What is the Proportionate Consolidation Method and how does it work? Thoroughly understanding this process will not only help you maximise on its accounting precision but also on the certain benefits and value it may add to your business. Read on to learn more.
An accounting method that includes income, expenses, assets and liabilities as items in proportion to the company or firm’s percentage of participation in the business venture, Proportionate Consolidation is used in accounting for joint ventures.
It was originally favoured by the International Financial Reporting Standards (IFRS) in their accounting standards but has been recently replaced by the Equity Method. Proportionate consolidation is favoured by those who maintain that the said accounting method allows for more detailed information, as it breaks joint venture interest performance down to component parts. On the other hand, the Equity Method is favoured because of its simpler and more straightforward accounting approach on outside investments.
Commencing the proportionate consolidation process requires that you:
- Collect sufficient and relevant reported financial data, with full—not proportional—amounts
- Post standardising entries wherever applicable
- Conduct currency translation wherever applicable
The proportionate consolidation process includes and requires the execution of the following process flow:
- Data monitor tasks
- Consolidation monitor and other consolidation functions tasks
The Customisation phase of the execution flow requires you to:
- Determine and specify that the accounting technique to be used is Proportionate Consolidation
- Define all methods to be used
- Assign a method with Proportionate/Proportional as accounting technique
- Create Apportionment as task, and also create task category of the same name
- Assign Apportionment task as task group for data processing in the data monitor
- Set a currency translation method
- Commence the interunit elimination process
- Choose between minimum apportionment or product apportionment
Determine and specify that the accounting technique to be used is Proportionate Consolidation
In commencing accounting using the proportionate consolidation process, you first need to specify that proportionate/proportional consolidation is the accounting technique to be employed.
This flow is realised by observing the following: Proceed to Consolidations Functions, then Automatic Posting, then Consolidation of Investments, and then Determine System Utilisation Consolidation of Investments (C/I). Note that this flow must be followed and done regardless whether or not Proportionate Consolidation is the only accounting technique used in investments consolidation.
Define all methods to be used
The second step requires you to define each one and then all of the methods for proportionate consolidation by observing this flow of commands: Consolidation of Investments then Methods then Define Methods. Again, this command series must be done regardless whether or not Proportionate Consolidation is the only accounting technique used in this specific investments consolidation process.
Assign a method with Proportionate/Proportional as accounting technique
Third, in the sequence flow, Consolidation of Investments, then Methods, then Assign Methods, you will need to assign a method with Proportional/Proportionate (standing for Proportionate Consolidation, of course) as accounting technique to all involved—and thus, relevant—consolidation units that are to be subjected to proportionate consolidation. Do not forget to enter any percentage rate—any rate between zero and 100—as the proportion percentage.
Note that in the consolidation group hierarchy, the same inheritance rules apply and need to be observed. Also, when changing the proportion (proportion percentage) in a period subsequent to the first consolidation, you will need to then assign said proportion change to a specific activity of that period, too. Remember: only a single proportion change is possible for every consolidation period.
Create Apportionment as task, and also create task category of the same name
Fourth, in creating Apportionment as task and then as task category, observe the following command series flow:
In step: Data, then Automatic Posting, then Apportionment: Define Task where you create Apportionment as task, and then upon said task creation, assign Apportionment also as task category.
Assign Apportionment task as task group for data processing in the data monitor
Fifth, you need to assign Apportionment as task and then as task group to undergo data processing via the data monitor. You effect this by observing the following command series flow:
In step: Data, then Data Monitor, then Define Task Group where you now assign Apportionment as task and then Apportionment as task group for the data monitor, commencing the data processing activity.
Bear in mind that in using consolidation of events, you might need to enter select items for the minority interest. For the specifics, confirm and engage the services of a trusted accountant with a proven expertise in the said process.
Set a currency translation method
Sixth, you need to set a currency translation method since Proportionate Consolidation uses the rounding logic of the function: currency translation. The currency translation method you assign will come with rounding rules which will facilitate the proportional consolidation of all relevant consolidation units.
Note that this must still be observed and done even if a consolidation unit or all of the consolidation units do not require currency translation (this happens when local currency = group currency, or the two are the same) but you want to still employ the rounding function.
Commence the interunit elimination process
Seventh, initiate the interunit elimination process. Remember that this process involves proportionally consolidated unit being eliminated against a fully consolidated unit through the purchase method. After said elimination, a portion of the eliminated amount—the third-party share amount in the proportionally consolidated unit—should undergo reclassification to a separate financial statement item—third parties—from the original, fully consolidated unit.
Defining said reclassifications for each item to undergo elimination necessitates the step: Interunit Elimination then Define Methods.
Choose between minimum apportionment or product apportionment
Ninth, and finally completing the Customisation phase, you need to identify which procedure to use: Minimum Apportionment or Product Apportionment. This is of course when you eliminate two proportionally consolidated units and determine the share to be eliminated.
This process requires the following command execution for setting: Master Data then Define Dimensions.
Again, if unclear about the specifics, never hesitate to consult and engage the services of your trusted accountant.
Data monitor tasks
After the Customisation phase, and after you have completed recording the reported financial data with their accompanying full amounts and then posting standardised entries, followed by currency translation (when necessary), you now proceed by executing the Task for Apportioning Reported Data and Standardising Entries.
The said function is utilised to valuate your reported financial data and standardised entries. The proportionate values are then inputted to the totals database, making them available for other and further consolidation functions.
Consolidation monitor and other consolidation functions tasks
Finally, you execute relevant tasks necessary to your Proportionate Consolidation process, including:
- Interunit elimination—includes elimination of payables and receivables, revenue and expense(s), and investment income
- Elimination of profit/loss inventory
- Investments consolidation
Your accountant will guide you through the entire process, if not lead you to completing all said processes.
Upon successfully doing all above processes, your accounting system will then carry out all consolidation tasks all the while taking into account all relevant and necessary proportion records of all proportionally consolidated units.
Remember that commencing and then finally successfully completing the Proportionate Consolidation process doesn’t require you to go through all these computational complexities alone. Your trusted accountant will be able to help you every step of the way, if not taking the lead and guiding you all the way until you have all the results you need.