Key Points
- IFRS 11 eliminated proportionate consolidation for joint ventures, requiring the equity method instead.
- Entities that previously used proportionate consolidation had to restate comparative periods on transition to IFRS 11 in 2013.
- Proportionate consolidation remains permitted under some local GAAPs, including French GAAP and certain Swiss frameworks.
- Switching from proportionate consolidation to the equity method typically reduces reported revenue and total assets while leaving net profit unchanged.
What is Proportionate Consolidation?
Under the old IAS 31.30, a venturer in a jointly controlled entity could choose between proportionate consolidation and the equity method. Proportionate consolidation meant including the venturer's share (say 50%) of each line item in the joint venture's financial statements directly in the venturer's own accounts. Half of the revenue, half of the trade receivables, half of the bank debt. The group balance sheet grew larger, and the income statement showed higher revenue, even though net profit was the same as under the equity method.
IFRS 11, effective for annual periods beginning on or after 1 January 2013, removed the choice. Joint ventures (as defined in IFRS 11.16) must now be accounted for using the equity method under IAS 28. Only joint operations (where the parties have rights to the assets and obligations for the liabilities directly) permit line-by-line recognition, and that is not the same mechanism as the old proportionate consolidation. For auditors working on a group audit, the distinction affects how the group engagement team scopes the joint venture's financial information under ISA 600.26(a): equity method investments are tested through the investor's records, not through full-scope or specified procedures at the joint venture level.
Worked example: Groupe Lefèvre S.A.
Client: Belgian holding company, FY2025, revenue EUR 185M, IFRS reporter. Lefèvre holds a 50% interest in NordLog Transports S.A.S., a French logistics joint venture with revenue of EUR 40M, total assets of EUR 52M, total liabilities of EUR 31M, and net profit of EUR 3.8M. The other 50% is held by a German transport group. Both parties share control through a unanimous-consent shareholders' agreement.
Step 1 — Classify the arrangement under IFRS 11
The shareholders' agreement requires unanimous consent for all operating and financial decisions. Neither party has rights to the assets or obligations for the liabilities of NordLog individually. NordLog operates through a separate legal vehicle with its own balance sheet. Under IFRS 11.B14–B16, this is a joint venture, not a joint operation.
Step 2 — Confirm proportionate consolidation is prohibited
Because NordLog is a joint venture under IFRS 11, Lefèvre must account for it using the equity method per IFRS 11.24 and IAS 28. Proportionate consolidation is not available. Had this been an engagement under French GAAP (CRC 99-02), Lefèvre could still elect proportionate consolidation for the consolidated financial statements.
Step 3 — Compare the balance sheet effect of both methods
Under the equity method, Lefèvre reports a single-line investment of approximately EUR 10.5M (50% of NordLog's net assets of EUR 21M, plus any goodwill or fair value adjustments). Under the former proportionate consolidation, Lefèvre would have added EUR 26M to total assets (50% of EUR 52M) and EUR 15.5M to total liabilities (50% of EUR 31M). The net balance sheet impact is the same EUR 10.5M, but reported total assets and total liabilities differ by EUR 15.5M.
Step 4 — Verify the income statement effect
Lefèvre's share of NordLog's profit is EUR 1.9M (50% of EUR 3.8M) under both methods. The equity method presents this as "Share of profit of joint ventures" on a single line. Proportionate consolidation would have added EUR 20M to revenue (50% of EUR 40M) and EUR 18.1M to expenses, producing the same EUR 1.9M net. Revenue under proportionate consolidation appears EUR 20M higher, which affects revenue-based covenants and ratios.
Conclusion: Lefèvre correctly applies the equity method to NordLog, producing an investment balance of EUR 10.5M and share of profit of EUR 1.9M.
Why it matters in practice
- Some practitioners still apply proportionate consolidation to joint ventures in IFRS consolidated financial statements, particularly when local GAAP statutory accounts use that method and the team carries the treatment across without adjustment. IFRS 11.24 is unambiguous: joint ventures require the equity method.
- Teams sometimes fail to distinguish between a joint venture and a joint operation when the arrangement uses a separate legal vehicle. IFRS 11.B14–B33 requires analysis of the legal form, contractual terms, and other facts and circumstances.
Proportionate consolidation vs. equity method
| Dimension | Proportionate consolidation (former IAS 31) | Equity method (IAS 28 / IFRS 11) |
|---|---|---|
| Balance sheet presentation | Venturer's share of each asset and liability added line by line | Single-line investment balance in non-current assets |
| Revenue effect | Includes the venturer's share of joint venture revenue | No revenue from the joint venture; share of profit shown below operating profit |
| Net profit impact | Same as equity method | Same as proportionate consolidation |
| IFRS availability | Prohibited for joint ventures since 1 January 2013 (IFRS 11) | Required for all joint ventures under IFRS 11.24 |
| Ratio impact | Higher total assets, higher revenue, lower return on assets, potentially different covenant calculations | Lower total assets, lower revenue, higher return on assets |
The distinction matters when a client transitions from a local GAAP that permits proportionate consolidation to IFRS. Revenue drops (sometimes materially) even though net profit stays flat. Debt covenants referencing revenue or total assets may breach on the transition date if they were calibrated to the proportionate consolidation figures. The auditor should review covenant definitions and flag any that reference metrics affected by the accounting method change, per ISA 570.16(a) if the breach creates a going concern uncertainty.
Related terms
Frequently asked questions
Is proportionate consolidation still allowed under any framework?
Yes. French GAAP (CRC 99-02) and some Swiss cantonal frameworks still permit proportionate consolidation for jointly controlled entities. Entities reporting under HGB in Germany may also encounter it in older group accounts. If the client files both IFRS consolidated accounts and local GAAP statutory accounts, the joint venture may appear differently in each set. IFRS 11.24 applies only to IFRS reporters.
What changed when IFRS 11 replaced IAS 31?
IFRS 11 removed the choice between proportionate consolidation and the equity method for joint ventures. It also introduced a stricter classification model: arrangements are either joint operations (with line-by-line recognition of the party's share of assets and liabilities) or joint ventures (equity method only). IAS 31 permitted proportionate consolidation for all jointly controlled entities regardless of structure.
Does proportionate consolidation affect audit materiality?
Indirectly. Under proportionate consolidation, the group's reported revenue and total assets are higher than under the equity method. If the auditor uses revenue or total assets as the materiality benchmark under ISA 320.A4, the benchmark base changes depending on which method applies. Confirming the correct accounting method before setting materiality avoids recalculation later in the engagement.