Proportionate consolidation is a method of accounting for joint ventures, in which the venturers (the parties involved in the joint venture) recognize their share of the assets, liabilities, revenues, and expenses of the joint venture in proportion to their ownership interests. Under proportionate consolidation, the venturers do not recognize their share of the joint venture as a separate entity, but rather as part of their own financial statements.
The proportionate consolidation method is used when the venturers have joint control over the joint venture and are jointly and severally liable for its obligations. It is a more conservative method of accounting than the equity method, as it does not allow the venturers to recognize any gain or loss on the disposition of their ownership interests in the joint venture.
Here is an example of how proportionate consolidation would be applied:
Suppose Company A and Company B form a joint venture, with Company A holding a 60% ownership interest and Company B holding a 40% ownership interest. Under proportionate consolidation, both companies would recognize their share of the assets, liabilities, revenues, and expenses of the joint venture in proportion to their ownership interests.
For example, if the joint venture earned revenues of $100,000 in a given year, Company A would recognize $60,000 of revenue ($100,000 x 60%), and Company B would recognize $40,000 of revenue ($100,000 x 40%). Similarly, if the joint venture incurred expenses of $50,000 in a given year, Company A would recognize $30,000 of expense ($50,000 x 60%), and Company B would recognize $20,000 of expense ($50,000 x 40%).
Overall, proportionate consolidation is a useful method of accounting for joint ventures in situations where the venturers have joint control and are jointly and severally liable for the obligations of the joint venture. It allows the venturers to accurately reflect their economic interest in the joint venture and the related assets, liabilities, revenues, and expenses on their own financial statements. It is important to understand the specific requirements and considerations of proportionate consolidation in order to correctly apply it in practice.