Could somebody kindly guide me with two clarifications below?
Consolidation method vs Proportinate Consolidation - what does this mean?
An investor company can influence the terms and timings of transactions with its associates; so profits from such transactions cannot be realized until confirmed through use or sale to third parties. Could somebody please elaborate what this statement clearly means? What is this “use or sale to third parties”?
consolidation means you bring all the assets & liabilities of the subsidiary onto the parent’s balance sheet, as well as revenues & expenses. proportionate consolidation is hence “proportionate” so you are only bringing on a % of the subsidiary that you own. Third party means you sell the product to a real customer (the 3rd party). Whereas if you the parent company sell something to your associate or affiliated company or subsidiary, that’s not a 3rd party, thats just selling shit to your relatives so should not be counted as a sale.
As Proportionate means percentage share, the parent only reports the percentage owned of the subsidiary whereas in Consolidation the whole amount (assets, liabilities, revenues & expenses), probably the fair value at acquisition of subsidiary, is added to the book value of the parent and reported. For ‘actual values to be reflected’ unless the goods are sold to the 3rd party, income is not realized. You see if it could be realized then manipulating the income would have been so easier for parent companies by simply selling the goods to subsidiaries I think…