Key Points
- IFRS 11 eliminated proportionate consolidation (PC) for joint ventures. The equity method is now the only option.
- Entities that previously used PC had to restate comparative periods on transition in 2013.
- PC remains permitted under some local GAAPs, including French GAAP (CRC 99-02) and certain Swiss frameworks.
- Switching from PC to the equity method reduces reported revenue and total assets but leaves net profit unchanged.
Where you'll encounter it
Every busy season, someone on the team pulls in a joint venture's revenue line by line into the group trial balance because "that's how the local GAAP file does it." The consolidation pack ties, the numbers look right, and nobody flags it until review. That's proportionate consolidation (PC) applied under IFRS, and it hasn't been allowed since 2013.
Under the old IAS 31.30 , a venturer in a jointly controlled entity could choose between PC and the equity method. PC meant including the venturer's share (say 50%) of each line item in the JV'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 use the equity method under IAS 28 . Only joint operations (where parties have rights to the assets and obligations for the liabilities directly) permit line-by-line recognition, and that isn't the same mechanism as the old PC. For auditors working on a group audit, this affects how the group engagement team scopes the JV'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 JV 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 JV 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 NordLog's liabilities 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 PC is prohibited
Because NordLog is a joint venture under IFRS 11 , Lefèvre must use the equity method per IFRS 11.24 and IAS 28 . PC is not available. Had this been an engagement under French GAAP (CRC 99-02), Lefèvre could still elect PC for the consolidated financial statements.
Step 3. Compare the balance sheet effect
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 PC, 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. PC 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 PC appears EUR 20M higher, which affects revenue-based covenants and ratios.
Why it matters in practice
- Some practitioners still apply PC 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. It's a SALY problem: nobody questions what rolled forward from last year. 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, the arrangement's other facts and circumstances, and whether the parties have direct rights to assets.
PC vs. equity method
| Dimension | PC (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 JV revenue | No revenue from the JV; share of profit shown below operating profit |
| Net profit impact | Same as equity method | Same as PC |
| 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 |
At firms like ours, this distinction matters most when a client transitions from a local GAAP that permits PC 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 PC figures. It's one of those areas where the accounting change is mechanical but the commercial fallout catches everyone off guard. The auditor should review covenant definitions and flag any that reference metrics affected by the method change, per ISA 570.16 (a) if the breach creates a going concern uncertainty.
Related terms
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Frequently asked questions
Is proportionate consolidation still allowed under any framework?
Yes. French GAAP (CRC 99-02) and some Swiss cantonal frameworks still permit PC 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 JV 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 PC 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 had permitted PC for all jointly controlled entities regardless of structure.
Does PC affect audit materiality?
Indirectly. Under PC, 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.