Proportional Consolidation Definition

What Is Proportional Consolidation?

Proportional consolidation was once as soon as a former method of accounting for joint ventures beneath the International Financial Reporting Necessities (IFRS) that was once as soon as abolished by means of the International Accounting Necessities Board (IASB) on Jan. 1, 2013.

It was once as soon as a technique of along with income, expenses, assets, and liabilities in share to an organization’s percentage of participation in a joint venture. Even though the proportional consolidation method was once as soon as in the past licensed by means of the IFRS, it moreover allowed the use of the equity method.

Underneath the U.S. typically licensed accounting concepts (GAAP), an organization’s interest in a joint venture is accounted for the usage of the equity method.

Figuring out Proportional Consolidation

A joint venture is when two or additional occasions share keep an eye on over an entity or industry enterprise. The occasions do not merge into a brand spanking new entity, and the joint venture is a separate establishment from the other interests of the occasions.

A joint venture will also be structured in lots of quite a lot of techniques and can include sharing keep an eye on over the entire enterprise, sharing keep an eye on of operations, sharing keep an eye on over assets and liabilities, or every other breakdown of shared duties. Common, however, the occasions contribute assets and share risks, enter new markets, amplify revel in and technology, and scale back costs.

In reporting their interest in a joint venture, occasions outdoor of the U.S. had been ready to use the equity method or proportional consolidation. Proportional consolidation works by means of the usage of what is known as a horizontal line-by-line technique to accounting. This shows the occasions’ share of every specific individual financial commentary products, which has similarities to the entire consolidation method used for accounting with subsidiaries. In contrast, the equity method uses a vertical one-line consolidation, during which all of the financial commentary items are aggregated into one line products on the balance sheet.

Proponents of proportional consolidation argued that this method equipped additional detailed wisdom as it broke out the potency of the joint venture interest into its specific individual parts. In this method, it is much more informative than the equity method. The equity method was once as soon as favored by means of GAAP, which believed that this is a more practical and more uncomplicated means of accounting for outdoor investments and avoids the cumbersome accounting art work that is sought after for the proportional consolidation method.

Abolishing Proportional Consolidation

The IFRS in the future came over to the simpler view of the equity method, and now the IFRS and GAAP are unified in the usage of the equity method for accounting for interests in joint ventures.

Part of the total enterprise of the IFRS is to standardize a clear means for financial accounting so that occasions all over the world can upper understand the operations of the corporate without reference to where it is located.

In addressing accounting for joint ventures, the IFRS wanted to get rid of inconsistencies throughout the reporting of “joint arrangements,” which the IFRS classifies as each “joint operations” or “joint ventures,” consistent with IFRS 11. International Accounting Necessities (IAS) 31 merged joint operations and joint ventures, and IFRS 11 requires the use of the equity method and the abolition of the proportional consolidation method.