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Rationale Learning Objectives and Outcomes Teaching and Learning Resources Intercorporate Acquisitions and Investments in Other Entities Reporting Intercorporate Interests The Reporting Entity and Consolidated Financial Statements Intercorporate Transactions and Indebtedness Consolidation Ownership Issues Multinational Accounting: Foreign Currency Transactions and Financial Instruments. Multinational Accounting: Translation of Foreign Entity Statements Segment and Interim Reporting. SEC Reporting Partnerships: Formation, Operation, and Changes in Membership. Partnerships: Liquidation Governmental Entities: Introduction and General Fund Accounting. Governmental Entities: Special Funds and Government-wide Financial Statements Not-for-Profit Entities Corporations in Financial Difficulty   Related Workshops Financial Accounting 1 Auditing Business Organisation Introduction to Accounting - An Integrated Approach Strategios   Case Studies Learner Support Career Direction Graduate Services Management of Learning Online Libraries International Student Services Study Abroad Study Skills   Recommended Texts Resources Business Studies Resources for objectives and strategy, accounting and finance, marketing, operations management, HRM and external influences. Go to Business Studies »   Accounting Careers Standard Costing   Assignments, Assessments Assessment Regulations   Learning Centres Economics Centre Education, Staff Development and Teacher Training Centre Entrepreneur Centre Financial Centre Foundation Study Centre Higher Qualifications Centre HR Centre IT Centre Language Centre Management and Leadership Development Centre Management Centre Marketing Centre MBA Centre Postgraduate Centre Research Centre Undergraduate Centre

 

Financial Accounting 2

 

Rationale

 

 

 

 

 

The Financial Accounting Standards Board (FASB) is a major organization whose primary purpose is to develop Generally Accepted Accounting Principles in the United States (US GAAP), similar to what the Governmental Accounting Standards Board (GASB) does for local and state governments in the United States. The FASB was created in 1973, replacing the Accounting Principles Board and the Committee on Accounting Procedure of the AICPA. The private not-for-profit organization is responsible for creating high quality accounting standards. The FASB is not a governmental body. The U.S. Securities and Exchange Commission (SEC) has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Throughout its history, however, the Commission’s policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfil the responsibility in the public interest. The SEC designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. Pursuant to the Sarbanes Oxley Act of 2002, the FASB began obtaining funding through the imposition of accounting support fees, which are allocated to companies with debt or equity securities issues pursuant to the '34 Act.

The FASB is part of a structure that is independent of all other business and professional organizations. Before the present structure was created, financial accounting and reporting standards were established first by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants (1936–1959) and then by the Accounting Principles Board, also a part of the AICPA (1959–73). Pronouncements of those predecessor bodies remain in force unless amended or superseded by the FASB.

The FASB is in the middle of a convergence project with the International Accounting Standards Board to make it easier for companies to report financial statements, so that separate financial statements are not needed for US and international markets. As part of the convergence project, the FASB has started transitioning from the principle of historical cost to fair value, something the IASB believes in dearly.

The board's current (2004) chairman is Robert H. Herz.

See also

• List of FASB Statements of Financial Accounting Concepts
• List of FASB Interpretations
• Current issues
  • Pooling of interests (Links to the IAS rules on pooling, which are not the same as FASB's)
  • Stock option expensing
• Related Associations
  • International Accounting Standards Board

 

External links

 

 

International Financial Reporting Standards (IFRS) along with International Accounting Standards (IAS) are a set of accounting standards. Currently they are issued by the International Accounting Standards Board (IASB). IASs were issued between 1973 and 2001 by Board of the International Accounting Standards Committee (IASC). In April 2001 the IASB adopted all IASs and continued the development, calling new standards IFRSs [1]. Although IASs are no longer produced, they are still in effect unless replaced by an IFRS, whether in its entirety or part of. International Financial Reporting Standards in a broad sense comprise: Framework for the Preparation and Presentation of Financial Statements—stating basic principles and grounds of IFRS IAS—standards issued before 2001 IFRS—standards issued after 2001 SIC—interpretations of accounting standards, giving specific guidance on unclear issues IFRIC—newer interpretations, issued after 2001 Adoption of IFRS Australia European Union Russia Convergence with US GAAP Details References   External links

Hong Kong Financial Reporting Standards - Table of Concordance China and Hong Kong Updates Oracle Responds to the International Accounting Standards China Accounting Standards Overview Download an Unofficial English Translation of the Accounting Law

 

 

Learning Objectives Outcomes

This is a non-taught unit designed for self-directed study by those intending to enhance their professional or managerial competence, knowledge, understanding, and skills in business finance.

Knowledge

After completing the course, students will be able to demonstrate:

Applications of Accounting Conventions and Accounting Practice as specified in the Companies Ordinance and Statements of Standard Accounting Practice

• Understanding of the accounting treatment for intangible assets, including research and development costs and goodwill
• Understanding of the accounting treatment for property, plant and equipment
• Understanding of the income measurement and revenue recognition
• Understanding of the accounting treatment for borrowing costs
• Understanding of the disclosure requirements for related party transactions
• Understanding of the classification, disclosure and accounting treatment required for interests in joint venture
• Understanding of the accounting treatment for inventories under the historical cost system
• Understanding of the accounting treatment of revenue and costs associated with construction contracts

 

Preparing Financial Statements for Partnership, Limited Company and Group Company

• Skills in preparing financial statements for partnerships
• Skills in preparing financial statements for limited companies
• Skills in preparing financial statements for group companies

 

Analysing and Evaluation of Financial Statements

• Skills in preparing cash flow statements
• Skills in calculating and interpreting significant ratios for financial statement analysis
• Skills in applying financial ratios to appraise and communicate the position and prospect of a business

 

 

Learning Objectives and Outcomes

 

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Intercorporate Acquisitions and Investments in Other Entities

Tutorials

• Intercorporate Acquisitions and Investments in Other Entities

 

Readings

 

 

Intercorporate Acquisitions and Investments in Other Entities

The business environment in the United States is perhaps the most dynamic and vibrant in the world. Each day, new companies and new products enter the marketplace, and others are forced to leave or to change substantially in order to survive. In this setting, existing companies often find it necessary to combine their operations with those of other companies or to establish new operating units in emerging areas of business activity.

 

 

In recent years, the business world has witnessed many corporate acquisitions and combinations, often involving some of the nation's largest and best-known companies. Some of these combinations have captured the attention of the public because of the personalities involved, the daring strategies employed, and the huge sums of money at stake.

Recent business practice has also experienced the creation of numerous less traditional types of enterprise structures and new, sometimes novel, entities for carrying out the enterprise's operating and financing activities. The creation of new structures and special entities is often a response to today's current operating environment, with its abundant operating risks, global considerations, and tax complexities. In some cases, however, as evidenced by recent lawsuits, criminal investigations, congressional actions, and corporate bankruptcies, the legitimacy of the use of some of these structures and special entities has been questioned.

Overall, today's business environment is one of the most exciting and challenging in history, being characterized by rapid change and exceptional complexity. In this environment, regulators, such as the Securities and Exchange Commission (SEC), Financial Accounting Standards Board (FASB), and Public Company Accounting Oversight Board (PCAOB), are scrambling to respond to the rapid-paced changes in a manner that ensures the continued usefulness of accounting reports to reflect economic reality.

A number of accounting and reporting issues arise when two or more companies join under common ownership or a company creates a complex organisational structure involving any of a variety of forms of new financing or operating entities. The first 10 chapters of this text focus on a number of these issues. Chapter 1 lays the foundation by describing some of the factors that have led to corporate expansion and some of the types of complex organisational structures and relationships that have evolved. Then the chapter deals explicitly with the accounting and reporting issues related to formal business combinations. Chapter 2 focuses on investments in the common stock of other companies and on selected other types of investments in and relationships with other entities. The next eight chapters systematically develop the reporting procedures used by related companies when one controls the others and they present consolidated financial statements that portray the related companies as if they were actually a single company.

