Decision Usefulness of Alternative Joint Venture Reporting Methods

Abstract

Depending on the country and circumstances, reporting rules for intercorporate investments may require the cost method, the equity method, proportionate consolidation, or full consolidation, and may yield dramatically different accounting numbers. In the post-Enron environment there is a particular focus on investments for which liabilities remain off balance sheet. We compare the information content of alternative accounting treatments for a sample of Canadian firms reporting joint ventures under proportionate consolidation. We restate their financial statements using the equity method, and we compare the information content of the two accounting methods in predicting accounting return on common shareholders' equity. We find evidence consistent with the view that financial statements prepared under proportionate consolidation provide better predictions of future return on shareholders' equity than do financial statements prepared under the equity method. We conclude that, for these firms, proportionate consolidation provides information with greater predictive ability and greater relevance than does the equity method.