What Is Proportionate Consolidation?

Proportionate Consolidation is the opposite of full consolidation. The assets, liabilities, income and expenses of the invested enterprise shall be incorporated into the reporting procedures of the financial statements of the investing enterprise according to the equity investment proportion of the investing enterprise in the invested enterprise.

Proportional consolidation

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Proportionate Consolidation is the opposite of full consolidation. The assets, liabilities, income and expenses of the invested enterprise shall be incorporated into the reporting procedures of the financial statements of the investing enterprise according to the equity investment proportion of the investing enterprise in the invested enterprise.

Chinese name

Proportional consolidation

Foreign name

no

Content

Parent company theory, entity theory

Subject

economics

Merger theory mainly includes parent company theory, entity theory and ownership theory. Different consolidation theories reflect people's different positions and views on a series of issues such as what kind of information should be provided in the consolidated statements, and in order to provide information, etc. In practice, they are further reflected in the determination of the scope of consolidation and the choice of specific consolidation methods. the same. Parent company theory emphasizes business

Significance in joint venture financial reports

First, the popularity of joint ventures has made the proportional consolidation method no longer an optional method. Modern companies have established joint ventures with other companies (especially foreign companies) for reasons such as diversifying investment risks, launching new businesses, acquiring new technologies, entering new markets, etc. This also provides an objective external environment for the application of the proportional consolidation method.

Second, for joint venture interests

The specific approach is : income and expenses are merged into the income statement of the investment company according to the proportion of equity investment, and investment income is correspondingly offset by the combined income and expenses; assets and liabilities are also merged into the balance sheet of the investment enterprise according to the proportion of equity investment , Long-term equity investments are offset by corresponding assets and liabilities. Under this procedure,

The 1979 American Institute of Certified Public Accountants discussion report entitled "Joint Accounting for Joint Ventures" suggested that, for joint ventures that are not under joint control, because their liabilities can be divided rather than consolidated, the proportional consolidation method should be adopted. Joint ventures that are not under joint control mainly refer to the proportional consolidation method. Joint ventures that are not under joint control mainly refer to non-company chemical joint ventures that use partnerships and do not distribute equity. According to this proposal, along with certain special industries such as oil and gas industry joint ventures, the United States often adopts the proportional merger method.

Introduction

According to the provisions of Article 5, Section 10 of the General Rules of the "Accounting System of Joint Stock Companies-Accounting Subjects and Accounting Statements" issued by the Ministry of Finance in 1998: When compiling consolidated accounting statements, companies should incorporate joint ventures, and The merger method combines assets, liabilities, income, expenses and profits of the joint venture. In the 1998 annual reports of listed companies, companies such as Postcom Equipment (600680) have begun to implement proportionally consolidated accounting statements. Investors have questioned this because no detailed disclosure of this matter was made in the notes to their accounting statements. From this we think that because the "Interim Provisions on Consolidated Accounting Statements" issued by the Ministry of Finance in 1995 did not include joint ventures in the consolidation scope of consolidated accounting statements, and the "Accounting System of Joint Stock Companies-Accounting Subjects and Accounting Statements" did not Proportionally consolidated accounting statements provide detailed explanations and regulations. Then, what rules does an enterprise follow when operating proportionally consolidated accounting statements? If the company does not make detailed disclosure in the notes to the accounting statements, the users of the statements will not know. So, what issues should investors pay attention to when reading the consolidated financial statements? What information should companies provide in detail? What should the policy designator make? This has become a practice-first and theory-back problem in China's accounting. Under the current circumstances, users of the statements, especially investors, should pay special attention to relevant issues when reading consolidated accounting statements to prevent falling into traps.

One trap-merge or not

In concrete

From the current accounting practices and practices in various countries, the "survival space" of the proportional consolidation method is very limited, and its scope of application is limited to the consolidation of statements by joint venturers to joint ventures (jointly controlled entities). China's "Accounting Standards for Business Enterprises-Investment" only requires the equity method in the accounting standards for consolidated statements. It has not required the use of the proportional consolidation method. The author believes that the proportional consolidation method is of great significance not only for the financial reports of jointly controlled entities, but also for the financial reports of other types of equity investments (control or significant impact).

