What is the Difference Between Proportionate Consolidation and Equity Method?
🆚 Go to Comparative Table 🆚The equity method and proportional consolidation method are two types of accounting methods used when two companies are part of a joint venture or when an investor has significant influence over the investee. The main differences between the two methods are:
- Ownership: Equity accounting is used when the investor has significant influence over the subsidiary, while proportional consolidation is used when the investor has control over the subsidiary. Equity accounting is generally employed when the investor owns between 20% and 50% of the investee, while proportional consolidation is used when the investor owns more than 50% of the investee.
- Control: Equity accounting is used when the investor has significant influence over the investee but not control, while proportional consolidation is used when the investor has control over the investee.
- Financial Statement Presentation: Under the equity method, the investor's financial statements reflect its share of the investee's income or loss, while proportional consolidation combines the financial statements of the investor and subsidiary as if they were a single entity.
- Adjustments: In proportional consolidation, consolidation adjustments are made to eliminate intercompany transactions and balances, while in equity accounting, these adjustments are not made.
- Complexity: Equity accounting is more straightforward than proportional consolidation, as it only reports the investor's share of the investee's profits or losses. Proportional consolidation is more complex, as it involves combining the financial statements of the investor and subsidiary.
In summary, the choice between the equity method and proportional consolidation method depends on the level of control the investing company has over the investee and the desired level of detail in the financial statements. While proportional consolidation provides a more accurate representation of the financial position, the equity method is simpler and less time-consuming.
Comparative Table: Proportionate Consolidation vs Equity Method
The key differences between the proportionate consolidation and equity methods are summarized in the following table:
| Aspect | Proportionate Consolidation | Equity Method |
|---|---|---|
| Ownership | Generally between 20% and 50% | Generally between 20% and 50% |
| Financial Statement Presentation | Investor's financial statements reflect a proportionate share of the investee's revenues, expenses, assets, and liabilities | Investor's financial statements reflect its share of the investee's income or loss |
| Investment Value | Adjusted periodically to reflect the investor's share of the investee's undistributed earnings or losses | Initial investment recorded at cost, with any changes in ownership interest accounted for |
| Disclosure | Provides a more complex and accurate representation of the investor's financial position | Provides a more straightforward representation of the investor's financial position |
Both methods are used to account for joint ventures and investments in other companies. The choice between the two methods depends on the investor's level of control over the investee's operations and the specific circumstances of the investment.
- Debt Ratio vs Debt to Equity Ratio
- Balance Sheet vs Consolidated Balance Sheet
- Debt vs Equity
- Combined vs Consolidated Financial Statements
- Liability vs Equity
- Equity vs Capital
- Cost of Capital vs Cost of Equity
- Equity vs Debt Financing
- Equity vs Assets
- Equity vs Equality
- Equity vs Shares
- Cost of Equity vs Cost of Debt
- Commodity vs Equity
- Derivatives vs Equity
- Equity vs Debt Securities
- Cost of Equity vs Return on Equity
- Common Law vs Equity
- Dividends vs Earnings Per Share
- Equity vs Security