The term “proportionate consolidation,” means presenting an investor’s pro-rata share of a venture’s assets and liabilities in each applicable line item of the investor’s balance sheet, and pro-rata results of a venture’s operations in each applicable line item in its income statement. This presentation may be used in two situations, if certain conditions are met.
• Undivided interest
In this situation, the investor does not have an ownership interest in a legal entity but rather has an undivided ownership interest in assets, and is proportionately liable for each liability. In this case, the reporting entity is outside of the scope of equity method accounting (ASC 323
) and proportionate consolidation is appropriate, except as described in the following paragraph.
If the venture holds real estate assets subject to joint control, then the investment would be in the scope of ASC 323
due to the guidance in ASC 970-323-25-12
and proportionate presentation would be precluded. The presentation and disclosure requirements of ASC 323
In the utilities industry, there are unique considerations for undivided interests predicated on an SEC Staff Accounting Bulletin that is further discussed in UP 15
Also, as discussed in Chapter 3.02 of the AICPA Audit and Accounting Guide, Entities With Oil and Gas Producing Activities, ownership of oil and gas is usually through a mineral interest, which is an economic interest in underground minerals. Such an arrangement does not involve a separate legal entity, and each party holds an individual interest in the asset and is proportionately liable for any liabilities. As a result, these arrangements are accounted for using proportionate consolidation.
• Equity method in the construction and extractive industries
In this situation, the investor has an ownership interest in an unincorporated legal entity. An investor that holds a noncontrolling ownership interest in an unincorporated legal entity in the construction or extractive industries that qualifies for the equity method of accounting may elect proportionate consolidation in accordance with ASC 810-10-45-14
. This is the case even if another reporting entity consolidates the legal entity.
In determining whether a legal entity is an unincorporated entity, the reporting entity should consider the governance attributes and economic characteristics of the legal entity to determine whether it is more akin to a corporation or a partnership. For example, if the legal entity has governance attributes that are more representative of a corporation (e.g., a board of directors as opposed to a general partner or managing member), it generally would not be considered an unincorporated legal entity. For more information, see CG 3.5.4
To qualify as an extractive industry, activities of the investee must be limited to extraction of mineral resources, such as oil and gas exploration and production. A reporting entity with a noncontrolling investment in an unincorporated legal entity engaged in activities such as refining, marketing, or transporting extracted mineral resources would not qualify to elect proportionate consolidation. In that case, the presentation and disclosure requirements of ASC 323