Proportionate consolidation is a method of accounting and reporting whereby a venturer’s share of each of the assets, liabilities, income and expenses of a jointly controlled entity is reported as separate line items in the venturer’s financial statements.
Proportionate consolidation method of accounting is to be followed except in the following cases:
- Investment is intended to be temporary because the investment is acquired and held exclusively with a view to its subsequent disposal in the near future. The term ‘Near Future’ is expressed in ASI – 8, explained above with AS – 21.
- Or joint venture operates under severe long-term restrictions, which significantly impair its ability to transfer funds to the venturers.
In both the above cases, investment of venturer in the share of the investee is treated as investment according to AS – 13.
A venturer should discontinue the use of the proportionate consolidation method from the date that:
- It ceases to have joint control in the joint venture but retains, either in whole or in part, its investment.
- The use of the proportionate consolidation method is no longer appropriate because the joint venture operates under severe long-term restrictions that significantly impair its ability to transfer funds to the venturers.
From the date of discontinuing the use of the proportionate consolidation method,
- If interest in entity is more than 50%, investments in such joint ventures should be accounted for in accordance with AS – 21, Consolidated Financial Statement.
- Joint ventures where interest is 20% or more but less than 51%, investments are to be accounted for in accordance with AS – 23, Accounting for Investment in Associates in Consolidated Financial Statement.
For all other cases investment in joint venture is treated as per AS – 13, Accounting for Investment. For this purpose, the carrying amount of the investment at the date on which joint venture relationship ceases to exist should be regarded as cost thereafter.
Following are the features of Proportionate Consolidation Method:
- Stress is given on substance over form i.e., more importance is given to the share of venturers in the profit or loss of the venture from the share of assets and liabilities rather than the nature and form of the joint venture.
- Venturer’s share of joint assets, liabilities, expenses and income are shown on the separate lines in the consolidated financial statement. all the items of expenses and income will also be classified line by line for each item. The whole basis of this provision is to bring transparency in the books of account. If there is any special clause for sharing of expenses, income or any other item that should be clearly disclosed in the consolidated financial statement.
- Most of the provisions of Proportionate Consolidation Method are similar to the provisions of AS 21.
- As far as possible the reporting date of the financial statements of jointly controlled entity and venturers should be same. If practically it is not possible to draw up the financial statements to such date and, accordingly, those financial statements are drawn up to different reporting dates, adjustments should be made in joint venturer’s books for the effects of significant transactions or other events that occur between the jointly controlled entity’s date and the date of the venturer’s financial statements. In any case, the difference between reporting dates should not be more than six months.
- Accounting policies followed in the preparation of the financial statements of the jointly controlled entity and venturer should be uniform for like transactions and other events in similar circumstances. If accounting policies followed by venturer and jointly controlled entity are not uniform, then adjustments should be made in the items of the venturer to bring it in line with the accounting policy of the joint venture.
- Any asset or liability should not be adjusted by another liability or asset. Similarly any income or expense cannot be adjusted with another expense or income. Such adjustment can be made only when legally it is allowed to adjust them and such items does lead to settlement of obligation or writing off of assets.
- For example, bills receivable cannot be adjusted with bills payable but if debtors includes ` 5,000 from Mr. A and creditors also have ` 3,000 to Mr. A, then ` 3,000 can be adjusted or deducted from both items i.e. debtors and creditors.
- On the date when interest in joint entity is acquired, if the interest of venturer in net assets of the entity is less than the cost of investment in joint entity, the difference will be recognized as goodwill in the consolidated financial statement and if net asset is more than cost of investment, then the difference is recognized as capital reserve.
- In case the carrying amount of investment is different then cost of investment, the carrying amount is taken for the purpose of the above calculation.
- An investor who don’t have joint control in the entity is like associate as discussed in AS – 23, therefore the treatment of losses will be similar to AS – 23. If investor’s share in loss of the joint entity is in excess of his interest in net asset, this excess loss will be recognized by the venturers. In future when entity starts reporting profits, investor’s share of profits will be provided to venturer till total amount is equivalent to absorbed losses.