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What Is Proportionate Consolidation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 November 2016
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    Conjecture Corporation
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Proportionate consolidation is a business and accounting strategy that allows for identifying the degree or amount of assets that business partners place into a common joint business venture. Typically, the idea is to consolidate those assets and liabilities in a manner that is balanced with the degree of support that each partner brings to the venture. The actual process calls for breaking down costs and profits into specific categories that can then be related back to the investments made by each partner, with each category balanced in proportion to the input of resources.

As an accounting approach, proportionate consolidation helps business partners to accurately account for the resources that are invested in various joint ventures. This includes specific entries made within the accounting records that firmly connect those entries with the joint ventures, and show up as line items on income statements and balance sheets. Doing so makes it easier to track progress with the investment made in the venture and assess if remaining a part of that project is in the best interests of each individual partner.

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While proportionate consolidation does allow for the accounting of the use of resources to invest in some sort of venture, the process also helps to provide the framework for identifying and realizing any benefits derived from the activity. Profits or reimbursements are in like manner identified in the accounting records in a way that relates those receipts to a specific business venture, and reflects those proceeds on the income statement and balance sheet of the business partner. When generally accepted accounting principles are used to manage the task of proportionate consolidation, the end result is a very clear history of what resources were invested, when those investments took place, and the particulars of any rewards or profits that have been generated as a direct result of those investments.

One of the benefits of a proportionate consolidation approach is that investors can easily monitor the returns generated from that portion of their assets devoted to the joint venture. Doing so makes it easier to see if the anticipated returns are being received within a reasonable time frame, and if there is justification for continuing to be involved in the partnership, possibly even choosing to increase the amount of resources devoted to that venture. Alternatively, monitoring the level of returns as they relate to the investment can also make it easier to determine if the investor should begin to withdraw from a failing venture before additional losses are incurred.

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