 

Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or new location, without creating a subsidiary, other child entity or using a joint venture. The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

 

 

Acquisition Distinction between mergers and acquisitions Business valuation Financing M&A Cash Stock Which method of financing to choose? Specialist M&A advisory firms Motives behind M&A Effects on management Different Types of M&A Strategic Mergers M&A research and statistics for acquired organizations Brand considerations The Great Merger Movement Short-run factors Long-run factors Merger waves Deal objectives in more recent merger waves Cross-border M&A M&A failure Major M&A 1990s 2000s M&A in popular culture

 

See also

• References
• Further reading

 

 

An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of the previous companies survives independently. Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquireee or merging company (also termed a target) is or is not listed on public stock markets. An additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be very difficult, while various studies have shown that 50% of acquisitions were unsuccessful.[1] The acquisition process is very complex, with many dimensions influencing its outcome.[2] Whether a purchase is perceived as being a "friendly" one or a "hostile" depends significantly on how the proposed acquisition is communicated to and perceived by the target company's board of directors, employees and shareholders. It is normal for M&A deal communications to take place in a so-called 'confidentiality bubble' wherein the flow of information is restricted pursuant to confidentiality agreements.[3] In the case of a friendly transaction, the companies cooperate in negotiations; in the case of a hostile deal, the board and/or management of the target is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ultimately become "friendly", as the acquiror secures endorsement of the transaction from the board of the acquiree company. This usually requires an improvement in the terms of the offer and/or through negotiation. "Acquisition" usually refers to a purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and/or longer-established company and retain the name of the latter for the post-acquisition combined entity. This is known as a reverse takeover. Another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company (often one that has strong prospects and is eager to raise financing) buys a publicly listed shell company, usually one with no business and limited assets.[4]   There are also a variety of structures used in securing control over the assets of a company, which have different tax and regulatory implications:

1. The buyer buys the shares, and therefore control, of the target company being purchased. Ownership control of the company in turn conveys effective control over the assets of the company, but since the company is acquired intact as a going concern, this form of transaction carries with it all of the liabilities accrued by that business over its past and all of the risks that company faces in its commercial environment.

2. The buyer buys the assets of the target company. The cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of transaction leaves the target company as an empty shell, if the buyer buys out the entire assets. A buyer often structures the transaction as an asset purchase to "cherry-pick" the assets that it wants and leave out the assets and liabilities that it does not. This can be particularly important where foreseeable liabilities may include future, unquantified damage awards such as those that could arise from litigation over defective products, employee benefits or terminations, or environmental damage. A disadvantage of this structure is the tax that many jurisdictions, particularly outside the United States, impose on transfers of the individual assets, whereas stock transactions can frequently be structured as like-kind exchanges or other arrangements that are tax-free or tax-neutral, both to the buyer and to the seller's shareholders.

The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a situation where one company splits into two, generating a second company separately listed on a stock exchange.

As per knowledge-based views, firms can generate greater values through the retention of knowledge-based resources which they generate and integrate. Extracting technological benefits during and after acquisition is ever challenging issue because of organisational differences. Based on the content analysis of seven interviews authors concluded five following components for their grounded model of acquisition:

1. Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition.

2. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence.

3. Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing.

4. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.

5. Transfer of technologies and capabilities are most difficult task to manage because of complications of acquisition implementation. The risk of losing implicit knowledge is always associated with the fast pace acquisition.

Preservation of tacit knowledge, employees and literature are always delicate during and after acquisition. Strategic management of all these resources is a very important factor for a successful acquisition.

Increase in acquisitions in our global business environment has pushed us to evaluate the key stake holders of acquisition very carefully before implementation. It is imperative for the acquirer to understand this relationship and apply it to its advantage. Retention is only possible when resources are exchanged and managed without affecting their independence.

 

Distinction between mergers and acquisitions

 

The terms merger and acquisition mean slightly different things. The legal concept of a merger (with the resulting corporate mechanics, statutory merger or statutory consolidation, which have nothing to do with the resulting power grab as between the management of the target and the acquirer) is different from the business point of view of a "merger", which can be achieved independently of the corporate mechanics through various means such as "triangular merger", statutory merger, acquisition, etc. When one company takes over another and clearly establishes itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly (that is, when the target company does not want to be purchased) it is always regarded as an acquisition.

 

 

Working Papers

• Anchor Corporation and Zink Company, Combined Balance Sheet, February 1, 20X3

 

Activities

• Chapter 1 Template 19 (14.0K)
• Chapter 1 Template 29 (14.0K)
• Chapter 1 Template 34 (14.0K)
• Chapter 1 Template 36 (17.0K)

 

 

Reporting Intercorporate Interests

Tutorials

• Reporting Intercorporate Interests

 

Readings

Reporting Intercorporate Interests

Companies often acquire ownership or other interests in other companies through a variety of arrangements and for a variety of reasons. Some companies invest in other companies simply to earn a favourable return by taking advantage of potentially profitable situations. However, companies can have many other reasons for acquiring interests in other entities, including to (1) gain control over other companies, (2) enter new market or product areas through companies established in those areas, (3) ensure a supply of raw materials or other production inputs, (4) ensure a customer for production output, (5) gain economies associated with greater size, (6) diversify, (7) gain new technology, (8) lessen competition, and (9) limit risk. Examples of intercorporate investments include IBM's acquisition of a sizable portion of Intel's stock to ensure a supply of computer components, AT&T's purchase of the stock of McCaw Cellular Communications to gain a foothold in the cellular phone market, and Texaco's acquisition of Getty Oil's stock to acquire oil and gas reserves.

 

 

Accounting for intercorporate ownership investments and various types of interests in other companies can differ in a number of respects from accounting for other types of investments. This chapter presents the accounting and reporting procedures for investments in common stock and for selected other types of interests in different entities.

 

 

Common stock is a form of corporate equity ownership, a type of security. The terms "voting share" or "ordinary share" are also used in other parts of the world; common stock being primarily used in the United States. It is called "common" to distinguish it from preferred stock. If both types of stock exist, common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full. In the event of bankruptcy, common stock investors receive any remaining funds after bondholders, creditors (including employees), and preferred stock holders are paid. As such, such investors often receive nothing after a bankruptcy. On the other hand, common shares on average perform better than preferred shares or bonds over time.[1] Common stock usually carries with it the right to vote on certain matters, such as electing the board of directors. However, a company can have both a "voting" and "non-voting" class of common stock. Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company's board of directors. Some holders of common stock also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering. There is no fixed dividend paid out to common stock holders and so their returns are uncertain, contingent on earnings, company reinvestment, efficiency of the market to value and sell stock.[2] Additional benefits from common stock include earning dividends and capital appreciation. Ordinary shares   See also Shares authorized Shares issued Shares outstanding Share capital Treasury stock Capital surplus Shareholders' equity References   External links Common Stock vs. Preferred Stock

 

Activities

• Chapter 2 Template 9 (15.0K)
• Chapter 2 Template 31 (16.0K)
• Chapter 2 Template 37 (14.0K)

 

 

 

The Reporting Entity and Consolidated Financial Statements

Tutorials

• The Reporting Entity and Consolidated Financial Statements
• Consolidation as of the Date of Acquisition
• Consolidation Following Acquisition

 

Readings

Accounting For Intercorporate Investments

A strong understanding of accounting rules and treatments is the backbone of quality financial analysis. Whether you're an established analyst at a large investment bank, working in a corporate finance advisory team, just starting out in the financial industry or still learning the basics in school, understanding how firms account for different investments, liabilities and other such positions is key in determining the value and future prospects of any business. In this article we will examine the different categories of intercorporate investments and how to account for them on financial statements. Tutorial: Introduction To Accounting Intercorporate investments are undertaken when companies invest in the equity or debt of other firms. The reasons behind why one company would invest in another are many, but could include the desire to gain access to another market, increase its asset base, gain a competitive advantage or simply increase profitability through an ownership (or creditor) stake in another company. Intercorporate investments are typically categorized depending on the percentage of ownership or voting control that the investing firm (investor) undertakes in the target firm (investee). Such investments are therefore generally categorized under GAAP in three categories: (1) investments in financial assets, (2) investments in associates and (3) business combinations

Read More: http://www.investopedia.com/articles/fundamental-analysis/11/accounting-intercorporate-investment.asp#ixzz1onIdbPfH

 

A Holding Company or Parent Company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors.

 

 

Strictly speaking, the term "holding company" might be used to describe any company that owns a majority of shares in another company. Usually, though, the term signifies a company which does not produce goods or services itself, but, rather, whose only purpose is owning shares of other companies (or owning other companies outright). Holding companies allow the reduction of risk for the owners and can allow the ownership and control of a number of different companies.

Berkshire Hathaway is one of the largest publicly traded holding companies; it owns numerous insurance companies, manufacturing businesses, retailers, and other companies. Another large holding company of note is UAL Corporation, a publicly traded holding company whose primary purpose is to wholly own United Airlines.