The nature of this merger method

From the perspective of consolidation theory of financial statements, there are three main types of consolidation theory: parent company theory, entity theory and ownership theory. Different consolidation theories reflect people's different positions and views on a series of issues such as what kind of information should be provided in the consolidated statements, and in order to provide information, etc. In practice, it is reflected in the determination of the scope of the consolidation and the choice of the specific consolidation method. the same. The parent company theory emphasizes the statutory holding relationship existing in an enterprise group, the entity theory emphasizes the economic entity constituted by each member enterprise of the enterprise group, and the ownership theory emphasizes that the company preparing the consolidated statement has a significant impact on the economic activities and financial decisions of another enterprise Ownership. It is generally believed that the full merger method is derived from the parent company theory or the entity theory, and the proportional merger method is derived from the ownership theory. This shows that the proportional consolidation method and the full consolidation method have the same theoretical position, and both can be used as the method of statement consolidation alone. The reason why this is emphasized is that, due to the influence of the current accounting, people are prone to produce the proportional consolidation method, which is only applicable to a narrow understanding of the consolidation of statements of jointly controlled entities, which is extremely difficult to fully understand and actively apply the unique advantages of the proportional consolidation method.

The Significance of Proportional Consolidation Method in the Financial Report of Joint Venture Equity

First, the popularity of joint ventures has made the proportional consolidation method no longer an optional method. Modern companies have established joint ventures with other companies (especially foreign companies) for reasons such as diversifying investment risks, launching new businesses, acquiring new technologies, and entering new markets. This also provides an objective external environment for the application of the proportional consolidation method.

Second, the proportion of the joint venture's financial report on the financial report of the joint venture can better reflect the actual and economic realities of the joint venture's equity in the joint venture. The joint venturer determines the joint control of the real economic activities of the joint venture through the provisions of the contract, and controls its future economic benefits through its proportion in the assets and liabilities of the joint venture. The proportional consolidation method can be used to reflect the joint venture's share of jointly controlled assets and joint burdened liabilities in the consolidated balance sheet, and can reflect the joint venture's share of the joint venture's income and expenses in the consolidated profit and loss account. Relevant decision makers provide more useful information. If the equity method is only used to calculate the equity of the joint venture, the cost of providing information is reduced, but the essential difference between the two types of equity investment, "joint control" and "significant impact", is ignored, and the usefulness of financial reporting is more importantly limited .

Significance of Proportional Merger Method in Important Equity Investment

In important equity investments, the application of the proportional merger method can change the shortcomings of the current full merger method:

First, the full merger method assumes majority ownership or acquisition of control as the prerequisite for the merger, which brings two problems: the subjective definition of the scope of the merger is large; limited mergers, and the result is a merger that is considered to meet the merger conditions Financial statements are more useful than pure parent company statements. In fact, if a company does not meet the current merger conditions, the merger information is also useful, but the current full merger method leaves it aside.

Second, when the ownership ratio is less than 100%, the full merger method exaggerates the assets and liabilities of the investment enterprise when it is merged; when it is not merged (when the merger conditions are not met), it also masks the assets and liabilities of the investment enterprise.

Third, it is not conducive to shareholders' investment decision analysis. The full consolidation method exaggerates the liabilities when the merger conditions are met, and conceals the liabilities when the merger conditions are not met, and its financial information is seriously deficient. Because modern investment theory shows that the amount of a company's liabilities affects both the company's earnings per share and the return on net assets, the substitution of debt for equity increases the company's beta.

Investment decisions that serve shareholders are one of the main motivations for preparing consolidated statements. From this point of view, the proportional consolidation method should be applied to all important equity investment reports, and it has obvious advantages over the full consolidation method.

It should be pointed out that, when the proportional consolidation method is applied to acquiring control of equity investments, the consolidated statement will understate the assets and debts that the investment company controls, which is an information flaw in evaluating the performance of management. In addition, in the investment decision analysis of shareholders, the asset amount of the statement is required to be equal to the fair value or the present value as much as possible, and the current practice dominated by the historical cost model is insufficient. This will affect the advantages of the proportional consolidation method in the shareholder investment decision. , Which is not conducive to its application in other equity investments (control and significant impact). But this does not negate the inherent advantages and future value of the proportional merger method.