Advanced Financial Accounting Chapter 1 Notes
1
Intercorporate
Acquisitions and Investments in
Other Entities
McGraw-Hill/Irwin
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
The Development of Complex
Business Structures
• Enterprise expansion as a means of survival and profitability
– Size often allows economies of scale
– New earning potential
– Earnings stability through diversification
– Management rewards for bigger company size – Prestige associated with company size
1-2
Organizational Structure and
Business Objectives
• A subsidiary is a corporation that is controlled by another corporation, referred to as a parent company, usually through majority ownership of its common stock
• Because a subsidiary is a separate legal entity, the parent’s risk associated with the subsidiary’s activities is limited
1-3
Organizational Structure, Acquisitions, and Ethical Considerations
• Manipulation of financial reporting
– Usage of subsidiaries or other entities to borrow money without reporting the debt on their balance sheets
– Using special entities to manipulate profits
– Manipulation of accounting for mergers and acquisitions • Pooling-of-interests
1-4
Business Expansion and Forms of
Organizational Structure
• Expansion from within: New subsidiaries or entities such as partnerships, joint ventures, or special entities
• Motivating factors:
– Helps establish clear lines of control and facilitate the evaluation of operating results
– Special tax incentives
– Regulatory reasons
– Protection from legal liability
– Disposing of a portion of existing operations
1-5
Business Expansion and Forms of
Organizational Structure
– A spin-off
• Occurs when the ownership of a newly created or existing subsidiary is distributed to the parent’s stockholders without the stockholders surrendering any of their stock in the parent company
– A split-off
• Occurs when the subsidiary’s shares are exchanged for shares of the
Intercorporate
Acquisitions and Investments in
Other Entities
McGraw-Hill/Irwin
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
The Development of Complex
Business Structures
• Enterprise expansion as a means of survival and profitability
– Size often allows economies of scale
– New earning potential
– Earnings stability through diversification
– Management rewards for bigger company size – Prestige associated with company size
1-2
Organizational Structure and
Business Objectives
• A subsidiary is a corporation that is controlled by another corporation, referred to as a parent company, usually through majority ownership of its common stock
• Because a subsidiary is a separate legal entity, the parent’s risk associated with the subsidiary’s activities is limited
1-3
Organizational Structure, Acquisitions, and Ethical Considerations
• Manipulation of financial reporting
– Usage of subsidiaries or other entities to borrow money without reporting the debt on their balance sheets
– Using special entities to manipulate profits
– Manipulation of accounting for mergers and acquisitions • Pooling-of-interests
1-4
Business Expansion and Forms of
Organizational Structure
• Expansion from within: New subsidiaries or entities such as partnerships, joint ventures, or special entities
• Motivating factors:
– Helps establish clear lines of control and facilitate the evaluation of operating results
– Special tax incentives
– Regulatory reasons
– Protection from legal liability
– Disposing of a portion of existing operations
1-5
Business Expansion and Forms of
Organizational Structure
– A spin-off
• Occurs when the ownership of a newly created or existing subsidiary is distributed to the parent’s stockholders without the stockholders surrendering any of their stock in the parent company
– A split-off
• Occurs when the subsidiary’s shares are exchanged for shares of the