MV

IFRS vs ASPE – Joint Arrangements (Differences and Examples)

Differences between IFRS and ASPE

  • IFRS 11 uses the term "joint arrangements" and divides them into two categories: joint operations and joint ventures.
  • ASPE 3056 also uses the term joint arrangements, but it classifies joint arrangements into three categories:
    • jointly controlled operations
    • jointly controlled assets
    • jointly controlled enterprises.
  • Major distinctions
    • Jointly controlled operations and jointly controlled assets (ASPE) correspond to IFRS "joint operations" in the sense that the investor participates in the resources and shared revenues/expenses, or shares the outputs and expenses of assets, respectively.
    • Jointly controlled enterprises (ASPE) are essentially the same as IFRS joint ventures: the investor has rights to the net assets of the joint arrangement rather than rights and obligations to its assets and liabilities.
    • Under ASPE, the investor in a jointly controlled enterprise may report the investment using either the cost method or the equity method.
    • Under IFRS, the classification can lead to formation of a separate legal entity in some cases (a joint arrangement), whereas ASPE explicitly states that jointly controlled operations and assets do not involve creating a new corporation.
  • Key definitions and implications
    • Joint operations (IFRS) / jointly controlled operations (ASPE): each investor uses its resources and shares either revenues/expenses (operations) or outputs/expenses (assets).
    • Joint ventures (IFRS) / jointly controlled enterprises (ASPE): the investor has rights to the net assets of the arrangement; investment measurement can be cost or equity method.
    • Equity method vs cost method (ASPE for JCEs):
    • Equity method increases the investment for the investor’s share of net income and decreases for distributions (dividends). Carrying amount reflects post-acquisition profits and losses.
    • Cost method recognizes dividends as income and does not adjust the investment for the investor’s share of profits.
  • Relationship to real-world practice
    • Many industries (e.g., oil/pipelines, infrastructure) use joint arrangements to share assets and revenue streams.
    • IFRS 11 emphasizes the potential for forming a separate joint entity; ASPE focuses more on the accounting for the investor and its share of operations/assets.

59.5a Let’s look at an example (ASPE, joint venture under cost vs equity methods)

Academic Texts Corp. (ATC) is a printing company reporting under ASPE. On June 1, Year 1, ATC and another company form a new company, Print Co., in which each owns 50% and all decisions require both parties’ agreement. Under ASPE, this is a joint arrangement and, since Print is formed with shared net assets, it is a jointly controlled enterprise. ATC can account for its investment using either the cost method or the equity method.

  • Scenario: Print Co. earns net income of 150{,}000 and pays dividends of 60{,}000 in Year 2 (end May 31, Year 2).
  • ATC’s share: 50%
  • Calculations:
    • Share of net income: 0.50 imes 150{,}000 = 75{,}000
    • Share of dividends: 0.50 imes 60{,}000 = 30{,}000

If ATC uses the cost method for the investment in Print Co.

  • Dividend recognition (cash received):
    • Journal entry:
    • Dr Cash 30{,}000
    • Cr Dividend income 30{,}000
    • Calculation note: the dividend is recorded as income to the investor, not as a reduction of the investment.

If ATC uses the equity method for the investment in Print Co.

  • Recording equity income from the investment:

    • Journal entry:
    • Dr Investment in Print Co. 75{,}000
    • Cr Investment income 75{,}000
    • Calculation note: this increases the carrying amount of the investment by ATC’s share of Print’s net income.

  • Recording the dividend received:

    • Journal entry:
    • Dr Cash 30{,}000
    • Cr Investment in Print Co. 30{,}000
    • Calculation note: the cash dividend reduces the carrying amount of the investment under the equity method.

  • Summary of results (ATC’s perspective):

    • Under cost method, only the dividend income affects the income statement for the period; no adjustment to the investment account for Print’s income.
    • Under equity method, ATC recognizes its share of Print’s income in the income statement and increases the investment account; dividends reduce the investment account.