Sometimes a company intended to be a pure holding company identifies itself as such by adding "Holdings" or "(Holdings)" to its name. This was spoofed by Terry Pratchett and Neil Gaiman in their book Good Omens with the fictional company Holdings (Holdings) Incorporated.

See also

• Bank holding company
• Conglomerate (company)
• Shell corporation
• Patent holding company

 

Consolidated Accounts are financial statements that factors the holding company's subsidiaries into its aggregated accounting figure. It is a representation of how the holding company is doing, as a group. The consolidated accounts should provide a true and fair view of the financial and operating conditions of the group.

 

 

 

 

International Accounting Standard 22, Business Combinations, became effective for annual financial statements for periods beginning on or after 1 January 1995. IAS 22 is superseded by IFRS 3 Business Combinations effective 1 January 2005. In October 1996, certain paragraphs were revised to be consistent with IAS 12: Income Taxes. The revisions became operative for annual financial statements covering periods beginning on or after 1 January 1998. In July 1998, various paragraphs of IAS 22 were revised to be consistent with IAS 36: Impairment of Assets, IAS 37: Provisions, Contingent Liabilities and Contingent Assets, and IAS 38: Intangible Assets, and the treatment of negative goodwill was also revised. The revised Standard (IAS 22 (revised 1998)) became operative for annual financial statements covering periods beginning on or after 1 July 1999.

 

In 1999, various paragraphs were amended to be consistent with IAS 10: Events After the Balance Sheet Date. The amended text became effective for annual financial statements covering periods beginning on or after 1 January 2000.

The following SIC Interpretations relate to IAS 22:

• SIC 9: Business Combinations - Classification either as Acquisitions or Unitings of Interests and
• SIC 22: Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported.

 

Working Papers

• Fineline Pencil Company and SubsidiaryConsolidated Balance SheetJanuary 2, 20X3
• Simon Corporation and Faith Corporation Consolidated Balance Sheet Workpaper, December 21, 20X2
• Blake Corporation and Shaw Corporation, Consolidation Workpaper, December 31, 20X3

 

Case Study

• Barclays Plc

 

The Reporting Entity and Consolidated Financial Statements

Today, nearly all major corporations prepare consolidated financial statements. While people often think of the world's corporate giants as being single companies, closer examination reveals that each actually is composed of a number of separate companies. For example, General Motors Corporation and Ford Motor Company both own dozens of other companies. The Walt Disney Company is famous for spectacular theme parks and immortal cartoon characters, but it also owns many subsidiaries that include the following businesses: Miramax Films, Touchstone Pictures, Buena Vista Home Entertainment, Hollywood Records, the ABC Television Network and ABC Radio Networks, ESPN, many local television and radio stations, and Disney Cruise Line. Similarly, Time Warner Inc. owns more than 1,500 subsidiaries, including America Online, MapQuest, Moviefone, Time Warner Cable (which owns many subsidiaries), Turner Broadcasting (which owns many subsidiaries), Warner Bros. Entertainment, Warner Bros. Television, New Line Cinema, Warner Home Entertainment, DC Comics, Home Box Office, the Atlanta Braves (professional baseball), Time, and CNN (Cable News Network). General Motors, Ford, The Walt Disney Company, and Time Warner each present consolidated financial statements, as do nearly all corporations that are publicly held.

 

Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if all the individual entities actually were a single company or entity. Consolidation is required when a corporation owns a majority of another corporation's outstanding common stock. As discussed later in the chapter, consolidation also may be appropriate in certain other situations, and not all units subject to consolidation need necessarily be corporations or even business (for profit) enterprises.

 

 

Two companies are considered to be related companies or affiliates when one controls the other or both are under the common control of another entity. Consolidated financial statements are generally considered to be more useful than the separate financial statements of the individual companies when the companies are related. The accounting principles applied in the preparation of consolidated financial statements are the same accounting principles applied in preparing separate-company financial statements. The process of preparing consolidated financial statements involves bringing together the separate financial statements of related companies as if the related companies were actually a single company.

Any business combination results in one of two situations: either (1) the net assets of one or both of the combining companies are transferred to a single company (a merger or statutory consolidation) or (2) the combining companies each remain as separate legal entities (a stock acquisition). In the first case, no consolidation questions arise because only a single corporation emerges from the business combination. The financial statements of the resulting reporting entity are those of a single corporation. The matter of consolidated financial statements arises in the second instance because of the existence of two or more legally separate but related companies. A similar situation also arises if a company creates rather than purchases a subsidiary. Whether the subsidiary is acquired or created, each individual company maintains its own accounting records, but consolidated statements are needed to present the companies together as a single economic entity for general-purpose financial reporting.

 

 

Consolidation or amalgamation is the act of merging many things into one. In business, it often refers to the mergers and acquisitions of many smaller companies into much larger ones. In the context of financial accounting, consolidation refers to the aggregation of financial statements of a group company as consolidated financial statements. The taxation term of consolidation refers to the treatment of a group of companies and other entities as one entity for tax purposes. Under the Halsbury's Laws of England, 'amalgamation' is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company". Thus, the two concepts are, substantially, the same. However, the term amalgamation is more common when the organizations being merged are private schools or regiments.

• Types of business amalgamations
• Terminology
• Accounting treatment (US GAAP)
  • Purchase of Net Assets
  • Purchase of Common Stock
• Reporting intercorporate interest — investments in common stock
  • 20% ownership or less
  • 20% to 50% ownership — Associate company
  • More than 50% ownership — Subsidiary

 

See also

• Arrangements between railroads
• Associate company
• Business valuation
• Consolidated financial statement
• Enterprise value
  • Goodwill (accounting)
  • Minority interest
  • Mergers and acquisitions
  • Tax consolidation
• References

 

 

In business, a Subsidiary is a company controlled by another company or corporation, called its parent (or parent company). The most common way that this control is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex (see below).

 

 

 

A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a group. When ownership is not shared, a subsidiary is termed wholly owned.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.

Subsidiaries are a common feature of business life and few if any major businesses do not organise their operations in this way. Examples include holding companies such as Berkshire Hathaway[1], Time Warner, or Citigroup as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national or functional subsidiaries, sometimes with multiply nested levels of subsidiaries.

An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity, locomotives and rolling stock.

In contrast, a non-operating subsidiary would exist on paper only (i.e. stocks, bonds, articles of incorporation) and would use the identity and rolling stock of the parent company.

See also

• Mergers and acquisitions

 

Business models which feature elements similar to subsidiaries

• Conglomerate (company)
• Zaibatsu
• Keiretsu
• Chaebol

 

Working Papers

• Lofton Company and Temple Corporation, Consolidated Balance Sheet Workpaper, December 31, 20X6
• Doorst Corporation and Hingle Company, Consolidated Balance Sheet Workpaper, December 31, 20X8
• Porter Company and Temple Corporation, Consolidation Workpaper, December 31, 20X2
• Talbott Company and Short Company. Consolidated Balance Sheet Workpaper, December 31, 20X9
• Consolidated Enterprises, Inc. and Subsidiary, Consolidated Statement of Cash Flows, For the Year Ended December 31, 20X3

 

Workshop

• Business Organisation

 

Case Study

• Cheung Kong Holdings Limited

 

Consolidation of Wholly Owned Subsidiaries

Consolidated and unconsolidated financial statements are prepared using the same generally accepted accounting principles. The unique aspect of consolidated statements is that they bring together the operating results and financial positions of two or more separate legal entities into a single set of statements for the economic entity as a whole. To accomplish this, the consolidation process includes procedures that eliminate all effects of intercorporate ownership and intercompany transactions.

 

 

This chapter and the next provide a thorough introduction to the process of preparing consolidated financial statements. Then, using these chapters as a foundation and following a building-block approach, Chapters 6 through 10 deal with intercorporate transfers and other consolidation issues.

 

Consolidation of Less-than-Wholly Owned Subsidiaries

A controlling financial interest in a subsidiary is normally required for a parent to consolidate that subsidiary. In practice, this means that only majority ownership is required for consolidation, not total ownership. Consolidated financial statements often include one or more subsidiaries that are less than wholly owned by the parent. The stockholders who own the shares of the subsidiary not held by the parent are referred to collectively as the noncontrolling interest or minority interest.

