What are the two types of joint arrangements under IFRS 11?

Under IFRS 11 – Joint Arrangements, the standard establishes two primary types of joint arrangements: joint ventures and joint operations.

Joint ventures are arrangements where the parties have rights to the net assets of the arrangement. This means that the partners share the risks and rewards of the venture, and they typically create a separate vehicle (like a corporation or partnership) through which they conduct their business activities. The accounting for joint ventures is done using the equity method, where each venturer recognizes its share of the profit or loss from the joint venture in its financial statements based on its ownership interest.

On the other hand, joint operations arise when the parties have rights to the assets and obligations for the liabilities of the arrangement. This typically does not involve a separate legal entity; instead, each party accounts for its own share of the assets, liabilities, revenues, and expenses in accordance with the rights and obligations outlined in the arrangement. This approach allows for more granularity in reflecting the financial position and performance of each party involved in the operation.

Understanding these distinctions is crucial for accurately reporting joint arrangements in financial statements, which enhances transparency and aids users of financial statements in understanding the nature and impact of the partnership on the entities involved.