Proportional Consolidation under IFRS

Proportional consolidation is a method in which an investor combines its share of the assets, liabilities, income and expenses of a jointly controlled arrangement line by line with similar items in its own financial statements. Under the former standard, IAS 31 Interests in Joint Ventures, it could be used as an option for joint ventures. IFRS 11 Joint Arrangements, effective for periods beginning on or after 1 January 2013, removed this option.

How was proportional consolidation applied?

Under proportional consolidation, the assets, liabilities, income and expenses of the joint venture were consolidated in proportion to the investor's interest.

1. Share: For example, in a joint venture in which a company held a 40% interest, only the assets, liabilities, income and expenses corresponding to that 40% share were consolidated.

2. Consolidation procedure:

   • Assets and liabilities: the company's share was added to the balance sheet line items.

   • Income and expenses: the company's share was presented in the income statement.

   • Other venturers' shares: these were not included in the financial statements at all; only the company's share was reported.

Joint arrangements under IFRS 11

IFRS 11 classifies joint arrangements into two types and sets the accounting for each:

1. Joint operations: the parties have rights to the assets and obligations for the liabilities relating to the arrangement. Each party recognises its own assets, liabilities, income and expenses and its share of jointly held items. The result may resemble proportional consolidation, but what is recognised is the directly held rights and obligations, not a share.

2. Joint ventures: the parties have rights to the net assets of the arrangement. IFRS 11 requires joint ventures to be accounted for using the equity method under IAS 28; proportional consolidation is not permitted.

3. Control and significant influence: if the investor has control, it consolidates in full under IFRS 10; if it has only significant influence (an associate), it applies the equity method under IAS 28.

Example

For a joint venture in which a 40% interest is held, the former proportional consolidation brought in 40% of the assets, liabilities, income and expenses line by line. Under IFRS 11, the investment is presented as a single line in the balance sheet as an "investment accounted for using the equity method", and 40% of the joint venture's profit for the period is recognised as a single line in the income statement.

In summary:

• Proportional consolidation can no longer be used for joint ventures under IFRS.

• Joint ventures are accounted for using the equity method, and joint operations according to the rights and obligations held.

• Proportional presentation may still be seen in some local frameworks or in management reporting, but it is not applied to joint ventures in IFRS-compliant financial statements.