How to Audit Joint Arrangements Under IFRS 11

Why the classification matters more than the ownership percentage

IFRS 11 replaced IAS 31 specifically to eliminate a choice that IAS 31 permitted. Under IAS 31, entities with interests in jointly controlled entities could choose between proportionate consolidation and equity method accounting. IFRS 11 removed that choice and replaced it with a classification-based model. The classification determines the accounting. There is no policy election.

The financial statement impact of misclassification is significant. When a joint operation is incorrectly accounted for as a joint venture (equity method instead of line-by-line), total assets are understated, total liabilities are understated, revenue is understated, and the balance sheet shows a single investment line instead of the individual assets and liabilities the client actually has rights and obligations to. For a 50/50 arrangement with €20M in assets, this could mean €10M of assets and €10M of liabilities missing from the client’s balance sheet.

The reverse error (treating a joint venture as a joint operation) overstates assets, liabilities, and revenue by including items the client has no direct rights or obligations to. Both directions create material misstatement risk.

The IFRS 11.B14 through B33 classification test

IFRS 11.14 defines joint control as the contractually agreed sharing of control, which exists only when decisions about the relevant activities require unanimous consent of the parties. Before you can classify the arrangement, confirm that joint control exists. If one party controls the arrangement unilaterally, IFRS 11 does not apply; you’re looking at a subsidiary under IFRS 10 or an associate under IAS 28.

Once joint control is confirmed, IFRS 11.B14 through B33 provide the classification framework. The standard sets out a hierarchy.

First, consider the legal form of the separate vehicle (if one exists). IFRS 11.B22 states that a joint arrangement not structured through a separate vehicle is always a joint operation. When no separate legal entity exists, the parties must be operating through their own assets directly, which by definition gives them rights to assets and obligations for liabilities.

Second, if a separate vehicle exists, examine its legal form. IFRS 11.B22 through B24 explain that the legal form of the vehicle may confer rights to assets and obligations for liabilities on the parties (making it a joint operation) or may give the parties rights to net assets only (pointing towards a joint venture). A Dutch V.O.F. (vennootschap onder firma), for example, does not create a separate legal barrier between the partners and the arrangement’s assets. A B.V. does.

Third, and this is where most classification errors originate, examine the contractual terms. IFRS 11.B25 through B28 state that the contractual terms can override the legal form. Even when the arrangement operates through a B.V. (which in isolation would suggest a joint venture), contractual terms that give the parties rights to substantially all the economic benefits of the assets and obligations for the liabilities reclassify it as a joint operation. The most common contractual indicator is an output purchase obligation: if the parties are contractually required to purchase all output at prices that cover substantially all costs, the arrangement functions as a joint operation regardless of legal form.

Fourth, consider “other facts and circumstances” under IFRS 11.B29 through B33. If the arrangement has been designed so that its activities primarily aim to provide output to the parties, and the parties are the only source of cash flows, that supports joint operation classification even without an explicit output purchase clause.

Your file needs to walk through each level of this hierarchy and document the conclusion at each step.

What to look for in the shareholders’ agreement

The shareholders’ agreement (or equivalent governing document) is your primary audit evidence for the classification. IFRS 11.B2 identifies the sources of contractual arrangements as including articles of association, minutes of discussions, or other agreements between parties. Read the actual agreement. Do not rely on management’s summary.

These are the clauses that determine classification. Output purchase obligations requiring the parties to buy all or substantially all production at cost-plus or market-based prices are the strongest indicator of a joint operation. Funding obligations requiring the parties to cover operating shortfalls pro rata indicate that the parties bear the obligations for the liabilities, not the vehicle. Revenue-sharing clauses that distribute revenue from third-party sales to the parties based on their interest also indicate a joint operation, because the parties are receiving the economic benefits of the assets directly rather than through dividends.

Conversely, if the arrangement generates revenue from third-party customers, retains its own profits, funds its own operations, and distributes dividends to the parties, the indicators point towards a joint venture. The vehicle acts as a standalone business, not an extension of the parties’ own operations.

Watch for side agreements. A shareholders’ agreement may establish a B.V. that looks like a joint venture, while a separate offtake agreement between the B.V. and the parties creates an output purchase obligation that changes the classification entirely. Your audit request list should include all agreements between the parties and the arrangement, not only the governing shareholder document.

