1220598901 - 1-1 CHAPTER ONE Intercorporate Acquisitions &...

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1 1-1 CHAPTER ONE Intercorporate Acquisitions & Investments in Other Entities ACCT400 Advanced Financial Accounting Fall Semester 2008 1-2 Development of complex business structures To expand enterprise as means of survival and profitability (benefits: enjoy economies of scale, reduce earnings volatility, enhance reputation, etc.) To achieve business objectives (e.g. risk sharing, tax savings, etc.) Subsidiary : corporation that is controlled by another corporation, i.e., parent company Parent company : control subsidiary through majority ownership of its common stock To manipulate financial reporting Special-purpose entity (SPE) : financing vehicle usually created for a single specified purpose – Mergers and acquisitions
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2 1-3 Business expansion Expansion from within – Conduct expanded operations through new subsidiaries, partnerships, joint ventures or special entities – Old entity Existing assets New entity – New entity Equity ownership Old entity – Dispose portion of existing operations through new subsidiaries or other entities Spin-off : subsidiary ownership is distributed to parent’s stockholder without affecting their original ownership Split-off : subsidiary ownership is exchanged for parent ownership leading to reduction of parent’s outstanding shares Expansion through business combinations Business combination : 2 or more companies join under common control (i.e. ability of direct policies and management) Informal arrangements : easy to terminate and less likely to be recorded (e.g. strategic alliances and interlocking directorates) Formal agreements : written, enforceable and more likely to be recorded 1-4 Complex organizational structures Traditional: parent-subsidiary structure Complex: corporate joint ventures, partnerships, special- purpose and variable interest entities Depend on circumstances No direct ownership interest Beneficial interest Report as “investment” in investor company using specific accounting method Purchase/create another entity with less-than- majority interests Noncontrolling ownership Consolidate parent and subsidiary FS Acquired company remains separate legal entity and majority of stocks owned by acquiring company Controlling ownership (parent – subsidiary) Base on original organizational structure Combine A & L of acquired and acquiring companies Merger Financial reporting Treatment Type
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3 1-5 Creating business entities • Parents/investors create entities, not purchase • Transferring company creates a subsidiary or partnership it owns and controls • Can transfer both assets and liabilities to created entity • Use BV of assets and liabilities OR fair value (if fair value < BV Impairment loss) • Ownership interest = BV of net assets transferred • Prepare consolidated financial statements 1-6 • Entry by parents/investors
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This note was uploaded on 11/27/2008 for the course ACCT ACCT440 taught by Professor Teresa during the Spring '08 term at University of Manchester.

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1220598901 - 1-1 CHAPTER ONE Intercorporate Acquisitions &...

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