If Proportionate Consolidation method is not a provision of US GAAP, what does US GAAP require for join venture? Is it Equity Method or Normal consolidation method?
Depends on the proportion of the company owned and influence exerted. If its a 50:50 split, then I think under US GAAP you’d use the equity method
Most firms will try to use the equity method as it will improve their results based on the accounting conventions.
hmm…so that means there is a choice is using the method then is it? Also, just to make sure i am understanding the differences between the methods… 0-20% = cost/market method 20-50% = equity method (dependent on influence) over 50% = consolidation method since most joint ventures are usually 50-50…then i guess we’d use equity method? i hope my logic is correct here.
If it’s equal 50/50 then it’s Equity method. Reason is that neither party has absolute control over the other.
sparty419 Wrote: ------------------------------------------------------- > hmm…so that means there is a choice is using the > method then is it? > > Also, just to make sure i am understanding the > differences between the methods… > 0-20% = cost/market method > 20-50% = equity method (dependent on influence) > over 50% = consolidation method > > since most joint ventures are usually 50-50…then > i guess we’d use equity method? i hope my logic is > correct here. I would think you are correct. I have only read schweser and they didn’t really have much information on it. They did hint that most US firms use the equity method though (as they have the choice unlike those under IAS).
I think Proportionate Consolidation is only allowd under IAS and not GAAP.
equity unless one of the parties has control over the combined entity.
I think most of you guys are missing a crucial point here…somewhere in those notes…(I don’t have them open right now…or I would’ve given you a page number)…schweser clearly states…that even though earlier the percentage ranges were enough to decide whether to use cost, eqity, consolidation method…it is no longer so…they specify more than once…that these are mere guidelines…NOT specific rules… the focus has not changed on degree of control…which means…that if your case question says something like the company owns 25% …BUT they specify something about the acquirer company having SIGNIFICANT influence over the target company…then they would consolidat…even though they have less than 50%. will check on the page number and update soon…but that is from my memory of reading this stuff a few weeks ago… to answer your question sparty…if you come across a joint venture Qs on the D-day…look for hints that say whether or not the compan exerts significant influence - on managemnt decisions, dividend payout decisions etc…if YES - then you consolidate…if not…then use the Equity method…
update to my own post…it’s almost 1 on a weekend night …i’m in the UAE…but since i’m a geek …I just had to open my books and find that…or you know…I wouldn’t fall asleep!! … anyway…Schweser Book 2, Pg 133 …the entire section under U.S.GAAP, and Pg 134…the first paragraph on the page… both highlight what I just said above… haaaa…I can sleep in peace now… siighhh…when did I reach this stage in life??? …zzzzzzzzzz
Why would a company WANT to use the consolidation method if they dont have to??? It makes their balance sheet look like crap. Earnings are going to be the same as any other method (b/c of minority interest) but you have to take on all the assets and liabilities of the sub. Think about it – ROA = NI/TA, your TA goes up and ROA goes down. Interest coverage is lower and debt/equity is higher under consolidation. I guess maybe if you wanted to boost sales then you would use consolidation. Per the curriculum…Do you have control? yes? then consolidation. Do you have significant influence but no control? then equity method.