Joint operation accounting: what the client should be recognising

IFRS 11.20 requires a joint operator to recognise its share of the assets, liabilities, revenue, and expenses of the joint operation, combined with any assets it holds and liabilities it incurs in relation to the arrangement. This is line-by-line recognition, not consolidation.

On your file, the key audit procedures are verifying that the client has obtained the joint operation’s financial information (trial balance or equivalent), that the line-by-line pick-up is arithmetically correct at the client’s ownership percentage, and that intra-arrangement transactions have been eliminated per IFRS 11.22. Gains and losses on transactions between the joint operator and the joint operation are eliminated to the extent of the operator’s interest. If the client sold €400K of inventory to the joint operation and holds 50%, the unrealised profit on any inventory still held by the arrangement at year-end needs elimination.

A common error on mid-market files is treating the joint operation’s financial statements like a subsidiary and performing a full line-by-line consolidation with elimination of all intercompany balances. Joint operation accounting is not consolidation. There are no non-controlling interests, no goodwill, and no IFRS 10 consolidation adjustments beyond the intercompany elimination in IFRS 11.22. The client recognises its proportionate share of each asset and liability alongside its own.

Joint venture accounting: equity method under IAS 28

IFRS 11.24 requires a joint venturer to account for its interest using the equity method in accordance with IAS 28. The mechanics are identical to equity accounting for an associate.

Your audit procedures on the equity method investment cover the initial recognition at cost (IAS 28.10), the subsequent adjustment for the investor’s share of the investee’s profit or loss (IAS 28.10), dividends received reducing the carrying amount, and the assessment of whether impairment indicators exist under IAS 28.40 through IAS 28.43. If the joint venture’s financial statements are not audited by your firm, you need to evaluate the sufficiency of the audit evidence available, which may involve obtaining the joint venture’s audited financial statements from another auditor or performing your own procedures on the joint venture’s financial information.

One area that catches teams out is the elimination of unrealised profits on transactions between the investor and the joint venture. IAS 28.28 requires the investor to eliminate its share of unrealised profits on upstream transactions (joint venture sells to the client) and downstream transactions (client sells to the joint venture). Downstream transactions where the client sells inventory to the joint venture at a margin require elimination of the unrealised profit to the extent of the client’s interest. If the inventory is still held by the joint venture at year-end, the profit is unrealised and needs elimination.

Worked example: Hendriksen Bouw B.V. and its shared concrete plant

Scenario: Hendriksen Bouw B.V. (revenue €38M, construction) and Groot Beton B.V. (revenue €25M, building materials) together established Betoncentrale Rijn B.V., a 50/50 joint arrangement operating a concrete batching plant in Arnhem. The B.V. was incorporated in 2021. Hendriksen accounts for its 50% interest using the equity method, recording a single investment line of €2.8M on its balance sheet. Your firm audits Hendriksen.

Step 1: Confirm joint control

The shareholders’ agreement requires unanimous consent for all operating and capital decisions exceeding €50,000. Both parties appoint two of four board members. IFRS 11.7 defines joint control as requiring unanimous consent of the parties sharing control. Joint control exists.

Step 2: Assess legal form

Betoncentrale Rijn is a B.V. Under Dutch law, a B.V. is a separate legal entity. IFRS 11.B22 through B24 indicate that the legal form of the B.V. gives the parties rights to the net assets of the vehicle, which in isolation points towards joint venture classification.

Step 3: Examine the contractual terms

The shareholders’ agreement contains an output purchase clause in Article 14: both parties are required to purchase all concrete output at a price equal to production cost plus 3%. Article 16 requires both parties to fund any operating deficit pro rata to their interest. No third-party sales are permitted without unanimous consent (Article 18), and in practice, Betoncentrale Rijn has never sold to a third party.

Applying IFRS 11.B25 through B28: the output purchase obligation means the parties receive substantially all the economic benefits of the arrangement’s assets. The deficit funding obligation means the parties bear the obligations for the liabilities. These contractual terms override the legal form analysis. Classification: joint operation.

Step 4: Determine the accounting impact

Hendriksen should recognise its 50% share of Betoncentrale Rijn’s assets and liabilities line by line, not a single equity method investment. Betoncentrale Rijn’s balance sheet at year-end shows total assets of €7.2M (PP&E €5.1M, inventory €0.9M, receivables €0.4M, cash €0.8M) and total liabilities of €1.6M (payables €0.8M, bank loan €0.8M).

