What Is Proportional Consolidation?
Proportional consolidation was a former method of accounting for joint ventures, abolished by the International Financial Reporting Standards (IFRS) Foundation as of January 1, 2013. It was a method of including income, expense, assets, and liabilities in proportion to a firm's percentage of participation in a joint venture. The proportional consolidation method was previously accepted by IFRS accounting standards, though it also allowed use of the equity method. Under U.S. generally accepted accounting principles (GAAP), a firm's interest in a joint venture is accounted for using the equity method.
Proportional Consolidation Explained
Proponents of proportional consolidation argued that this method provided more detailed information, since it broke out the performance of the joint venture interest into its component parts. The equity method was favored by GAAP, which believed that it is a simpler and more straightforward approach of accounting for outside investments. The IFRS eventually came around to this view, and now IFRS and GAAP are unified in using the equity method for accounting for interests in joint ventures.
Part of the overall mission of the IFRS is to standardize a clear approach for financial accounting so that interested parties around the world can better understand the operations of the firm no matter where it is located. In addressing accounting for joint ventures, the IFRS wanted to eliminate inconsistencies in the reporting of "joint arrangements," which the IFRS classifies as either "joint operations" or "joint ventures," in accordance with IFRS 11. International Accounting Standards (IAS) 31 merged joint operations and joint ventures, and IFRS 11 requires the use of the equity method and abolition of the proportional consolidation method.