IAS 31, Interests in Joint Ventures, was the International Accounting Standard that governed how a company reported its stake in a business it jointly controlled with one or more other parties. It was first issued in December 1990, revised in 2003, and superseded by IFRS 11 and IFRS 12 for annual periods beginning on or after January 1, 2013. While no longer in force, its structure still shapes how practitioners read older financial statements and understand the evolution of joint venture accounting under IFRS.
Joint Control Was the Gateway Test
Nothing in IAS 31 applied unless the parties shared 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.
The word “contractually” did real work. 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 unanimous agreement on key decisions did IAS 31 apply. Without that, the interest fell to be treated as a simple investment, co-ownership, or an associate under IAS 28.
The Three Forms of Joint Arrangement
IAS 31 sorted joint arrangements into three categories based on their structure. The accounting followed the form.
Jointly Controlled Operations
The simplest structure. Each venturer used its own assets and staff to carry out part of a shared activity, without creating a separate entity. Two construction firms each contributing equipment and labor to a shared project is the classic example. Each venturer recognized the assets it controlled, the expenses it incurred, and its share of the revenue earned, directly in its own financial statements. There was no separate entity to consolidate.
Jointly Controlled Assets
This category covered shared ownership of specific property used for the arrangement, such as a pipeline, a specialized machine, or an oil production facility. Each venturer recognized its share of the jointly controlled asset, any liabilities it had incurred alone, its share of any jointly incurred liabilities, its income from the arrangement, and its share of expenses. Again, no separate legal entity was required.
Jointly Controlled Entities
The most structured form. A jointly controlled entity (JCE) was a separate legal vehicle, typically a corporation or partnership, that kept its own books, contracted in its own name, and held its own assets and liabilities. The accounting question for JCEs was the hardest one under IAS 31, because the standard permitted two different methods and the choice materially changed the venturer’s reported balance sheet.
Proportionate Consolidation Versus the Equity Method
For interests in jointly controlled entities, IAS 31 named proportionate consolidation as the benchmark treatment and the equity method as an allowed alternative. Both were acceptable, and a venturer could choose.
Under proportionate consolidation, a venturer included its share of the JCE’s individual assets, liabilities, income, and expenses directly, on a line-by-line basis. A 40 percent interest meant folding 40 percent of the JCE’s inventory into the venturer’s own inventory, 40 percent of its debt into the venturer’s liabilities, and 40 percent of its revenue into the venturer’s revenue. The logic was that a party with joint control has an enforceable right to a share of the underlying assets and bears responsibility for a share of the underlying liabilities, and reporting only a net investment figure would hide that reality.
Under the equity method, the interest sat on the balance sheet as a single investment line, initially measured at cost and then adjusted for the venturer’s share of the JCE’s post-acquisition profit or loss. If a JCE reported $10 million of net income and the venturer held 30 percent, the investment balance rose by $3 million and the same $3 million appeared as one income statement line, commonly labeled “share of profit of joint venture.” Distributions received reduced the carrying amount rather than being recognized as income. None of the JCE’s underlying assets, liabilities, revenue, or expense lines appeared on the venturer’s statements. The rationale was that a venturer’s real claim is on the net assets of the entity as a whole, not on individual assets.
The practical difference was significant. Proportionate consolidation inflated reported assets, liabilities, and revenue relative to the equity method, changing ratios like debt-to-equity and return on assets. Two otherwise identical companies with identical JCE stakes could publish materially different statements depending on which method they picked. That optionality was one of the most criticized features of the standard and a primary reason the IASB eventually replaced it.
Scope Exclusion for Venture Capital and Similar Entities
IAS 31 carved out an exception for interests held by venture capital organizations, mutual funds, unit trusts, and similar entities, including investment-linked insurance funds. When those interests were measured at fair value through profit or loss, the entity could bypass both proportionate consolidation and the equity method and mark its joint venture interests to market each reporting period. The exclusion turned on the nature of the entity’s activities, not its size or history.
What Venturers Had to Disclose
IAS 31 required several categories of note disclosure so that readers could gauge the scale and risk of a venturer’s 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 joint venture interests, reported separately from other commitments.
- 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.
How IAS 31 Differed From US GAAP
The biggest difference was proportionate consolidation. US GAAP has never permitted it for corporate joint ventures. Under ASC 323, all joint venture investments where the investor shares joint control must use the equity method, regardless of ownership percentage. The benchmark treatment under IAS 31 simply had no US equivalent.
Terminology also differed. US GAAP calls an entity accounted for under the equity method an “investee,” while IFRS distinguishes between “associate” (significant influence, under IAS 28) and “joint venture” (joint control). US GAAP also offered a fair value option at initial recognition for equity method investments; IAS 31 did not include a general fair value option, though the venture capital scope exclusion allowed fair value measurement for those specific entities.
How IFRS 11 and IFRS 12 Replaced IAS 31
IFRS 11, Joint Arrangements, superseded IAS 31 for annual periods beginning on or after January 1, 2013. The new standard responded to two specific criticisms: that legal form drove the accounting, and that venturers had a free choice of method for jointly controlled entities.1IFRS Foundation. International Financial Reporting Standard 11 – Joint Arrangements
IFRS 11 collapsed the three categories into two. Jointly controlled operations and jointly controlled assets merged into “joint operations.” Jointly controlled entities became “joint ventures.” Classification under IFRS 11 depends on whether the parties have direct rights to the assets and obligations for the liabilities of the arrangement (a joint operation), or rights to the net assets (a joint venture), looking at the substance of the parties’ rights rather than the legal form of the vehicle.2IFRS Foundation. IFRS 11 Joint Arrangements
The most consequential change was the removal of 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, meanwhile, still recognize their share of the arrangement’s individual assets, liabilities, revenue, and expenses directly, much as they did under the old jointly controlled operations and jointly controlled assets categories.
The disclosure rules previously in IAS 31 moved to IFRS 12, Disclosure of Interests in Other Entities, which expanded what companies must report. IFRS 12 requires disclosure of the nature of interests in joint arrangements, summarized financial information for material joint ventures, and information about associated risks, including restrictions on fund transfers.4IFRS Foundation. IFRS 12 Disclosure of Interests in Other Entities
Companies that had used proportionate consolidation had to restate on transition, collapsing previously line-by-line JCE items into a single equity method investment. Reported revenue, total assets, and total liabilities all fell, and financial ratios shifted with them.