Page 26 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

Joint Ventures READING 14: INTERCORPORATE INVESTMENTS

MODULE 14.9: JOINT VENTURES

Both U.S. GAAP and IFRS require the equity method of accounting for joint ventures.

In rare circumstances, the proportionate consolidation method may be allowed under U.S. GAAP and IFRS.

Proportionate consolidation is similar to a business acquisition, except the investor (venturer) only reports the proportionate share of the
assets, liabilities, revenues, and expenses of the joint venture.

Since only the proportionate share is reported, no minority owners’ interest is necessary.

Recall Company P acquired 80% of Company S on January 1, 2010, for $8,000 cash?

Under proportionate consolidation:
• Company P’s current assets are $52,800 [$48,000 P current
assets − $8,000 cash paid + ($16,000 S current assets ×
80%)].

• Company P reports its 80% share of each of Company S’s
assets and liabilities.

No minority ownership interest is necessary. Just like a regular
consolidation, Company S’s equity is ignored.

Results in higher assets and liabilities, compared to the equity
method, but stockholders’ equity (or net assets) is the same.