Proportionate Consolidation Method
Andrea Marciana B. Diwa
June 11, 2012 - Monday
Joint venture is identified as a topic of study because of the massive rise in international joint ventures during the business globalization and because of the different joint venture accounting practices across countries. The increasing trend to produce financial statements which are free from errors and misstatements lead to the competitiveness of various firms when it comes to abiding with the proper disclosures set forth by the International Accounting Standard. These disclosures requirements are designed to guide different firms into coming up with a financial statements which are useful in the decision making process of users of financial information. Worldwide accounting practices for joint ventures vary between proportionate consolidation and equity method because countries differ both in their definition of what constitutes a joint venture and in their prescribed accounting treatment. The paper provides the first empirical comparison of the proportionate consolidation and equity methods of accounting for joint ventures which finds the evidence that venturer financial statements prepared using proportionate consolidation for joint venture interests provide better predictions of future profitability than do financial statements prepared using the equity method. This greater predictive ability suggests that proportionate consolidation may have more relevance than the equity method for market participants and users of financial information which are interested in predicting future performances and productivity of a company.
THE JOURNAL ARTICLE
Joint Venture has a varying definition across the globe which led to different interpretations and accounting treatments. A number of factors prompted the standard setting body to reconsider the joint ventures issue in the early 1990’s....