Proportional Consolidation

What Is Proportional Consolidation?

Proportional consolidation was a former method of accounting for joint ventures under the International Financial Reporting Standards (IFRS) that was nullified by the International Accounting Standards Board (IASB) on Jan. 1, 2013.

It was a method of including income, expenses, assets, and liabilities in relation to a firm's percentage of participation in a joint venture. However the proportional consolidation method was recently accepted by the IFRS, it likewise permitted the utilization of the equity method.

Under the U.S. generally accepted accounting principles (GAAP), a firm's interest in a joint venture is represented utilizing the equity method.

Grasping Proportional Consolidation

A joint venture is when at least two parties share control over an entity or business venture. The parties don't merge into another entity, and the joint venture is a separate foundation from different interests of the parties.

A joint venture can be structured in a wide range of ways and can incorporate sharing control over the whole venture, sharing control of operations, sharing control over assets and liabilities, or some other breakdown of shared liabilities. Overall, nonetheless, the parties contribute assets and share risks, enter new markets, grow ability and technology, and reduce costs.

In reporting their interest in a joint venture, interested parties outside of the U.S. had the option to utilize the equity method or proportional consolidation. Proportional consolidation works by utilizing what is known as a horizontal line-by-line approach to accounting. This shows the parties' share of every individual financial statement thing, which is like the full consolidation method utilized for accounting with subsidiaries. Conversely, the equity method utilizes a vertical one-line consolidation, by which all the financial statement things are totaled into one detail on the balance sheet.

Advocates of proportional consolidation contended that this method gave more point by point data since it broke out the performance of the joint venture interest into its individual parts. As such, it is substantially more educational than the equity method. The equity method was inclined toward by GAAP, which accepted that it is a less complex and more direct approach of accounting for outside investments and evades the unwieldy accounting work that is required for the proportional consolidation method.

Annulling Proportional Consolidation

The IFRS in the end came around to the less difficult perspective on the equity method, and presently the IFRS and GAAP are unified in involving the equity method for accounting for interests in joint ventures.

Part of the overall mission of the IFRS is to normalize an unmistakable approach for financial accounting so that interested parties around the world can better comprehend the operations of the firm regardless of where it is found.

In tending to accounting for joint ventures, the IFRS wanted to wipe out irregularities in the reporting of "joint arrangements," which the IFRS characterizes as by the same token "joint operations" or "joint ventures," as per IFRS 11. International Accounting Standards (IAS) 31 merged joint operations and joint ventures, and IFRS 11 requires the utilization of the equity method and the nullification of the proportional consolidation method.

Features

• Proportional consolidation was a former accounting method under International Financial Reporting Standards (IFRS).
• Proportional consolidation thought about income, expenses, assets, and liabilities with respect to a firm's percentage of participation in a joint venture.
• On Jan. 1, 2013, the International Accounting Standards Board (IASB) annulled the utilization of proportional consolidation.
• The equity method, utilized under generally accepted accounting principles (GAAP), is an alternative accounting approach to proportional consolidation.
• Today both the IFRS and GAAP utilize the equity method.