Brief Definition
Proportionate consolidation is an accounting method used to report the financial results of a joint venture. Under this method, a company includes its share of the joint venture’s assets, liabilities, income, and expenses in its financial statements.
Further Explanation
Proportionate consolidation is an accounting method used to report the financial results of a joint venture. Under this method, a company includes its share of the joint venture’s assets, liabilities, income, and expenses in its financial statements. This approach reflects the economic reality that the company has joint control and shares in the risks and rewards of the venture.
Example:
Company A owns 50% of a joint venture with Company B. The joint venture has $1,000,000 in assets and $400,000 in liabilities. Using proportionate consolidation, Company A would report $500,000 (50% of $1,000,000) of the joint venture’s assets and $200,000 (50% of $400,000) of the joint venture’s liabilities on its balance sheet. Similarly, it would include 50% of the joint venture’s income and expenses in its income statement.