Proportional Consolidation Method

Proportionate consolidation method is used to account for jointly-controlled arrangements by the controlling company under IFRS.

If Company A has a jointly-controlled interest in Company J and it accounts for the investment using proportionate consolidation it will add its proportionate share of the assets and liabilities of Company J to its own total assets and liabilities respectively; and its share of Company J's revenues and expenses to its revenues and expenses.

In addition to proportionate consolidation, IFRS allows equity method to account for jointly-controlled arrangement. US GAAP on the other hand does not allow proportionate consolidation method except in few rare situations.

Example

Company A controls 50% of Company J. Company A's revenues are $200 million while revenues of Company J are $80 million. Company A's total assets are $1,000 million, its liabilities are $600 million and its shareholders' equity is $400 million while Company J's total assets are $600 million, total liabilities are $450 million and its shareholders' equity is $150 million.

Revenues reported on the income statement prepared under the proportionate consolidation would equal $240 million ($200 million revenues of Company A plus 50% of Company J revenues of $80 million).

Total assets reported on the balance sheet prepared under the proportionate consolidation method would be $1,300 million ($1,000 million assets of Company A plus 50% of Company J's assets of $600 million). Similarly, total proportionately-consolidated liabilities would be $825 million ($600 million assets plus 50% of $450 million) and consolidated total equity is $475 million (Company A's total equity of $400 million plus 50% of Company J's equity of $150 million).

by Obaidullah Jan, ACA, CFA and last modified on

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