Overview

What you’ll learn:

• What control really means in accounting (and why it’s not about percentages)
• The difference between control and joint control in property developments
• Why contracts and shareholder agreements matter more than shareholding
• How this single assessment determines whether a project is consolidated or equity accounted

This episode focuses on decision-making power, not accounting entries.

Best for:

• Offshore finance teams setting up new project entities
• Finance staff supporting consolidation and JV reporting
• Team members confused about why similar projects have different accounting outcomes
• Anyone involved in reviewing shareholder or JV agreements

Basic property knowledge is helpful, but not required.

• Estimated time: 6 mins

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Chapter 2 Control vs Joint Control (AASB 10 vs. AASB 11)

Context: This note outlines the principles for determining the existence of Control (AASB 10) versus Joint Control (AASB 11) in property development structures. This assessment determines whether an entity consolidates a project or accounts for its interest as a joint arrangement.

1. Assessment of Control (AASB 10)

Under AASB 10 Consolidated Financial Statements, an investor controls an investee if and only if it has all three of the following elements:

1. Power over the investee: Existing rights that give it the current ability to direct the relevant activities,.
2. Exposure, or rights, to variable returns: Returns from its involvement with the investee that have the potential to vary as a result of the investee’s performance,.
3. Link between power and returns: The ability to use its power over the investee to affect the amount of the investor’s returns.

Relevant Activities in Property Development Power is defined by the ability to direct "relevant activities"—those that significantly affect the investee's returns. In a property development context, these typically include:

• Acquiring or disposing of assets (land/sites).
• Determining the funding structure.
• Appointing and remunerating key management personnel (e.g., the Development Manager or Builder).
• Managing the asset upon completion (leasing or sales decisions).

Substantive vs. Protective Rights To have power, an investor must hold substantive rights. Rights are substantive if the holder has the practical ability to exercise them.

• Protective Rights: Rights designed only to protect the interest of the party holding them without giving power over the entity (e.g., a lender's right to seize assets upon default, or a minority shareholder's right to approve extraordinary capital expenditure) do not constitute control.

1. Joint Arrangements and Joint Control (AASB 11)

A Joint Arrangement is an arrangement of which two or more parties have Joint Control.

Definition of Joint Control Joint control is 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.

• Unanimous Consent: This is the distinguishing feature. If a single party can decide the relevant activities unilaterally, they have Control (AASB 10). If a group of parties must agree, it is Joint Control.

1. Classification: Joint Operation vs. Joint Venture

Once Joint Control is established, the arrangement must be classified as either a Joint Operation or a Joint Venture based on the rights and obligations of the parties.

Classification Assessment Hierarchy:

1. Structure: Is the arrangement structured through a separate vehicle (e.g., a Pty Ltd company or Unit Trust)?.

◦ If No (e.g., a direct consortium or tenancy in common): It is classified as a Joint Operation.

◦ If Yes: Proceed to step 2.

1. Legal Form: Does the legal form of the vehicle confer separation between the parties and the vehicle?.

◦ Entities like limited liability companies generally confer separation (suggesting a Joint Venture).

1. Contractual Terms: Do the terms reverse the effect of the legal form?.

◦ If the agreement specifies that parties have rights to the assets and obligations for the liabilities, it may be a Joint Operation despite the legal wrapper.

1. Other Facts and Circumstances: Is the arrangement designed such that the parties consume all output or are the sole source of cash flows?.

◦ If the parties are obligated to purchase all output (common in manufacturing/mining but less common in property development for resale), it may be a Joint Operation.

Summary of Distinction:

• Joint Venture (JV): The parties have rights to the net assets (equity) of the arrangement. This is the most common classification for property development SPVs where the intent is to sell product to third parties and share the net profit.
• Joint Operation (JO): The parties have rights to the assets and obligations for the liabilities relating to the arrangement. This is common in unincorporated joint ventures or where land is held directly as tenants in common.

1. Property Governance Considerations

Shareholder Agreements and "Reserved Matters" In property development, ownership percentage (e.g., 50%) does not automatically dictate the accounting. The governance structure defined in the Shareholders' Agreement is critical.

• Unanimous Approval: If the agreement requires unanimous consent for "Reserved Matters" such as setting the project budget, obtaining bank funding, or appointing the builder, Joint Control likely exists.
• Development Management Agreements: A developer often holds a minority or equal stake but acts as the Development Manager (DM). If the DM's authority is limited to day-to-day execution within a budget approved unanimously by all partners, the DM is likely acting as an agent rather than a principal with control,.

Scenario Examples:

• 50/50 JV: Two parties hold equal shares. Decisions on budget and strategy require approval from both. This is Joint Control (Joint Venture).
• Manager with Control: A developer owns 40% but holds a "casting vote" on all relevant activities or has the unilateral right to appoint the majority of the board. This is Control (Subsidiary) under AASB 10, despite minority ownership.
• Passive Investor: An investor holds 10% with no board representation or veto rights over relevant activities. This is likely neither Control nor Joint Control, and is accounted for as a Financial Asset (AASB 9) unless Significant Influence (AASB 128) exists.

Key Takeaways

• Owning 50% (or even 60%) does not automatically mean control
• Control depends on who can make the key commercial decisions
• If major decisions require unanimous consent, the arrangement is jointly controlled

Common Mistakes / Watch-outs

• Assuming ownership percentage alone determines control
• Not reading the “Reserved Matters” section of the agreement
• Confusing protective rights with real decision-making power
• Deciding accounting treatment before completing the control assessment

Quick Links

• Next episode →Episode 3 – Equity Accounting Explained
• Back to hub → Episode 1 - Why JV