disclosure of the nature of interests in joint arrangements, summarized financial information for material joint ventures, and information about the associated risks, including restrictions on fund transfers and any unconsolidated structured entities.4IFRS Foundation. IFRS 12 Disclosure of Interests in Other Entities
For companies that had been using proportionate consolidation, the switch to IFRS 11 was substantive rather than cosmetic. Reported revenue, total assets, and total liabilities all decreased when previously line-by-line JCE items were collapsed into a single equity method investment, and financial ratios shifted accordingly. The effect was most visible in industries where jointly controlled entities were common, including oil and gas, construction, and telecommunications.