59.5b Let’s look at another example (ASPE, joint arrangement as a jointly controlled operation)

Continuing with the earlier scenario, ATC enters into an agreement with another company to set up a partnership. All decision-making at Print requires agreement of both parties. Each company contributes cash, inventory, and other resources for an equal share in the partnership’s revenues and expenses.

  • Under ASPE, this is a joint arrangement because decisions are jointly made.

  • This is considered a jointly controlled operation because the resources contributed by the parties will be used to earn revenues and incur expenses that the parties have agreed to share equally.

  • If the partnership earns revenue of 400{,}000 for the year, ATC will recognize its share of revenue, i.e. 200{,}000, on its income statement.

  • Note: In a jointly controlled operation, ATC does not consolidate a separate entity; instead, its share of the revenues and expenses is recognized directly in ATC’s financial statements.

  • Illustrative impact (revenue recognition):

    • ATC’s share of revenue: 200{,}000
    • Entry example (illustrative, to reflect revenue recognition):
    • Dr Accounts Receivable or Cash 200{,}000
    • Cr Revenue from joint operation 200{,}000

  • Practical implication: under ASPE, the choice between equity vs cost method applies to joint ventures (jointly controlled enterprises), not to jointly controlled operations or assets; those latter categories primarily focus on recognizing share of revenues/expenses or outputs and expenses, without forming a separate entity.

Quick reference comparison (key points)

  • IFRS 11: Joint arrangements → two categories: joint operations and joint ventures.
  • ASPE 3056: Three categories: jointly controlled operations, jointly controlled assets, jointly controlled enterprises.
  • Mapping:
    • ASPE jointly controlled operations/assets ≈ IFRS joint operations.
    • ASPE jointly controlled enterprises ≈ IFRS joint ventures.
  • Measurement for joint ventures (ASPE): choice of cost method or equity method. Equity method adjusts the investment for share of net income and reduces it by distributions; cost method records dividends as income.
  • Measurement for jointly controlled operations/assets (ASPE): no formation of a new entity; investor records own share of revenues/expenses (operations) or outputs and expenses (assets).
  • IFRS nuance: joint arrangements can involve forming a separate joint entity (joint venture) in some cases; otherwise, investors recognize their share of assets/liabilities and revenues/expenses depending on the type.

Key formulas and calculations to remember

  • Share of income for a joint venture (ASPE, equity method):

    • ext{Share of net income} = ext{Net income of joint venture} imes ext{Ownership percentage}

  • Share of dividends (ASPE, equity method):

    • ext{Dividends received} = ext{Dividends} imes ext{Ownership percentage}

  • Equity method carrying amount update (illustrative):

    • ext{Investment}{t} = ext{Investment}{t-1} + ext{Share of net income} - ext{Dividends received}

  • Example calculations from 59.5a:

    • Ownership = 50%
    • Net income share: 0.50 imes 150{,}000 = 75{,}000
    • Dividends received share: 0.50 imes 60{,}000 = 30{,}000
    • Cost method entry for dividend: Dr Cash 30{,}000, Cr Dividend income 30{,}000
    • Equity method entries: Dr Investment in Print Co. 75{,}000, Cr Investment income 75{,}000; Dr Cash 30{,}000, Cr Investment in Print Co. 30{,}000

  • Example from 59.5b (partnership revenue sharing under ASPE):

    • Partnership revenue: 400{,}000 total; ATC’s share (50%) = 200{,}000
    • ATC records its share as revenue on the income statement (no separate consolidation of a new entity)
    • Illustrative revenue entry: Dr Accounts Receivable or Cash 200{,}000, Cr Revenue from joint operation 200{,}000

  • Real-world relevance: joint arrangements are common in industries requiring shared infrastructure or risk (e.g., oil pipelines, advanced manufacturing consortia, infrastructure projects). The accounting approach (cost vs equity, and whether a separate entity is formed) affects how profits, losses, and cash flows are reported to investors and stakeholders.