Joint Ventures

Joint Ventures

Recall that a joint venture is an entity in which control is shared by two or more investors. Joint ventures are created in various legal, operating, and accounting forms and are often used to invest in foreign markets, special projects, or risky ventures. Both U.S. GAAP and IFRS require the equity method of accounting for joint ventures.

In rare circumstances, the proportionate consolidation method may be allowed under U.S. GAAP and IFRS. Proportionate consolidation is similar to a business acquisition, except the investor (venturer) only reports the proportionate share of the assets, liabilities, revenues, and expenses of the joint venture. Since only the proportionate share is reported, no minority owners’ interest is necessary.

Let’s return to our earlier acquisition example and refer back to Figure 7.5. Recall that Company P acquired 80% of Company S on January 1, 2023, for $8,000 cash. Figure 7.7 compares the proportionate consolidation method and the equity method on the postacquisition balance sheet of Company P.

Figure 7.7: Balance Sheet Comparison of Proportionate Consolidation and Equity

Methods

Under proportionate consolidation, Company P’s current assets are $52,800 [$48,000 P current assets − $8,000 cash paid + ($16,000 S current assets × 80%)].

With proportionate consolidation, Company P reports its 80% share of each of Company S’s assets and liabilities. No minority ownership interest is necessary. Just like a regular consolidation, Company S’s equity is ignored.

Notice that proportionate consolidation results in higher assets and liabilities, compared to the equity method, but stockholders’ equity (or net assets) is the same.

Figure 7.8: Income Statement Comparison of Proportionate Consolidation and Equity

Methods

With proportionate consolidation, Company P reports its 80% share of Company S’s revenues and expenses. Once again, no minority ownership interest is necessary.

Notice that proportionate consolidation results in higher revenues and expenses compared to the equity method, but net income is the same.