 

 

All of a subsidiary's assets, liabilities, revenues, and expenses are included in consolidated financial statements whether or not that subsidiary is wholly owned. The parent's percentage ownership of a subsidiary does not affect the portion of the subsidiary's financial statement amounts included in the consolidated statements—100 percent must be included. Because of this, whenever a parent company holds less than total ownership of a subsidiary, the claim of the noncontrolling shareholders must be reflected in the consolidated financial statements. The noncontrolling interest's share of subsidiary income is deducted from consolidated net income at the bottom of the consolidated income statement to arrive at the income attributable to the controlling interest. The noncontrolling interest's claim on the net assets of the subsidiary is shown at the bottom of the stockholders' equity section of the consolidated balance sheet.

 

 

 

Intercorporate Transactions and Indebtedness. Consolidation Ownership Issues

Tutorials

Intercorporate Transfers: Noncurrent Assets Intercompany Inventory Transactions Intercompany Indebtednes Consolidation Ownership Issues Additional Consolidation Reporting Issues

 

Readings

Intercompany Transfers of Services and Noncurrent Assets

A parent company and its subsidiaries often engage in a variety of transactions among themselves. For example, manufacturing companies often have subsidiaries that develop raw materials or produce components to be included in the products of affiliated companies. Some companies sell consulting or other services to affiliated companies. A number of major retailers, such as J. C. Penney Company, transfer receivables to their credit subsidiaries in return for operating cash. United States Steel Corporation and its subsidiaries engage in numerous transactions with one another, including sales of raw materials, fabricated products, and transportation services. Such transactions often are critical to the operations of the overall consolidated entity. These transactions between related companies are referred to as intercompany or intercorporate transfers.

 

 

The central idea of consolidated financial statements is that they report on the activities of the consolidating affiliates as if the separate affiliates actually constitute a single company. Because single companies are not permitted to reflect internal transactions in their financial statements, consolidated entities also must exclude from their financial statements the effects of transactions that are totally within the consolidated entity.

Building on the basic consolidation procedures presented in earlier chapters, this chapter and the next two deal with the effects of intercompany transfers. This chapter deals with intercompany services and sales of fixed assets, and Chapters 7 and 8 discuss intercompany sales of inventory and intercompany debt transfers.

 

Intercompany Inventory Transactions

Inventory transactions are the most common form of intercompany exchange. Conceptually, the elimination of inventory transfers between related companies is no different than for other types of intercompany transactions. All revenue and expense items recorded by the participants must be eliminated fully in preparing the consolidated income statement, and all profits and losses recorded on the transfers are deferred until the items are sold to a nonaffiliate.

 

 

The recordkeeping process for intercompany transfers of inventory may be more complex than for other forms of transfers. There often are many different types of inventory items, and some may be transferred from affiliate to affiliate. Also, the problems of keeping tabs on which items have been resold and which items are still on hand are greater in the case of inventory transactions because part of a shipment may be sold immediately by the purchasing company and other units may remain on hand for several accounting periods. Nevertheless, the consolidation procedures relating to inventory transfers are quite similar to those discussed in Chapter 6 relating to fixed assets.

 

Eurozone crisis live: Greek debt swap declared a 'credit event'

• Greek officials call result 'a triumph'
• Ruling: insurance may pay out up to $3.2bn
• EU, Germany, France all pleased
• Creditors holding €172bn of debt accept bond swap offer
• Take-up rate to hit 95% once collective action clauses used
• Analyst: 'default creates eurozone precedent'
• Today's agenda

 

 

 

Intercompany Indebtedness

 

One advantage of having control over other companies is that management has the ability to transfer resources from one legal entity to another as needed by the individual companies. Companies often find it beneficial to lend excess funds to affiliates and to borrow from affiliates when cash shortages arise. The borrower often benefits from lower borrowing rates, less restrictive credit terms, and the informality and lower debt issue costs of intercompany borrowing relative to public debt offerings. The lending affiliate may benefit by being able to invest excess funds in a company about which it has considerable knowledge, perhaps allowing it to earn a given return on the funds invested while incurring less risk than if it invested in unrelated companies. Also, the combined entity may find it advantageous for the parent company or another affiliate to borrow funds for the entire enterprise rather than having each affiliate going directly to the capital markets.

 

Consolidation Ownership Issues

 

Rupert Murdoch's News of the World was embroiled in a phone-hacking scandal that brought
forth arguments against media consolidation.

 

The News of the World’s disgraceful phone hacking scandal has brought new attention to media
ownership issues. Indeed, for those championing the dangers of media consolidation,
an ethical scandal involving one of the most well-known media moguls could be seen as a blessing.  

As the leader of Britain’s Labour Party argued while advocating for the dismantling of Murdoch’s empire,
“If you want to minimize the abuses of power, then that kind of concentration of power is frankly quite dangerous.”
Although it is easy to conceive a possible link between the News Corporation’s malfeasance and
its sizable influence, it is difficult to pinpoint the root of The News of the World’s criminality with certainty.

Read More ...

 

Only simple ownership situations have been presented in the preceding illustrations of consolidations. In practice, however, relatively complex ownership structures are often found. For example, a subsidiary may have preferred stock outstanding in addition to its common stock, and in some cases a parent may acquire shares of both a subsidiary's common and preferred stock. Other times, one or more subsidiaries may acquire stock of the parent or of other related companies. Sometimes the parent's ownership claim on a subsidiary may change through its purchase or sale of subsidiary shares or through stock transactions of the subsidiary.

The discussion in this chapter is intended to provide a basic understanding of some of the consolidation problems arising from complex ownership situations commonly encountered in practice. The following topics are discussed:

1. Subsidiary preferred stock outstanding.
2. Changes in the parent's ownership interest in the subsidiary.
3. Multiple ownership levels.
4. Reciprocal or mutual ownership.
5. Subsidiary stock dividends.

 

Additional Consolidation Reporting Issues

The financial statements of a consolidated entity must be prepared in conformity with generally accepted accounting principles in the same manner as for any individual enterprise. Standards of reporting and presentation are no different for a consolidated entity than for a single-corporate entity. This chapter discusses the following general financial reporting topics as they relate to consolidated financial statements:

1. The consolidated statement of cash flows.
2. Consolidation following an interim acquisition.
3. Consolidation tax considerations.
4. Consolidated earnings per share.

 

 

Multinational Accounting

Tutorials

• Multinational Accounting: Foreign Currency Transactions and Financial Instruments
• Multinational Accounting: Translation of Foreign Entity Statements
• Management of Economic Exposure
• Management of Transaction Exposure
• Management of Translation Exposure
       
  

Readings

When a U.S. multinational company prepares its financial statements for reporting to its stockholders, it must prepare the statements according to U.S. GAAP and measured in U.S. dollars. These foreign operations may be subsidiaries, branches, or investments of the U.S. company. This chapter presents the current efforts to develop a global set of high-quality accounting standards and the translation of the financial statements of a foreign business entity into U.S. dollars.

 

 

Differences in accounting standards across countries and jurisdictions can cause significant difficulties for multinational firms. Some of the challenges multinational companies face include the preparation of financial statements according to the differing standards in countries where their subsidiaries are located and subsequent consolidation of the financial statements. These and significant other problems that result from differences in accounting standards are generating significant interest in the potential to converge accounting standards globally.

Accountants preparing financial statements must consider both the differences in accounting principles and the differences in currencies used to measure the foreign entity's operations. Restatement into U.S. dollars is necessary before the statements can be combined or consolidated with the U.S. company statements, which are already reported in dollars. For example, a British subsidiary of a U.S. company provides the parent statements measured in British pounds sterling, using the British system of accounting.

The U.S. parent company must typically perform the following steps in the translation and consolidation of the British subsidiary:

1. Receive the British subsidiary's financial statements, which are reported in pounds sterling.

2. Restate the statements to conform to U.S. GAAP.

3. Translate the statements measured in pounds sterling into their equivalent U.S. dollar amounts. Each foreign entity account balance must be individually translated into its U.S. dollar equivalent, as follows:

 

1. Consolidate the translated subsidiary's accounts, which are now measured in dollars, with the parent company's accounts.

 

International Trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the usually primary meaning of "globalization".

 

International trade is also a branch of economics, which, together with international finance, forms the larger branch of international economics

• International trade theory
  • Ricardian model
  • Heckscher-Ohlin model
  • Specific Factors
  • Gravity model
• Regulation of international trade
• Risks in international trade
  • Economic risks
  • Political risks

 

See also

• Balance of trade
• Comparative advantage
• Customs union
• Economics
• Free trade
• Free trade area
• Gravity model of trade
• List of countries by imports
• List of countries by exports
• List of international trade topics
• List of economists
• Most favoured nation clause
• OPEC
• Protectionism
• Trade bloc
• Data

 

External links

• World Bank's Trade and Production Database
• Resources for data on trade, including the gravity model

 

 

Financial Instruments package financial capital in readily tradeable forms - they do not exist outside the context of the financial markets. Their diversity of forms mirrors the diversity of risk that they manage.

