Intercorporate Investments: What is the treatment of equity accounts when doing proportional consolidation?
When accounting for an investment via proportionate consolidation, what is the treatment of the investee’s accounts on the balance sheet?
For example, let’s say that ParentCo is accounting for its 50% stake in ChildCo, which has Assets of $100, Liabilities of $80, and Equity of $20. From the CFAI text, we know that ChildCo’s Assets, Liabilities (and Revenues, Expenses) are proportionally consolidated with ParentCo. So, ParentCo would include its share of ChildCo’s Assets and Liabilities, which are $50 and $40, respectively.
Furthermore, we are told that proportionate consolidation does not affect the consolidating entity’s equity account (see solution to end-of-chapter question 23 for Reading 14 (Intercorporate Investments).
Now coming back to our scenario - how would ParentCo account for the $20 discrepancy between Assets and Liabilities if its Equity account is unchanged?
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