Proportional consolidation was a former accounting method under International Financial Reporting Standards (IFRS). On Jan. 1, 2013, the International Accounting Standards Board (IASB) abolished the use of proportional consolidation. Today both the IFRS and GAAP use the equity method.

The proportional consolidation method of accounting records the assets and liabilities of a joint venture on a company’s balance sheet in proportion to the percentage of participation a company maintains in the venture.

The consolidation method works by reporting the subsidiary’s balances in a combined statement along with the parent company’s balances, hence “consolidated”. Under the consolidation method, a parent company combines its own revenue with 100% of the revenue of the subsidiary.

An example of a jointly controlled operation is when two or more venturers combine their operations, resources and expertise in order to manufacture, market and distribute, jointly, a particular product, such as an aircraft. Different parts of the manufacturing process are carried out by each of the venturers.

Types of Joint Ventures

• Project Joint Venture. This is the most common form of joint venture.
• Functional Joint Venture.
• Vertical Joint Venture.
• Horizontal Joint Venture.

The investor records their share of the investee’s earnings as revenue from investment on the income statement. For example, if a firm owns 25% of a company with a $1 million net income, the firm reports earnings from its investment of $250,000 under the equity method.

IFRS 10 defines ‘relevant activities’ as those activities of the investee that significantly affect the investee’s returns (IFRS 10 Appendix A).

At the end of the year, a consolidation working paper eliminates intercompany transactions between parent and subsidiary. As of 2004, the acquisition method is the only allowable method that can be used to prepare consolidated financial statements for companies that combined after 2004.

I have described the consolidation procedures and their 3-step process in my previous article with the summary of IFRS 10 Consolidated financial statements, but let me repeat it here and follow these steps: Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with those of its subsidiaries;

Proportionate consolidation – A method of accounting whereby a venturer’s share of each of the assets, liabilities, revenue and expenses of a jointly controlled entity is combined line by line with similar items in the venturer’s financial statements or reported as separate line items in the venturer’s financial statements.

IFRS 10 is a new standard which supersedes IAS 27 Consolidated and Separate Financial Statements (“IAS 27”) and SIC-12 Consolidation – Special Purpose Entities (“SIC- 12”). The primary goal behind the new standard was to come up with a single model for control which could be applied to all entities.

The new control model under IFRS 10 is based on the existence of three elements of control. When all of these three elements of control are present then an investor is considered to control an investee and consolidation is required.