Proportionate consolidation - Joint ventures with no significant influence. Assets/liabilities/income items of subsidiary are absorbed into parent as a percentage of ownership
Equity Method - Significant influence, no control. Investment recorded at cost and adjusted carrying amount for investor’s share of earnings, which are reported as income for the parent. Dividends/distributions are not reported as income but rather are treated as a return of capital and and simply reduce the carrying amount and increase cash.
Acquisition method - Control. Assets,liabilities,income items absorbed 100% into parent.
If this is correct, would the subsidiary report a net income and pay taxes on 100% of its net income and the parent report its share of income and also pay taxes on its share of income? This seems like a double taxation. So I would imagine that the subsidiary’s tax liability would be pro rated such that it only pays tax on its share of income. Can anyone confirm/correct?
For 2013 forward after “IFRS 9”, I think you are wrong, though I have been very confused by this. It is my understanding that proportionate consolidation is not used at all any more. I don’t think there can be a joint venture with no significant influence. So if the there is significant influence but not control (20% - 50% ownership), then the equity method is used. If there is significant influence (>50% ownership) then the acquisition method is use. What is unclear to me is if we will be tested on proportionate consolidation. There are some EOC questions in the book on it even though it is not in the book. I don’t know the answer to your tax question and would also like to know.
The control is shared in joint ventures. Although it is possible that you can have control but not influence but imo that would be an exception and not the rule.
True.
You also need to create a “Minority Interest” account if you own less than 100% of the subsidiary.
It would not be double taxation but it would be triple taxation because subsidiary, parent and parent’s shareholders will all be paying taxes on the same income which is generated by the subsidiary.
In my opinion, there can be two solutions. One is which you suggested that the subsidiary only pay taxes on its share of income and the second is that parent recognizes the income from subsidiary as a tax deductible item. However, I don’t know which method is used in tax practice.
You are right with regards to IFRS 9 (new rule). However, the official books cover both IFRS 39 (old rule) and IFRS 9 (new rule) so the CFAI can test us on either the Equity method or Proportionate consolidation.
Companies have time till 2015 to switch to IFRS 9. So CFAI would not discontinue testing it before 2015 at least.