There are a number of ways businesses can trade together, the most common of which are Partnerships and Joint Ventures. Another structure, often overlooked but can be attractive is a Joint Agreement Not Entity.
Joint Agreement Not Entity
A joint arrangement does not have to be a separate entity, unlike a joint venture which must be an entity,
A JANE will have the following characteristics:
- The parties are bound by a contractual agreement
- The contractual arrangement gives two or more of those parties joint control over the arrangement
Under such an agreement, parties engaged in joint activities do not create an entity because they would not be carrying on a trade or business of its own. As the arrangement predetermines all key policy matters, it is not defined as an entity because the policies are those of each separate party and not of a separate entity.
Participants in a JANE, including structures with the form but not substance of a joint venture, will account for their own assets, liabilities and cashflows within the arrangement measured according to the agreement governing the arrangement. However, a joint venture will be equity accounted.
Paragraph s.15.4 and s.15.5 (jointly controlled operations), confirms the treatment per FRS102 similar to that of IFRS 11.
Joint venture vs. Joint operation
One of the reasons a JANE is often overlooked is because it is conceptually very similar to a joint venture. However, a JANE enables the participants to have the same level of control but in an unincorporated form i.e. on a line by line basis.
A joint arrangement can be classified as a joint operation or joint venture. The illustration below determines classification;
IFRS 11 defines the following terms:
An arrangement of which two or more parties have joint control
The contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement
A joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement
A party to a joint venture that has joint control of that joint venture
Party to a joint arrangement
An entity that participates in a joint arrangement, regardless of whether that entity has joint control of the arrangement
A separately identifiable financial structure, including separate legal entities or entities recognised by statute, regardless of whether those entities have a legal personality
Given the area is open to judgement, careful consideration is required in the classification of a joint agreements’ assessment of the substance of the participant’s interest, including consideration of related contractual agreements and other factors and circumstances.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.