Hendriksen’s balance sheet should show: PP&E €2.55M, inventory €0.45M, receivables €0.2M, cash €0.4M, payables €0.4M, bank loan €0.4M. Net assets recognised: €2.8M. This matches the current equity method carrying amount by coincidence, but the composition on the balance sheet changes entirely. Total assets increase by €0.8M (from a single €2.8M investment line to €3.6M in four asset lines), and total liabilities increase by €0.8M.

Conclusion: The file now shows the classification analysis walking through all four levels of the IFRS 11 hierarchy. A reviewer sees the shareholders’ agreement analysis, the contractual override of legal form, and the reclassification journal from equity method to line-by-line. The €2.8M equity method investment is derecognised and replaced with €3.6M in assets and €0.8M in liabilities.

When the classification changes mid-engagement

A change in the contractual terms can trigger reclassification. IFRS 11.B33 requires reassessment when facts and circumstances change. If the parties amend the shareholders’ agreement to remove the output purchase obligation (because the arrangement has started selling to third parties), the classification may shift from joint operation to joint venture.

IFRS 11 does not prescribe specific transition accounting for a reclassification triggered by a change in facts and circumstances. In practice, the change is accounted for prospectively from the date the facts change. For a shift from joint operation to joint venture, the party derecognises its share of the individual assets and liabilities and recognises an equity method investment at the carrying amount of its net interest at the date of change. For the reverse, the equity method investment is derecognised and replaced with line-by-line recognition at carrying amounts.

Your file should document the date the facts changed, the specific contractual or operational change that triggered reassessment, the classification analysis under the new facts, and the accounting entries. If the change occurs mid-year, you also need to consider whether the arrangement was correctly accounted for up to the change date.

Practical checklist for your next joint arrangement file

1. Obtain the complete shareholders’ agreement (or equivalent governing document) and all side agreements between the parties and the arrangement. Read the actual documents. Do not rely on management’s verbal description of the terms.
2. Confirm joint control exists by verifying that decisions about the relevant activities require unanimous consent (IFRS 11.7). If one party can make decisions unilaterally, IFRS 11 does not apply.
3. Walk through the IFRS 11.B14 through B33 classification hierarchy in order: no separate vehicle (always joint operation), legal form of the vehicle, contractual terms, other facts and circumstances. Document your conclusion at each level.
4. For the contractual terms analysis, specifically look for output purchase obligations, deficit funding obligations, restrictions on third-party sales, and revenue distribution clauses. Any of these can override a legal form conclusion pointing towards joint venture.
5. Verify the accounting matches the classification. Joint operation: line-by-line recognition of the client’s share of assets, liabilities, revenue, and expenses (IFRS 11.20). Joint venture: equity method under IAS 28. If the accounting does not match, quantify the misstatement.
6. Check IFRS 12 disclosures for the arrangement (see the ciferi IFRS 12 guide for the specific requirements).

Common mistakes

• Classifying a joint arrangement based solely on legal form without examining the contractual terms. The AFM’s thematic reviews on structured entities and arrangements have noted that auditors accept B.V. structures as joint ventures without reading the shareholders’ agreement for output purchase or deficit funding clauses that would change the classification.
• Applying proportionate consolidation instead of line-by-line recognition for joint operations. Proportionate consolidation was permitted under IAS 31 but is not available under IFRS 11. The line-by-line pick-up under IFRS 11.20 recognises the operator’s share of each asset and liability alongside its own, without the full consolidation mechanics that proportionate consolidation entailed.

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Further reading and source references

• IFRS 11, Joint Arrangements: the classification framework for joint operations and joint ventures, including the B14 through B33 hierarchy.
• IAS 28, Investments in Associates and Joint Ventures: equity method accounting mechanics for joint ventures.
• IFRS 10, Consolidated Financial Statements: the control framework that determines whether an arrangement is a subsidiary rather than a joint arrangement.
• IFRS 12, Disclosure of Interests in Other Entities: disclosure requirements for joint arrangements, including significant judgment disclosures.
• Equity method: Ciferi glossary entry covering the IAS 28 mechanics for joint ventures.