Unformatted text preview: ownership
1-7 Internal Expansion: Creating a Business Entity 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 1-8 Internal Expansion: Creating a Business Entity 1-9 Internal Expansion: Creating a Business Entity A spinoff 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 splitoff 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
1-10 External Expansion: Business Combinations Sometimes, entry into new product areas or geographic regions is easier by acquiring or combining with other companies
A business combination occurs when “. . . an acquirer obtains control of one or more businesses” Control → ability to direct policies & management 1-11 Control: How? The Usual Way Owning more than 50% of the subsidiary’s outstanding voting stock The Unusual Way Having contractual agreements or financial arrangements that effectively achieve control Informal arrangements
Formal agreements 1-12 Organizational Structure and Financial Reporting
A business combination in which the acquired company’s assets and liabilities are combined with those of the acquiring company.
The acquiring company “swallows” the acquired company.
Financial reporting is based on the original organizational structure
1-13 Organizational Structure and Financial Reporting
B) CONTROLLING OWNERSHIP
A business combination in which the acquired company remains as a separate legal entity with a majority of its common stock owned by the purchasing company leads to a parent–subsidiary relationship.
Accounting standards normally require consolidated financial statements
1-14 Organizational Structure and Financial Reporting
C) NONCONTROLLING OWNERSHIP
The purchase of a lessthanmajority interest in another corporation does not usually result in...
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