Financial instruments can be categorised according to whether they are cash instruments or derivatives of other instruments.

 

 

1. Cash instruments can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

2. Derivative instruments can be divided into exchange traded derivatives and over-the-counter (OTC) derivatives.

 

Alternatively they can be categorised by 'asset class' depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term. Foreign Exchange instruments and transactions are neither debt nor equity based and belong in their own category.

Combining the above methods for categorisation, the main instruments can be organized into a matrix as follows:

ASSET CLASS	INSTRUMENT TYPE
	Securities	Other cash	Exchange traded derivatives	OTC derivatives
Debt (Long Term) >1 year	Bonds	Loans	Bond futures Options on bond futures	Interest rate swaps Interest rate caps and floors Interest rate options Exotic instruments
Debt (Short Term) <=1 year	Bills, e.g. T-Bills Commercial paper	Deposits Certificates of deposit	Short term interest rate futures	Forward rate agreements
Equity	Stock	N/A	Stock options Equity futures	Stock options Exotic instruments
Foreign Exchange	N/A	Spot foreign exchange	Currency futures	Foreign exchange options Outright forwards Foreign exchange swaps Currency swaps

 

Some instruments defy categorisation into the above matrix, for example repurchase agreements.

 

A currency is a unit of exchange, facilitating the transfer of goods and services. It is a form of money, where money is defined as a medium of exchange (rather than e.g. a store of value). A currency zone is a country or region in which a specific currency is the dominant medium of exchange. To facilitate trade between currency zones, there are exchange rates i.e. prices at which currencies (and the goods and services of individual currency zones) can be exchanged against each other. Currencies can be classified as either floating currencies or fixed currencies based on their exchange rate regime. In common usage, currency sometimes refers to only paper money, as in "coins and currency", but this is misleading. Coins and paper money are both forms of currency. In most cases, each country has monopoly control over its own currency. Member countries of the European Monetary Union are a notable exception to this rule, as they have ceded control of monetary policy to the European Central Bank. In cases where a country does have control of its own currency, that control is exercised either by a central bank or by a Ministry of Finance. In either case, the institution that has control of monetary policy is referred to as the monetary authority. Monetary authorities have varying degrees of autonomy from the governments that create them. In the United States, the Federal Reserve operates with full independence from the government. It is important to note that a monetary authority is created and supported by its sponsoring government, so independence can be reduced or revoked by the legislative or executive authority that creates it. In almost all Western countries, the monetary authority is largely independent from the government. Several countries can use the same name, each for their own currency (e.g. Canadian dollars and US dollars), several countries can use the same currency (e.g. the euro), or a country can declare the currency of another country to be legal tender. For example, Panama and El Salvador have declared US currency to be legal tender, and from 1791-1857, Spanish silver coins were legal tender in the United States. At various times countries have either restamped foreign coins, or used currency board issuing one note of currency for each note of a foreign government held, as Ecuador currently does. Each currency typically has one fractional currency, often valued at 1⁄100 of the main currency: 100 cents = 1 dollar, 100 centimes = 1 franc, 100 pence = 1 pound. Units of 1⁄10 or 1⁄1000 are also common, but some currencies do not have any smaller units. Mauritania and Madagascar are the only remaining countries that do not use the decimal system; instead, the Mauritanian ouguiya is divided into 5 khoum, while the Malagasy ariary is divided into 5 iraimbilanja. However, due to inflation, both fractional units have in practice fallen into disuse. See Non-decimal currencies for other (mostly historic) currencies with non-decimal divisions.

History Early currency Coinage The era of hard and credit money Legal tender era The paper money era Modern currencies Privately-issued currencies Local currencies Single global currency Lists of currencies Accounting units Proposed currencies References Lists   See also ISO 4217 Currency codes Non-decimal currencies Exchange rate Foreign exchange Optimum currency area   External links Currency-related world records Profitable forex trading training

 

 

Foreign Exchange Exchange Rates Currency band Exchange rate Exchange rate regime Fixed exchange rate Floating exchange rate Linked exchange rate Markets Foreign exchange market Futures exchange Products Currency Currency future Forex swap Currency swap Foreign exchange option

 

 

Working Papers

• Subsidiary, Statement of Income, Year Ended December 31, 20XX

 

 

Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Many companies, large and small, depend on international markets for supplies of goods and for sales of their products and services. Every day the business press carries stories about the effects of export and import activity on the U.S. economy and the large flows of capital among the world's major countries. Also reported are changes in the exchange rates of the major currencies of the world, such as, "The dollar weakened today against the yen." This chapter and Chapter 12 discuss the accounting issues associated with companies that operate internationally.

A company operating in international markets is subject to normal business risks such as lack of demand for its products in the foreign marketplace, labor strikes, and transportation delays in getting its products to the foreign customer. In addition, the U.S. entity may incur foreign currency risks whenever it conducts transactions in other currencies. For example, if a U.S. company acquires a machine on credit from a Swiss manufacturer, the Swiss company may require payment in Swiss francs (SFr). This means the U.S. company must eventually use a foreign currency broker or a bank to exchange U.S. dollars for Swiss francs to pay for the machine. In the process, the U.S. company may experience foreign currency gains or losses from fluctuations in the value of the U.S. dollar relative to the Swiss franc.

The topic of foreign exchange markets is one of the most important and often misunderstood subjects in international business. It provides the framework for international business and influences both the form and the content of international business activities. Multinational enterprises (MNEs) entering into international transactions must agree on which currency will be used. Factors that affect this decision include familiarity with the foreign currency, the potential for gains and losses from changes in exchange rates, nationalistic pride, and practicality.

MNEs transact in a variety of currencies as a result of their export and import activities. There are approximately 150 different currencies around the world, but most international trade has been settled in six major currencies that have shown stability and general acceptance over time: the U.S. dollar, the British pound, the Canadian dollar, the Japanese yen, the Swiss franc, and the European euro.

The European euro (symbol €) is a relatively new currency introduced in 1999 to members of the European Union (EU) that wished to participate in a common currency. By 2002, euro notes and coins were introduced to be used in everyday trade. The EU is an organization of democratic member states from the European continent. The Union has grown over time and as of 2008 is composed of 27 member countries: Belgium, France, Germany, Italy, Luxembourg, the Netherlands, Denmark, Ireland, the United Kingdom, Greece, Portugal, Spain, Austria, Finland, Sweden, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia, Bulgaria, and Romania. In addition, Croatia, Turkey, and Macedonia have applied for accession. The EU is a dominant economic force, rivaling the United States, and the euro is now as familiar to companies doing international business as the U.S. dollar.

The EU is one of several regional groupings, and these groupings are becoming increasingly important. The North American Free Trade Agreement (NAFTA) was approved by the U.S. Congress in 1993 and created a free-trade area of Canada, the United States, and Mexico, a market that exceeds 420 million people. Over time, the agreement will result in the elimination of tariffs (taxes) on goods shipped between these three countries. The Agreement on the South Asian Free Trade Area, or SAFTA, was created on January 1, 2006, and will be operational following ratification of the agreement by seven governments. SAFTA creates a framework for the creation of a free-trade zone covering 1.4 billion people in India, Pakistan, Nepal, Sri Lanka, Bangladesh, Bhutan, and the Maldives. The Association of Southeast Asian nations (ASEAN) created the ASEAN Free Trade Area (AFTA), which is a trade bloc agreement. The goal of AFTA is to increase ASEAN's competitive edge as a production base in the world market through the elimination, within ASEAN, of tariffs and nontariff barriers. AFTA currently is composed of Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Laos, Vietnam, Myanmar, and Cambodia. In January 2005, the Greater Arab Free Trade Area (also referred to as GAFTA) came into existence. GAFTA is a pact made by the Arab League to achieve a complete Arab economic bloc that can compete internationally. GAFTA is relatively similar to ASEAN.

Currency names and symbols often reflect a country's nationalistic pride and history. For example, the U.S. dollar receives its name from a variation of the German word Taler, the name of a silver piece that was first minted in 1518 and became the chief coin of Europe and the New World. Some historians argue that the dollar symbol ($) is derived from a capital letter U superimposed over a capital letter S. The greenback as we know it today was first printed in 1862, in the midst of the Civil War, and now is issued by the 12 Federal Reserve banks scattered across the United States. The U.S. dollar can be identified in virtually every corner of the world because it has become one of the most widely traded currencies.

