Proportionate Consolidation vs Acquisition

[quiteawesome]

Hi can someone help with this?
What is the difference between Proportionate Consolidation and Acquisition (consolidation) methods?
On the balance sheet it seems like both take full assets of the subsidiary with a minority interest line. And on the income statement both take full revenue and expense with a minority interest line.
Also a related question is when calculating return on equity (ROE) under the Acquisition (consolidation) method, do we consider equity excluding the minority interest or is it included?

 

[data storm]

No, proportionate consolidation takes only it’s acquired share for instance “60% of assets, liabilities, revenue, etc” except for the equity it is higher for business consolidation method with the amount of the minority interest added in the balance sheet.
for income statement both will produce the same net income, but business consolidation method will exhibit higher revenues and expenses.
no minority interest is reconginzed in the proportionate consolidation method.

 

[quiteawesome]

Thanks Data Storm.
Would Proportionate Consol method then be the same as the treatment for the Joint Operation method?

 

[data storm]

you’re welcome,
Both IFRS and US. Gaap require equity method for joint venture acqusition, but under certain circumstances you may use it as previously explained.

 

[Flashback]

Well. Proportionate consolidation may be only applied on joint ventures which exactly means that each venturer consolidate exact 50 % its share in sub, no more no less. Thus, 60 % share in sub cannot be consolidated via PC method. Acquisition method applies in such case unless subject doesn’t have control in fact of holding 60 % of shares or other severe long-term restrictions limit parent to control the subsidiary.

 

[data storm]

Flashback wrote:
Well. Proportionate consolidation may be only applied on joint ventures which exactly means that each venturer consolidate exact 50 % its share in sub, no more no less. Thus, 60 % share in sub cannot be consolidated via PC method. Acquisition method applies in such case unless subject doesn’t have control in fact of holding 60 % of shares or other severe long-term restrictions limit parent to control the subsidiary.

Thanks flashback, you are always helpful
May be i stated it like this because the clarification example in Schweser doesn’t shed line on the exact ownership figure, albeit you’re totally right.

 

[Flashback]

Just remember that PC applies on joint ventures 50:50 and only in rare cases. Otherwise equity method is used at JVC. If share is 50 % +1 vote(share) and above, acquisition method should be used. The only exemption may be in cases when parent does not have control sub.
1 example of lose control under sub may be unification after the revolutionaries (communists or other) came to power in certrain country where sub had been established. In this case, under IFRS, it is considered that parent has no longer control and is no longer obligated consolidate this sub.
Another example may be contractual or other obligation which gives the extra voting power to minority sharholders rather than majority. It may also be the case under some legislatives in various countries.

 

[quiteawesome]

Thanks guys!
Just a clarifying question. Does Acquisition method and Consolidation method mean the same thing? In this case just Consolidation and not Proportionate Consolidation

 

[Flashback]

Correct. Aquisition method means consolidation of FS with minority interest shown if parent is not 100 % owner but has full control (technically over 50 % + 1 share in sub) where Aquisition method is just the name of method and consolidation is technique of financial reporting.

 

[quiteawesome]

Nice thanks a lot!
Anyone have quick comments on how Consolidation method differs from the Pooling of Interests method?

 

[defacto]

God I’m glad I got through this stuff!

 

[Jsnazz]

quiteawesome wrote:
Nice thanks a lot!
Anyone have quick comments on how Consolidation method differs from the Pooling of Interests method?

I’m really bad at pooling, but if I recall correclty everything is taken at book values. There is no adjustment to faire value, so it’s based off old data. I think, that equity is lower under this because lower assets and liab…but I’m not 100%. It’s also no longer allowed, and stopped around 2001 if I recall correctly.