T1 Solutions - ACCT3103 Corporate Accounting Solutions to...

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ACCT3103 Corporate Accounting Solutions to set work Week One: Introduction to Business Combinations & Principles of Consolidation Q1.1 The rationale for groups Explain why Australia’s largest companies conduct their business activities through a complex organisational design of subsidiaries, associates, trusts and joint ventures rather than through a single corporate entity. There are a number of advantages of conducting business activities using multiple companies rather than a single company. The Company’s and Securities Advisory Committee (2000) identified the following potential benefits of conducting economic activity through a corporate group structure: (a) Reducing commercial risk or maximising potential returns through diversification. Often diversification is achieved through incorporating or acquiring new companies; (b) Preserving the intangible property of existing companies (e.g. goodwill) by acquisition of other companies in order to expand an enterprise; (c) In many cases, less tax is payable on the acquisition of shares than by acquiring the underlying assets, for example, stamp duty on sale of property is avoided; (d) Attracting capital without forfeiting control. Management may not wish to allow outside investors to increase their level of control of the parent entity, but want outside investment as part of their overall business. This can be achieved by allowing outside shareholders to acquire shares in a subsidiary; (e) Lowering the risks of legal liability, including environmental and consumer liability. By setting up a number of separate subsidiaries, other group assets can be isolated and protected from high liability risks. In other words, high risk activities are ‘quarantined’ in a limited liability company; (f) Providing better security for proposed loans. By transferring assets into a separate company, a potential lender will have the opportunity to obtain a first charge over specific assets. This could benefit the group by facilitating a lower cost of borrowing, particularly through project financing; (g) Simplifying the process of partial sale of an enterprise. Rather than selling specific assets to a purchaser, shares of a group company can be transferred to a purchaser. This can also be tax-effective in many cases; (h) To comply with regulatory requirements. Some multinational groups need to comply with the foreign rules which require that business operations be conducted through a subsidiary that is incorporated in the foreign jurisdiction; and (i) Achieving scale through mergers and acquisitions of other companies, which may themselves be a parent entity in an economic entity;
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Question 1.4 Consolidation accounting loopholes Describe some of the practices used by some corporate managers during the 1980s to avoid the consolidation of a subsidiary. What incentives existed for this opportunistic management behaviour and how did the consolidation standard attempt to put a stop to it? Has the attempt been fully successful?
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