 

Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

When a U.S. multinational company prepares its financial statements for reporting to its stockholders, it must prepare the statements according to U.S. GAAP and measured in U.S. dollars. These foreign operations may be subsidiaries, branches, or investments of the U.S. company. This chapter presents the current efforts to develop a global set of high-quality accounting standards and the translation of the financial statements of a foreign business entity into U.S. dollars.

 

 

Differences in accounting standards across countries and jurisdictions can cause significant difficulties for multinational firms. Some of the challenges multinational companies face include the preparation of financial statements according to the differing standards in countries where their subsidiaries are located and subsequent consolidation of the financial statements. These and significant other problems that result from differences in accounting standards are generating significant interest in the potential to converge accounting standards globally.

Accountants preparing financial statements must consider both the differences in accounting principles and the differences in currencies used to measure the foreign entity's operations. Restatement into U.S. dollars is necessary before the statements can be combined or consolidated with the U.S. company statements, which are already reported in dollars. For example, a British subsidiary of a U.S. company provides the parent statements measured in British pounds sterling, using the British system of accounting. The U.S. parent company must typically perform the following steps in the translation and consolidation of the British subsidiary:

1. Receive the British subsidiary's financial statements, which are reported in pounds sterling.

2. Restate the statements to conform to U.S. GAAP.

3. Translate the statements measured in pounds sterling into their equivalent U.S. dollar amounts. Each foreign entity account balance must be individually translated into its U.S. dollar equivalent, as follows:

 



1. Consolidate the translated subsidiary's accounts, which are now measured in dollars, with the parent company's accounts.

 

 

International finance (also referred to as international monetary economics or international macroeconomics) is the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries.^[1][2] International finance examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investment, and how these topics relate to international trade.^[1][2][3]

 

Sometimes referred to as multinational finance, international finance is additionally concerned with matters of international financial management. Investors and multinational corporations must assess and manage international risks such as political risk and exchange rate risk, including transaction exposure, economic exposure, and translation exposure.^[4][5]

Some examples of key concepts within international finance are the Mundell-Fleming model, the optimum currency area theory, purchasing power parity, interest rate parity, and the international Fisher effect. Whereas the study of international trade makes use of mostly microeconomic concepts, international finance research investigates predominantly macroeconomic concepts.

• Finance
• Global financial system
• International economics
• International monetary systems
• International trade

 

 

Segment and Interim Reporting

Tutorials

• Segment and Interim Reporting
• SEC Reporting

 

Readings

Summary of Statement No. 131 Disclosures about Segments of an Enterprise and Related Information (Issued 6/97)

 

This Statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. This Statement does not apply to nonpublic business enterprises or to not-for-profit organizations. More ...

 

 

The United States Securities and Exchange Commission (commonly known as the SEC) is a United States government agency having primary responsibility for enforcing the Federal securities laws and regulating the securities industry. The SEC was created by section 4 of the Securities Exchange Act of 1934 (now codified as 15 U.S.C. § 78d). In addition to the 1934 Act that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002 and other statutes.

 

Appointed by George W. Bush, Christopher Cox is the current chairman of the SEC.

President Franklin Delano Roosevelt appointed Joseph P. Kennedy, Sr, father of future President John F. Kennedy, to serve as the first Chairman of the SEC. For a full list of SEC chairs and commissioners, see: Securities and Exchange Commission appointees.

• Overview
• Creation
• Structure
• Relationship to other agencies
• Related legislation
• SEC communications
  • Comment letters
  • No-action letters
• Forms
• Misc

 

See also

• Financial regulation
• Regulation D
• References

 

External links

 

 

• SEC Reporting for Business Combinations and Related Topics
• U.S. Securities and Exchange Commission website
• What the SEC does
• SECLaw.com – The Securities Law Home Page
• Introduction to the Federal Securities Laws
• United States Securities Laws and Rules
• Hedge Fund Regulation by the SEC
• Take a Look at the Securities and Exchange Commission Dead link as of Aug 17, 2010
• SEC Historical Society – Archive and Museum – nonprofit and independent from the SEC
• Association of Securities and Exchange Commission Alumni, Inc.
• TheCorporateCounsel.net (USA) Home of popular securities law blog and related resources
• Understanding the Securities Exchange Commission--About.com
• SecuritiesLinks Links to U.S. securities laws, rules, forms and other resources
• SEC Accounting Bulletins – United States
• SEC Division of Corporate Finance – United States
• SEC Said to Examine More Ponzi Schemes, Bloomberg.com
• seccube.com - Viewing SEC filings made easy

 

 

Case Study

 

Working Papers

• Segment Reporting Workpaper and Schedules

 

 

Segment and Interim Report

Diversification into new products and multinational markets during the 1960s and early 1970s created the need for disaggregated information about the individual segments or components of an enterprise. This information need was addressed by the Accounting Principles Board, the Financial Executives Institute, the Institute of Management Accountants, the Securities and Exchange Commission, and, finally, the Financial Accounting Standards Board.

Large, diversified companies can be viewed as a portfolio of assets operated as divisions or subsidiaries, often multinational in scope. The various components of a large company may have different profit rates, different degrees and types of risk, and different opportunities for growth. A major issue for accountants is how to develop and disclose the information necessary to reflect these essential differences. The following discussion presents the accounting standards for reporting an entity’s operating components, foreign operations, and major customers.

 

SEC Reporting

Since its creation in 1934, the Securities and Exchange Commission (SEC) has had a significant impact on the capital formation process by which companies obtain capital from investors. The SEC is an independent federal agency responsible for regulating securities markets in which stocks and bonds of the major companies trade and for the "full and fair disclosure" of financial information so investors may make informed investment decisions. The ability of companies to raise capital in the stock markets and the hundreds of millions of shares that are traded daily both indicate the SEC's success in maintaining an effective marketplace for companies issuing securities and for investors seeking capital investments.

If our example company, Peerless Products Corporation, decides to issue securities on a stock exchange (i.e., go public), the process begins with the company filing a registration statement, usually a Form S-1, with the Securities and Exchange Commission. Once approved by the SEC, Peerless would then make an initial public offering (IPO) of its securities. To remain publicly traded, Peerless would be required to meet a number of SEC filing requirements, including annual and interim reports to the SEC. This chapter presents an overview of the SEC and the laws and regulations that a publicly held company must follow.

 

 

 

Partnerships

Tutorials

• Partnerships: Formation, Operation, and Changes in Membership
• Partnerships: Liquidation

 

Readings

In the common law, a partnership is a type of business entity in which partners share with each other the profits or losses of the business undertaking in which they have all invested. There are two types of partners. General partners have an obligation of strict liability to third parties injured by the Partnership. General partners may have joint liability or joint and several liability depending upon circumstances. The liability of limited partners is limited to their investment in the partnership. A silent partner, also known as a sleeping partner, is one who shares in the profits and losses of the business, but is uninvolved in its management, and/or whose association with the business is not publicly known. In the civil law the partnership is a nominate contract between individuals who, in a spirit of cooperation, agree to carry on an enterprise, contribute to it, by combining property, knowledge or activities and to share its profit. Partners may have a partnership agreement, or declaration of partnership and in some jurisdictions such agreements may be registered and available for public inspection. Australian Partnerships under the Partnership Act 1958 (Vic) Formation of a Partnership Who is a Partner? Partner's Liability Limited Partnership   See also General partnership Limited partnership Limited liability partnership (LLP) Partnership taxation Strategic Alliance Corporation Types of companies   External links Understanding Partnerships – Advantages & Disadvantage – Must read, in-depth article. - "The Ministry of Commerce: Notice on Examination and Approval of Foreign Invested Enterprises" (Jan 2005) (in Chinese only) "Law of the People's Republic of China on Chinese-foreign Equity Joint Ventures" (Mar 2001) "Law of the People's Republic of China on Chinese-Foreign Contractual Joint Ventures" (Oct 2000) "Law of the People's Republic of China on Foreign-capital Enterprises" (Oct 2000) "Catalogue for the Guidance of Foreign Investment Industries" (Nov 2004)(in Chinese only) "Company Law of the People's Republic of China" (Revised in October 2005)

Business law Business organizations Common law business forms: Sole proprietorship Partnership  · Corporation General partnership Business trust Statutory business forms: Limited partnership Proprietary limited company Public limited company Limited liability partnership Limited liability company Civil law corporate forms: AB  · AG  · ANS  · A/S  · GmbH K.K.  · N.V.  · OY  · S.A. Company forms under EU law: SE  · SCE Doctrines Corporate governance Limited liability  · Ultra vires Business judgment rule De facto corporation and corporation by estoppel Piercing the corporate veil Related areas of law Contract  · Civil procedure

 

 

 

 

Partnerships: Formation, Operation, and Changes in Membership

The number of partnerships in the United States has been estimated to be between 1.5 and 2.0 million, second only to sole proprietorships, which number in excess of 15 million businesses. In contrast, there are about 1 million corporations in the United States. Accountants are often called on to aid in the formation and operation of partnerships to ensure proper measurement and valuation of the partnership's transactions. This chapter focuses on the formation and operation of partnerships, including accounting for the addition of new partners and the retirement of a present partner. Chapter 16 presents the accounting for the termination and liquidation of partnerships.

