Proportionate Consolidation and Financial Analysis

Two factors traditionally considered when determining the conditions for consolidating the financial statements of corporations owning the stock of other corporations are: 1. percentage of ownership interests, and 2. presence or absence of control. The present analysis offers a workable, useful alternative to specific percentages of ownership and to specific amounts of controls. It is shown that the financial statements of corporations consolidated on a proportionate basis provide financial information useful to financial analysts. The benefits of proportionate consolidation include: 1. It eliminates an arbitrary boundary between investments that are consolidated and those that are not. 2. When an investor owns less than 100% of a consolidated subsidiary, only a proportionate amount of the debt appears on the consolidated balance sheet rather than 100% of the debt. While theoretically all common stock investments result in proportionate consolidation, if the common stock investment is not material, the proportionate consolidation procedure would be set aside.