Advanced Accounting Ch. 1 - Intercorporate Acquisitions and...

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Intercorporate Acquisitions and Investments in Other Entities 1 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 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 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 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
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– 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 parent, thereby leading to a reduction in the outstanding shares of the parent company Expansion through business combinations – Entry into new product areas or geographic regions by acquiring or combining with other companies – A business combination occurs when “. . . an acquirer obtains control of one or more businesses” – The concept of control relates to the ability to direct policies and management Traditional view - Control is gained by acquiring a majority of the company’s common stock However, it is possible to gain control with less than majority ownership or with no ownership at all – Informal arrangements – Formal agreements • Consummation of a written agreement requires recognition on the books of one or more of the companies that are a party to the combination Frequency of Business Combinations – 1960s - Merger boom • Conglomerates – 1980s - Increase in the number of business combinations • Leveraged buyouts and the resulting debt – 1990s - All previous records for merger activity shattered – Downturn of the early 2000s, and decline in mergers – Increased activity toward the middle of 2003 that accelerated through the
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This note was uploaded on 05/11/2010 for the course ACCT 410 taught by Professor Hays during the Spring '10 term at Louisiana State University in Shreveport.

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Advanced Accounting Ch. 1 - Intercorporate Acquisitions and...

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