Partnerships are a popular form of business because they are easy to form and they allow several individuals to combine their talents and skills in a particular business venture. In addition, partnerships provide a means of obtaining more equity capital than a single individual can obtain and allow the sharing of risks for rapidly growing businesses.

Accounting for partnerships requires recognition of several important factors. First, from an accounting viewpoint, the partnership is a separate business entity. The Internal Revenue Code, however, views the partnership form as a conduit only, not separable from the business interests of the individual partners. Therefore, several differences exist between tax and financial accounting for specific events, such as the value assigned to assets contributed in the formation of the partnership. This chapter presents the generally accepted accounting principles of partnership accounting. A brief discussion of the tax aspects of a partnership is presented in Appendix 15A to this chapter.

Second, although many partnerships account for their operations using accrual accounting, some partnerships use the cash basis or modified cash basis of accounting. These alternatives are allowed because the partnership records are maintained for the partners and must reflect their information needs. The partnership's financial statements are usually prepared only for the partners but occasionally for the partnership's creditors. Unlike publicly traded corporations, most partnerships are not required to have annual audits of their financial statements. Although many partnerships adhere to generally accepted accounting principles (GAAP), deviations from GAAP are found in practice. The specific needs of the partners should be the primary criteria for determining the accounting policies to be used for a specific partnership.

 

Liquidation, or winding up, refers to a process whereby the assets of a business are converted to money. The conversion may be coerced by a legal process to pay off the debt of the business, or to satisfy any other business obligation that the business has not voluntarily satisfied. The person legally put in charge of the implementation of liquidation is called liquidator. The conversion may also be a voluntary action carried out by the business owners. Liquidation is one of the forms of "insolvency" in the Courts of England and Wales and is used when the other methods of corporate recovery have failed. There are two forms of Liquidation - compulsory (or Court ordered winding-up) and voluntary (creditors or members winding-up).

 

The purpose of a liquidation is to realise the assets of the company in order that the creditors of the company can be paid off.

Although the initial principle of liquidation was that the creditors would be paid off pari passu, i.e. all creditors would receive an equal share of the assets of the company in accordance with the debt they were owed, there are now a number of classes: debenture or fixed charge holders, preferential creditors, floating charge holders and unsecured creditors.

Informally, liquidation may be used to refer to any rapid conversion of an asset into cash.

External links

• Company Law of the People's Republic of China (revised in 2005)
  

 

 

 

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed; however, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization. Purpose History Bankruptcy fraud Bankruptcy in Canada Duties of trustees Creditors' meetings Consumer proposals - an alternative to personal bankruptcy Bankruptcy reform Student loans in bankruptcy Bankruptcy in the United Kingdom Bankruptcy in the United States Bankruptcy chapters The Bankruptcy Estate Chapter 7 Chapter 13 Chapter 15 Compulsory winding up - Hong Kong, China Bibliography   See also Debt consolidation Insolvency Liquidation Bankruptcy alternatives Rebuilding credit   External links U.S. federal bankruptcy courts National Association of Consumer Bankruptcy Attorneys (U.S.) LII Law about... Bankruptcy Website of the Insolvency Service in the UK Not-For-Profit Bankruptcy Information Centre in the UK

Working Papers

• Apple-Jack Partnership, Statement of Partners’ Capital, For the Year Ended December 31, 20X5
• Marshaling of Assets

 

 

Partnerships: Liquidation

 

 

Because of the normal risks of doing business, the majority of partnerships begun in any one year fail within three years and require dissolution and liquidation. The ending of a partnership's business is often an emotional event for the partners. The partners may have had high expectations and invested a large amount of personal resources and time in the business. The end of the partnership often is the end of those business dreams. Accountants usually assist in the winding down and liquidation process and must recognize the legitimate rights of and any amounts due to the many parties involved in the partnership: individual partners, creditors of the partnership, customers, and others doing business with the partnership.

The Uniform Partnership Act of 1997 has 71 sections, 7 of which deal specifically with the dissolution and winding up of a partnership. Several sections discuss the specific rights of creditors of the partnership. Creditors have first claim to the partnership's assets. After the creditors are fully satisfied, any remaining assets are distributed to the partners based on the balances in their capital accounts. This chapter presents the concepts that accountants must know if they offer professional services to partnerships undergoing winding down and liquidation.

 

 

Governmental Entities. Not-for-Profit Entities

Tutorials

• Governmental Entities: Introduction and General Fund Accounting
• Governmental Entities: Special Funds and Government-wide Financial Statements
• Not-for-Profit Entities

 

Readings

Governmental Accounting is an umbrella term which refers to the various accounting systems used by various public sector entities. In the United States, for instance, there are three levels of government which follow different accounting standards set forth by independent, private sector boards. At the federal level, the Federal Accounting Standards Advisory Board (FASAB) sets forth the accounting standards to follow. Similarly, there is the Governmental Accounting Standards Board (GASB) for state level government and Federal Accounting Standards Board (FASB) for local level government.

Public vs. Private Accounting

There is an important difference between private sector accounting and governmental accounting. The main reasons for this difference is the environment of the accounting system. In the government environment, public sector entities have differing goals, as opposed to the private sector entities' one main goal of gaining profit. Also, in government accounting, the entity has the responsibility of fiscal accountability which is to demonstrate that it is in compliance in its use of resources in a budgetary context. In the private sector, the budget is just a tool in financial planning and it isn't mandatory to comply with it.

Governmental Accounting

The governmental accounting system uses the historic system of fund accounting. A set of separate, self-balancing accounts are responsible for managing resources that are assigned to specific purposes based on regulations and limitations.

The governmental accounting system has a different focus for measuring accounting than public sector accounting. Rather than measuring the flow of economic resources, governmental accounting measures the flow of financial resources. Instead of recognizing revenue when they are earned and expenses when they are incurred, revenue is recognized when there is money available to liquidate liabilities within the current accounting period, and expenses are recognized when there is a drain on current resources.

Governmental financial statements must be accompanied by required supplementary information (RSI). The RSI is a comparison of the actual expenses compared to the original budget created at the beginning of the fiscal year.

 

The Governmental Accounting Standards Board (GASB) is currently the source of generally accepted accounting principles (GAAP) used by State and Local governments in the United States of America. As with most of the entities involved in creating GAAP in the United States, it is a private, non-governmental organization.

 

The mission of the Governmental Accounting Standards Board is to establish and improve standards of state and local governmental accounting and financial reporting that will result in useful information for users of financial reports and guide and educate the public, including issuers, auditors, and users of those financial reports.

The GASB has issued Statements, Interpretations, Technical Bulletins, and Concept Statements defining GAAP for state and local governments since 1984. GAAP for the Federal government is defined by the Federal Accounting Standards Advisory Board.

See also

• Timeline of Governmental Accounting Standards - US
• List of GASB Statements
• Government Accounting Standards, Asian Development Bank
  • Introduction
  • Government Accounting
  • Arguments For and Against Accrual Accounting
  • DMC Government Accounting
  • Country Implementation Experiences
  • Implications and Recommendations for DMCs

 

 

Fiscal Policy is the economic term which describes the actions of a government in setting the level of public expenditure and how that expenditure is funded.

 

 

It contrasts with monetary policy, which describes the policies about the supply of money to the economy.

• Types of Fiscal Policy
• Methods of raising funds
  • Funding of deficits
• Economic effects of fiscal policy
• Monetary effects of fiscal policy

 

External links

• China’s monetary and fiscal policy
  • China proposes prudent fiscal policy for 2005

 

 

 

Non-Profit Making Organisations KISS: Keep It Simple, Stupid Simple but not Stupid The Analysed Receipts and Payments Account Accruals Concept Accumulated Fund and the Balance Sheet Calculating Losses of Stock and Cash The Remaining Issues   Activity Simple but not Stupid - Click on image on the right.

