The equity method and the proportional consolidation method are two types of accounting methods used when two or more companies are part of a joint venture. Which one is used depends on the way the companies' 澳洲幸运5官方开奖结果体彩网:balance sheets and 澳洲幸运5官方开奖结果体彩网:income statements report these partnerships.

Note that since 2013, for the most part, only the equity method is still in use.

Joint Ventures

A joint venture is a type of business agreement involving two or more parties that groups the available resources in a common undertaking. Joint ventures are commonly used to invest in foreign and 澳洲幸运5官方开奖结果体彩网:emerging market economies.

Each☂ party in a joint venture has a certain amount of control and responsibility for the costs associated with the venture, as well as for the sharing of profits or losses.

Joint ventures offer an expedient way for companies and individuals to pool knowledge, expertise, and resources to accomplish a potentially 澳洲幸运5官方开奖结果体彩网:lucrative deal while🦋 decreasing each 🍃party's exposure to risk.

꧂ The joint venture is an enterprise ꦐin and of itself, separated and set apart from any other business deals or interests in which the partnered companies are involved.

The Equity Method

The 澳洲幸运5官方开奖结果体彩网:equity method of accounting is used to assess th𒈔e profits earned by a firm's investments in a joint venture. The firm reports the income earned on its income statement. Under the equity method, the reported value is based on the size of the equity investment.

This equity method is commonly used when one company in a joint venture has a recognizably greater level of influen🤡ce or control over the venture than the other.

For example, if a firm holds more than 20% of another company's stock, the firm has significant control that it can use to exert influence over the other company.

Using the equity method, a firm's initial investment is recorded at cost and then, each quarter, adjustments are made based on the joint venture's performance.

For example, Company A buys 10,000 shares of Company B at $10 per share. Company A would record the initial investment cost of $100,000. Any profit or loss by the joint venture in the coming periods would result iജn adjustments being made to the⛎ investment.

The value reported by each company represents their relative share of the costs and assets.

If a firm comes to a point where it no longer maintains a significant level of control over the joint venture, the equity method can no longer be used. At that point, a new value is recorded in the company's 澳洲幸运5官方开奖结果体彩网:profit and loss records, determined on the basis of the current cost.

The Proportional Consolidation Method

The 澳洲幸运5官方开奖结果体彩网:proportional consolidation method of accounting records the assets and 澳洲幸运5官方开奖结果体彩网:liabilities of a joint venture on a company’s balance sheet in proportion to the percentag🦹e of participation a company maintains in the venture.

In calculating those assets and liabilities, the company lists all income and expenses from the joint venture and includes them on its ba🌳lance sheet and income statement.

For example, i♍f Company A has a 50% controlling interest in Company X, Company A would record the investment at 50% of the assets, liabilities, revenues, and expenses of Company X.

So if Company A has reve༺nues of $100 million and Company X has revenues of $40 million, Company A would havಞe in total $120 million.

Those favoring the proportional consolidation method argue that it provides a more accurate and detailed record because it breaks down hಌow well a joint venture performs.

This method allows each company to see the operational effectiveness of various steps in the joint venture process, including 澳洲幸运5官方开奖结果体彩网:production costs, shipping costs, and the 澳洲幸运5官方开奖结果体彩网:profit margin.

Accounting Rules

Under U.S. 澳洲幸运5官方开奖结果体彩网:generally accepteไd accounting principles (GAAP), a firm's interest in a joint venture is accounted for using the equity method.

Moreover, since 2013 the proportional method has largely been abandoned. In addressing accounting for joint ventures, the International Financial Reporting Sta🉐ndards (IFRS) rule🌳s sought 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.

澳洲幸运5官方开奖结果体彩网:Internati🦄onal Accounti🐻ng Standards (IAS) 31 merged joint operations and joint ventures, and IFRS 11 requires the use of the equity meth🎐od and ܫthe abolition of the proportional consolidation method.

Though the proportional consolidation method was previously accepted by the IFRS, it also allowed the use of the 澳洲幸运5官方开奖结果体彩网:equity method.

The Bottom Line

There are proponents for the use of each of the above accounting methods, and different 澳洲幸运5官方开奖结果体彩网:accounting standards organizations are split as t❀o which is the more appropriate practice.

Companies generally use the method that fits best w🗹ith their overall operations and existing accounting practices.

However, the 澳洲幸运5官方开奖结果体彩网:International Accওounting Stand✨ards Board (IASB) decided that it was no longer appropriate to use proportional consolidation, effective January 1, 2013.