CFM52730 - Derivative contracts: partnerships: partnership interest measured at fair value

CTA09/S621: company partners using fair value accounting

A company may account for its interest in a partnership in a number of ways, depending on the circumstances.

A partnership may be a joint venture as defined in IFRS 11 Joint Arrangements. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Where the partnership is a joint venture the company investing in the partnership should, in accordance with FRS 11, account for its interest in the partnership as a fixed asset investment. It may do this in one of two ways:

• It may show the investment at cost, less any amounts written off. The company’s share of the partnership profits or losses will go through profit and loss account, where it will be separately identified.
• Alternatively, it may show the investment at fair value. The amounts credited to profit and loss account will consist of any partnership profits which the company draws, plus any increase in the value of the company’s interest in the partnership (a decrease will, of course, be debited). The P&L entries will not normally equate directly with the company’s share of partnership profits.

In the first case, the share of partnership profits brought into account by the company will include a share of any profits or losses arising on derivative contracts held by the partnership. Applying the statutory procedure in CTA09/S620 will, in general, give you the same credits and debits in respect of derivative contracts as are represented in the company’s accounts.

If the partnership accounts for the derivative contract at fair value, you should apply fair value accounting in computing the gross debits and credits for tax purposes, whether or not the company accounts for its derivative financial instruments in this way (see CFM52710). Similarly, if the partnership uses an amortised cost basis of accounting for the contract, you should compute the total credits and debits on that basis.

Matters are less straightforward where the company shows its investment in the partnership at valuation, because the investing company is not directly bringing into account a share of profits or losses on the partnership’s derivative contracts. A special provision is needed, and is given by CTA09/S621.

Where a company uses fair value accounting in relation to its interest in the partnership, it must compute debits and credits on the partnership’s derivative contracts on the basis of fair value accounting.

You may occasionally see cases where a company, which is a partner in a partnership, shows directly in its accounts its assets and liabilities, including its share of any that are jointly owned, and its share of revenue and expenses of the partnership This will normally occur where the partnership is not a joint venture within the IFRS 11 definition, but is a joint operation, as defined by that standard.

For example, a number of companies may enter a joint arrangement to undertake a major property development, without the arrangement constituting a joint venture – even if it is structured as a partnership or limited partnership. In such a case, the company will bring into its statutory accounts debits and credits relating to derivative contracts of the partnership, so mandatory fair value accounting will not apply. If the partnership accounts use fair value, and that is reflected in the company’s own accounts under this basis, then total credits and debits will be computed on a fair value basis in accordance with the normal rules.