 

 

Corporations in Financial Difficulty

Tutorials

• Corporations in Financial Difficulty

 

Readings

Insolvency is a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency, or when the person or entity can no longer meet its debt obligations when they come due, commonly referred to as 'cash-flow' insolvency.

 

 

The term is often incorrectly used as a synonym for bankruptcy, which is a distinct concept, except in Germany. A state of insolvency generally leads to a legal finding of bankruptcy. However, because putting a person or entity into bankruptcy requires the payment of court fees, an insolvent person or entity may be insolvent and not legally bankrupt. In most jurisdictions, it is an offence under the bankruptcy laws for a corporation to continue in business once it is insolvent. A notable exception is the United Kingdom, where it is not, in and of itself, even considered improper.

It is also usually grounds for a civil action, or even an offence, to continue to pay some creditors in preference to other creditors once a state of insolvency is reached. When determining whether a gift or a payment to a creditor is an unlawful preference, the date of the insolvency, rather than the date of the bankruptcy, will usually be the primary consideration.

However in the UK, both are relevant. For example, if a corporation pays a large bonus to its management several months before it actually files for bankruptcy protection, the court will not look at the date of the bankruptcy filing, but at the date where the corporation's debts exceeded its liabilities, and/or the date at which it was unable to pay its debt obligations when they became due, in determining whether the directors can be sued for the return of the bonuses. In the United States, under the Uniform Commercial Code, a person is considered "insolvent" when the party has ceased to pay its debts in the ordinary course of business, or cannot pay its debts as they become due, or is insolvent within the meaning of the Bankruptcy Code.

This is important because certain rights under the code may be invoked as against an insolvent party which are otherwise unavailable. Although the terms bankrupt and insolvent are often used in reference to governments or government obligations, a government cannot be insolvent in the normal sense of the word. Generally, a government's debt is not secured by the assets of the government, but by its ability to levy taxes. By the standard definition, all governments would be in a state of insolvency unless they had assets equal to the debt they owed. If, for any reason, a government cannot meet its interest obligation, it is technically not insolvent but is "in default".

As governments are sovereign entities, persons who hold debt of the government cannot seize the assets of the government to re-pay the debt. However, in most cases, debt in default is refinanced by further borrowing or monetized by issuing more currency.

 

 

See also

• Liquidation

 

External links

• UK Government Insolvency Service

 

 

Recommended Texts

 

Advanced Financial Accounting, 6/e Richard E. Baker, Northern Illinois University Valdean C. Lembke, University of Iowa Thomas E. King, Southern Illinois University ISBN: 0072866322 Copyright year: 2005 Check the availability and buy your books from our Bookshop. Resources

 

International Financial Management Cheol S. Eun, Williams Professor at Georgia Tech Bruce G. Resnick, the Joseph M. Bryan Jr. Professor of Banking and Finance at the Babcock Graduate School of Management Check the availability and buy your books from our Bookshop.

 

 

 

Resources

 

 

 

 

 

 

Case Studies

 

 

Barclays PLC (LSE: BARC, NYSE: BCS, TYO: 8642 ) is the third largest bank in the United Kingdom. The bank can trace its roots back to 1690 in London. The name "Barclay" first arose in 1736. Today the bank is a global financial service provider operating in the UK, Europe, United States, Asia and Africa. The bank's headquarters are at One Churchill Place in Canary Wharf, in London's Docklands, having moved there in May 2005 from Lombard Street in the City of London. Barclay's US headquarters are in New York at 200 Park Avenue. From 2004 onwards Barclays has sponsored the FA Premier League.Barclays PLC is the holding company that is listed on the London, New York and Tokyo Stock Exchange. It consists almost solely of Barclays Bank PLC.

• History of Barclays
• Constituents of the Barclays Group

 

External links

• Consolidated accounts Barclays PLC Official siteYahoo! - Barclays Bank PLC Company ProfileBarclays Bank UKBarclays USA
• Barclays press release - Barclays puts Woolwich at heart of UK retail revitalisation

 

 

Cheung Kong Holdings Limited SEHK: 0001 is the flagship of the Cheung Kong Group, headquartered in Hong Kong, and one of Hong Kong's leading multi-national conglomerates.The Group consists of ten companies that are listed on the Hong Kong Stock Exchange. Cheung Kong (Holdings) Limited (長江實業(集團)有限公司 ) SEHK: 0001, a constituent member of the Hang Seng IndexHutchison Whampoa Limited (和記黃埔有限公司) SEHK: 0013, a constituent member of the Hang Seng IndexCheung Kong Infrastructure Holdings Limited(長江基建集團有限公司) SEHK: 1038, a constituent member of the Hang Seng IndexHongkong Electric Holdings Limited (香港電燈集團有限公司 ) SEHK: 0006, a constituent member of the Hang Seng IndexHutchison Telecommunications International Limited SEHK: 2332, NYSE: HTXHutchison Harbour Ring Limited SEHK: 0715TOM Group Limited SEHK: 2383CK Life Sciences Int'l., (Holdings) Inc. (長江生命科技集團有限公司) SEHK: 8222, listed on the Growth Enterprise Market TOM Online Inc. NASDAQ: TOMO, SEHK: 8282, listed on the Growth Enterprise Market   The chairman of Cheung Kong (Holdings) Limited is Mr. Li Ka Shing (李嘉誠). His elder son, Victor Li, is the Managing Director and Deputy Chairman of Cheung Kong (Holdings) Limited.Cheung Kong Holdings is one of the largest property developers of residential, office, retail, industrial, hotel and property developers in Hong Kong. With its long history of property development expertise, Cheung Kong Holdings has built many of Hong Kong's most notable landmark buildings and complexes.Cheung Kong Holding has a long track record of developing some of Hong Kong's most renowned buildings and residential estates. The followings are some of its completed developments: Residential/comprehensive developments: City One Shatin, Tierra Verde and Caribbean Coast Phase I - Monterey Cove.Hotels: Harbour Plaza Resort City and Harbour Plaza North Point.Office buildings: Cheung Kong Center, World-Wide House, Shun Tak Centre and The Center. Industrial: Modern Warehouse. Li Ka Shing founded Cheung Kong Industries in 1950 as a plastics manufacturer. Under his leadership, the company grew rapidly and eventually evolved into a property investment company. "Cheung Kong (Holdings) Limited" was developed in a successful way from 1970s. Cheung Kong (Holdings) Board of directors Group Structure Hutchison Whampoa Limited Cheung Kong Infrastructure Holdings Limited Hongkong Electric Holdings Limited Cheung Kong Life Sciences Properties and Hotel Mainland Properties Current Development Property of the Hutchison Whampoa Property and Hotel Group Internet Businesses Cheung Kong Group Total Market Capitalisation General Enquiry   See also List of Chinese companies 3G   External links Cheung Kong (Holdings) Limited Hutchison Whampoa Limited Cheung Kong Infrastructure Holdings Limited Hong Kong Electric Holdings Limited TOM Group Limited CK Life Sciences Int'l., (Holdings) Inc Hutchison Telecommunication International Limited Hutchison Harbour Ring Limited TOM Online Inc.

 

 

Hong Kong Exchanges and Clearing Limited (Chinese: 香港交易及結算所有限公司, also 香港交易所 or 港交所; abbreviated as HKEx; SEHK: 0388) is the stock exchange of Hong Kong. HKEx is the holding company for The Stock Exchange of Hong Kong Limited (SEHK), Hong Kong Futures Exchange Limited (HKFE) and Hong Kong Securities Clearing Company Limited.

HKEx was formed in March 6, 2000 by a merger of its three main constituent companies. The company itself is listed on its own exchange, the HKSE.As of September 2005, the stock exchange had a market capitalization of HK$ 7,544 million (US$ 967mn), making it the second-largest stock exchange in the Asia Pacific region after Japan.As of 2006, with a total market capitalization of more than HK$10 trillion (US$1.3 trillion), the Hong Kong Stock Exchange ranks 8th in the world by market capitalization of listed companies (see List of stock exchanges for complete rankings). [1] See also

1. Hang Seng IndexEconomy of Hong KongList of Chinese companies

2. Companies listed on the Hong Kong Stock Exchange List of stock exchanges

3. Category: Companies of Hong Kong

 

 

 

 

 

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